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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, 1997
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 28, 1997 (based upon the closing sale price of stock
on such date) was $172,724,861. As of November 28, 1997, 15,749,251 of the
Registrant's Common Stock were outstanding.
Documents Incorporated by Reference:
Portions of the Company's 1997 Notice of Annual Meeting of Shareholders and
Proxy Statement are incorporated by reference into Part III hereof.
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PART I
Item 1: BUSINESS
Zitel Corporation ("Zitel" or the "Company") is an information technology
company specializing in advanced memory algorithms, systems optimization, and
modeling and search technology. The Company employs these core competencies in
three related lines of business: multi-platform and multi-system performance
measurement and modeling software used to optimize performance in mission-
critical environments; high-performance, enterprise-wide storage systems for
mission-critical applications that include relational database, batch and on-
line transactions; and, Year 2000 services and consulting including project
management, planning, analysis, code conversion and testing using the MatriDigm
Corporation ("MatriDigm", see "Business - Investment in MatriDigm Corporation",
below) technology and other tools.
General
Zitel provides Year 2000 conversion services through product and professional
services offerings and it develops, markets and supports a wide range of data
management solutions in the form of software products for performance
monitoring, analysis and modeling, and high performance data storage technology.
The Company does so through its three divisions:
The solution services division provides services to convert customers' legacy
software code that could not recognize or utilize dates in and after the year
2000 into code that is able to recognize and utilize dates into the next
century. Year 2000 conversion services include project management, planning,
analysis, code conversion, and testing. Zitel's primary code conversion
methodology is based on the MatriDigm MAP2000(sm) process for IBM COBOL. In
addition, as a solution provider, Zitel utilizes other tools and processes to
meet customer needs in different environments. Zitel serves its Year 2000
customers both directly, with its own consulting staff, and through a teaming
program where Zitel may be the subcontractor or partner to other solution
providers worldwide.
The software products division is the combination of the recently acquired
Datametrics Systems Corporation and Palmer & Webb Systems companies with the
Company's Performance & Modeling subsidiary. The division operates under the
Datametrics Systems name. The division's product line is composed of a suite of
software utilized for data management, monitoring, analysis, modeling and
control capabilities for mainframe computers, open systems and distributed
network systems.
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The data storage division (also known as the Intelligent Storage Systems
Division) develops, manufactures and markets high-performance products based on
proprietary Cached Actuator Storage Device (CASD-Registered Trademark-)
technologies. The value of the Company's products incorporating CASD technology
is the result of proprietary caching algorithms, embedded intelligence and
retentive learning which provide a unique probabilistic, predictive caching
storage solution for customers' high-performance data storage needs.
In 1992, the Company entered into a joint development agreement with
International Business Machines Corporation ("IBM"). The product of this joint
development effort was IBM's RAMAC storage product line, which incorporates
Zitel's CASD technology, and upon which the Company is receiving royalties based
on RAMAC products sold. Royalties from RAMAC products constituted 65%, 63%, and
30% of total revenue in fiscal 1995, 1996, and 1997, respectively. The Company
believes that IBM is transitioning to a device that does not require royalty
payments to the Company and, as a result, royalty revenue will continue to
decline.
An investment in the Company involves a high degree of risk. Please refer to
information included under the caption "Business - Risk Factors", below.
Products and Services
Year 2000 Services
The Company's solution services division was launched during fiscal 1997 and
provides Year 2000 conversion services, including project management, planning,
analysis, code conversion and testing. The primary code conversion methodology
of this division is based on MatriDigm's MAP2000 process (see "Business -
Investment in MatriDigm Corporation", below); the division will also use other
tools and processes to meet customer needs in non-IBM COBOL environments. The
Company has an exclusive right to create temporary, portable conversion centers
utilizing the MAP2000 process at customer sites for customers with security or
other requirements which prohibit delivery of code to offsite conversion
facilities. Commercial availability of MatriDigm's MAP2000 windowing process
was announced in May and June, 1997. The demand for Year 2000 conversion
services has emerged more slowly than originally anticipated by industry sources
and the Company has not as yet realized significant revenues from the provision
of such services.
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Software Products
The Company, on June 30, 1997, concluded the acquisition of three companies
primarily engaged in development and marketing of software products: Datametrics
Systems Corporation, headquartered in Fairfax, Virginia; Palmer & Webb Systems,
Limited, headquartered in the United Kingdom; and Palmer & Webb Systems, B.V.,
headquartered in The Netherlands. These entities combined with the Company's
subsidiary, Performance & Modeling, Inc., form the new division operating as
Datametrics Systems. The Company's software products division offers a suite of
products utilized for data management, monitoring, analysis and control of
mainframe computers, open systems servers and distributed network systems.
Corporate customers with significant investments in management information
systems utilize these products to maximize efficiency of existing systems and
plan system enhancements. These products function with IBM VMS, Digital VMS,
and Unisys proprietary platforms as well as a wide variety of open systems
platforms.
The flagship product of the division is ViewPoint(tm), which is a real-time data
collector of approximately 2,000 different system attributes. It operates on
select computer mainframes and all major open systems platforms. While the data
is collected on the computer system, ViewPoint allows the user to replay the
real-time data on any Windows-based PC. Included in ViewPoint are extensive
comparative and auto-analysis capabilities and an auto-correlation engine.
Data Storage Products
The Company offers a family of rotating memory products utilizing the CASD
technology for use with Unisys A/V series mainframe computers and most open
systems environments such as UNIX, NT, Open VMS and NetWare server platforms.
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 36
gigabytes, depending on the market into which the products are sold. 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 216 gigabytes per
cabinet.
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Marketing
The Company markets its Year 2000 conversion services through a direct sales
force and through teaming agreements with professional services and consulting
firms in the United States and internationally.
The Company's software products are sold through a direct sales force in the
United States, the United Kingdom and The Netherlands, and through VARs,
distributors and OEMs. The Company provides direct customer maintenance and
support for its software products.
The Company's data storage products are sold by a direct sales force which
operates from offices throughout the United States and Europe. Other
distribution channels include VARs, system integrators and distributors. The
Company maintains a field service organization and contractual relationships
with third parties to service Zitel's data storage products worldwide.
Technical support personnel make or assist in the initial installation, assist
the service organization with problem resolution and field upgrades, and help
customers determine how best to deploy Zitel products in their system to achieve
maximum benefit.
Competition
The market for Year 2000 conversion services is highly competitive, with
services being provided by a number of national, regional and local firms, many
of which have existing relationships and contractual arrangements with
customers. Many of these competitors have substantially greater financial,
technical and marketing resources than the Company. The Company competes by
integrating tools and professional services into a complete solution for Year
2000 conversion needs.
The market for system management tools in which the Company's software products
division competes is intensely competitive. Many of the companies with which
the Company competes such as TeamQuest, Computer Associates and BGS, Inc. have
substantially larger installed bases and greater financial resources than the
Company. The Company believes that the important considerations for software
customers are ease of use, product reliability, quality and price. The Company
believes that it competes favorably in each of these areas.
The Company's data storage division competes with larger data
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storage companies, such as EMC Corporation and Data General Corporation, as well
as manufacturers of computer systems, such as Unisys Corporation, Sun
Microsystems, Inc. and Hewlett-Packard Company. Most of its competitors have
substantially greater financial resources and installed bases than the Company.
The data storage market is intensely competitive, with technological advances
driving continuous erosion of prices for data storage capacity. The Company
competes by providing customers with cost-effective performance solutions,
quality and customer service.
Proprietary Technology
The Company currently relies on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality agreements and contractual provisions to
protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company has registered its Zitel,
CASD, and Datametrics trademarks and will continue to evaluate the registration
of additional trademarks as appropriate. The Company generally enters into
confidentiality agreements with its employees and with key vendors and
suppliers. The Company currently has nine United States patents, including one
assigned jointly with IBM, on its data storage and software technologies. The
Company believes that the rapidly changing technology in the computer industry
makes the Company's success depend more on the technical competence and creative
skills of its personnel than on patents.
The Company's solution services division relies primarily on proprietary
technology developed by MatriDigm and licensed to the Company and the prospects
for the division are dependent on the ability of MatriDigm to maintain and
expand a toolset which provides a relative advantage over competing Year 2000
conversion service providers.
Manufacturing of Data Storage Products
The Company manufactures a large percentage of its data storage products from
standard component parts and subassemblies purchased from others. Certain of
these parts, including printed circuit boards and subassemblies, are produced
from design and to the Company's specifications. Use of such standard items
simplifies the manufacturing process, reduces the number of items carried in
inventory and permits the Company to expand its product line while minimizing
the expense of designing and developing new assemblies.
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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 the Company's workmanship standards. Completed assemblies are
then inspected by the Company'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 data storage 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 adverse effect on
operations.
Employees
At the end of fiscal 1997, the Company employed 246 persons on a full-time
basis: 62 in research and development, 21 in manufacturing, 117 in sales and
marketing, and 46 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 the Company's employees are represented by a labor union and the Company
believes that its employee relations are good.
Investment in MatriDigm Corporation
Zitel has invested approximately $5,879,000 through September 30, 1997, and owns
approximately 33% of MatriDigm Corporation, a private company formed to provide
software maintenance and re-engineering services for users of IBM mainframe
computer systems. The Company's percentage ownership has changed and will
continue to change as MatriDigm raises additional capital and as options under
MatriDigm's stock option plan vest and are exercised.
The primary focus of MatriDigm has been development of technology to automate
the conversion of legacy software code that could not recognize or utilize dates
after the year 1999 into code that is able to recognize and utilize dates into
the next century. MatriDigm has devoted substantially all of its resources to
development of such technology. In May and June 1997, MatriDigm announced the
commercial availability of its MAP2000 windowing process for programs written in
ANSI COBOL 74 and ANSI COBOL 85, respectively. MatriDigm intends to continue to
refine its
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current toolset and to extend its toolset to modify other COBOL languages, as
well as certain other computer languages widely used to write programs for IBM
mainframe computers.
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 multi-billions of dollars; however,
the demand for conversion services has emerged more slowly than anticipated. 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.
Risk Factors
Recent Levels of Net Sales
In recent years, the Company has not generated net sales sufficient to produce
an operating profit and has relied on a stream of royalty payments under an
agreement with IBM to support its activities. These royalties amounted to
$15,421,000 in fiscal 1995, $14,473,000 in fiscal 1996, and $5,340,000 in fiscal
1997. The Company believes that IBM is transitioning to a device that does not
require royalty payments to the Company and that, as a result, royalty revenue
will continue to decline. The Company sustained a substantial operating loss
and net loss in fiscal 1997. The Company must generate substantial additional
net sales and gross margins on its products and services and must successfully
implement a program to manage cost and expense levels in order to remain a
viable operating entity. There is no assurance that the Company can achieve
these objectives. During fiscal 1997, the Company substantially reorganized and
expanded its direct sales force for data storage products. Commencing in the
fourth quarter, this sales force has been training to also sell the Company's
software products. Net sales have not as yet risen to levels necessary to
support the expenses incurred in this effort and there can be no assurance that
satisfactory levels of net sales will be achieved in the future.
Fluctuations in Quarterly Results
The Company's quarterly operating results have in the past varied and may in the
future vary significantly depending on a number of factors, including: the level
of competition, the size, timing,
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cancellation or rescheduling of significant orders; product configuration and
mix; market acceptance of new products and product enhancements; new product
announcements or introductions by the Company's competitors; deferrals of
customer orders in anticipation of new products or product enhancements; changes
in pricing by the Company or its competitors; the impact of price protection
measures and return privileges granted by the Company to its distributors and
VARs; the ability of the Company to develop, introduce and market new products
and product enhancements on a timely basis; hardware component costs and
availability, particularly with respect to hardware components obtained from
sole-source suppliers; hardware supply constraints; the Company's success in
expanding its sales and marketing programs; technological changes in the market
for the Company's products; product mix and the mix of sales among the Company's
sales channels; levels of expenditures on research and development; changes in
the Company's strategy; personnel changes; and general economic trends and other
factors.
Sales for any quarter have not been predictable with any significant degree of
certainty. The Company generally operates its data storage division with
limited order backlogs because its data storage products typically are shipped
shortly after orders are received. Sales to a single customer in a quarter have
affected and may affect net sales and operating margins. As a result, sales in
any quarter are generally dependent on orders booked and shipped in that
quarter. Sales of data storage products are further difficult to forecast
because the Company has not as yet generated substantial sales of its products
incorporating the CASD technology. Due to the typical timing of customer
orders, the Company often ships data storage products representing a significant
portion of its net sales of such products for a quarter during the last month of
that quarter. Any significant deferral of these sales could have a material
adverse effect on the Company's results of operations in any particular quarter.
To the extent that the Company completes significant sales earlier than
expected, operating results for subsequent quarters may be adversely affected.
The Company's expense levels are based, in part, on its expectations as to
future sales. As a result, if sales levels are below expectations, net income
may be disproportionately affected.
The mix of the products marketed by the Company has been evolving over the last
three years and the Company is now offering additional software products and
Year 2000 conversion services. Due to all of the foregoing factors, the Company
believes that period-to-period comparisons of its results of operations are not
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necessarily meaningful and should not be relied upon as an indicator of future
performance. It is possible that in some future quarter the Company's operating
results may be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially and adversely affected.
Investment in MatriDigm Corporation
The Company has invested $5,879,000 through September 30, 1997, to acquire
approximately 33% interest in MatriDigm Corporation, a private company organized
to provide software maintenance and re-engineering services for users of IBM
mainframe computer systems. MatriDigm has primarily focused on development of a
set of automated tools to identify and specifically modify dates within IBM
COBOL programs so that the programs will function in the Year 2000 and beyond
and to test the modified programs. In May and June 1997, MatriDigm announced
commercial availability of an automated toolset for a windowing solution for
programs written in ANSI COBOL 74 and ANSI COBOL 85, respectively. MatriDigm
intends to continue to refine its current toolset and to extend its toolset.
Industry sources report a multi-billion dollar demand for services such as those
being developed by MatriDigm and an automated toolset should provide greater
profit opportunities than can be realized using other available methods.
However, the demand for Year 2000 conversion services has emerged at a slower
pace than originally anticipated, thus MatriDigm has not realized significant
revenue as yet, and there is no assurance that it can successfully market its
automated toolset, develop extensions for other computer languages or generate
substantial revenue and profits. During the course of development, the Company
has made additional investments in MatriDigm and may make additional investments
in the future.
Volatility of Stock Price
The price of the Company's Common Stock has been subject to extreme volatility
during fiscal 1997, as the closing bid price has ranged between a low of 10-7/8
and a high of 61-1/4. The Company believes that the principal reasons for this
volatility are rumored progress of and rumored problems in the product
development program of MatriDigm. MatriDigm is a private company and the
principal vehicle for public participation in ownership of MatriDigm is
indirectly through ownership of Common Stock of the Company. MatriDigm has been
unable or unwilling to provide public information on a regular basis about the
status of its development and marketing efforts, and as a result an opportunity
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is presented for third parties to initiate rumors which result in significant
swings in the price of the Company's Common Stock. Until MatriDigm discloses
the generation of significant sustained revenue, it will remain difficult for
investors to apply standard methods of analysis to the value of the Company's
investment in MatriDigm and the pattern of volatility may continue.
Competition
The market for Year 2000 conversion services is highly competitive, with
services being provided by a number of national, regional and local firms, many
of which have existing relationships and contractual arrangements with
customers. Many of these competitors have substantially greater financial,
technical and marketing resources than the Company and MatriDigm. The ability
of the Company and MatriDigm to compete in the IBM COBOL segment of this market
will depend primarily on the ability of MatriDigm to achieve market acceptance
of its automated solution and as yet there can be no assurance that MatriDigm
will be successful in this effort. In addition, the Company must achieve
general credibility as a provider of Year 2000 conversion services by generating
substantial net sales.
The market for system management tools in which the Company's software products
division competes is intensely competitive. Many of the companies with which
the Company competes, such as TeamQuest, Computer Associates and BGS, Inc. have
substantially larger installed bases and greater financial resources than the
Company. There can be no assurance that the Company's competitors will not
develop products comparable or superior to those developed by the Company or
adapt more quickly than the Company to new technologies, evolving industry
standards, new product introductions, or changing customer requirements.
The data storage market is intensely competitive, with technological advances
fueling continuous erosion of prices for data storage capacity. The Company
competes with much larger data storage companies such as EMC Corporation and
Data General Corporation as well as manufacturers of computer systems such as
Unisys Corporation, Sun Microsystems, Inc. and Hewlett-Packard Company. Many of
its competitors have substantially greater financial resources and installed
bases than the Company and, because of their substantially higher level of
purchases, are able to achieve significantly lower prices from suppliers of
component parts. While the Company believes that its CASD products are
currently superior to competitive products, unless it can significantly increase
the level of net sales and
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additional cost savings on component purchases, it will be unable to generate
adequate gross margins on its CASD products. There can be no assurance that the
Company will be able to generate the level of net sales to achieve adequate
gross margins.
Dependence on New Products; Rapid Technological Change
The markets in which the Company operates are characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. The introduction of products
embodying new technologies and/or the emergence of new industry standards could
render the Company's existing products and services obsolete and unmarketable.
The Company's future success will depend upon its ability to develop and to
introduce new products and services on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that the Company will be successful in developing and marketing products or
services that respond to technological changes or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of new products or
services, or that its new products or services will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company
is unable, for technological or other reasons, to develop and introduce new
products or services in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected.
Product Liability
The Company's standard warranty on data storage products provides that, if the
Company's product does not function to published specifications, the Company
will repair or replace the defective component without charge. Although to date
the Company's suppliers of hardware components have generally covered the
warranty costs associated with such components, there can be no assurance that
such manufacturers will continue to be willing or able to cover such costs, and
their failure to do so would result in such costs being borne by the Company.
There can be no assurance that the Company's warranty costs will not be
significant in the future. Significant warranty costs could have a material
adverse effect on the Company's business, operating results or financial
condition.
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The Company's agreements with its customers typically contain provisions
intended to limit the Company's exposure to potential product liability claims.
It is possible that the limitation of liability provisions contained in the
Company's agreements may not be effective. Although the Company has not
received any product liability claims to date, the sale and support of products
by the Company and the incorporation of products from other companies may entail
the risk of such claims. A successful product liability claim against the
Company could have a material adverse effect on the Company's business,
operating results and financial condition.
The market for Year 2000 conversion services is in the early stages of
development and service warranty standards have not as yet been defined. The
extent to which the solution services division must provide warranty protection
to its customers in order to be competitive remains uncertain. To the extent
that future warranty obligations shift risks to the Company that are in excess
of the warranty protection provided to the Company by MatriDigm and other
toolset providers, a successful claim against the Company could have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Proprietary Technology
The Company's success depends significantly upon its proprietary technology.
The Company currently relies on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality agreements and contractual provisions to
protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company has registered its Zitel,
CASD and Datametrics trademarks and will continue to evaluate the registration
of additional trademarks as appropriate. The Company generally enters into
confidentiality agreements with its employees and with key vendors and
suppliers. The Company currently holds United States patents on certain of its
data storage and software technologies. There can be no assurance that these
patents will provide the Company with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on the Company's ability to do business. The Company
believes that the rapidly changing technology in the computer industry makes the
Company's success depend more on the technical competence and creative skills of
its personnel than on patents.
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There has also been substantial litigation in the computer industry regarding
intellectual property rights, and litigation may be necessary to protect the
Company's proprietary technology. The Company has not received significant
claims that it is infringing third parties' intellectual property rights, but
there can be no assurance that third parties will not in the future claim
infringement by the Company with respect to current or future products,
trademarks or other proprietary rights.
The Company expects that companies in its markets will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's target markets grows. Any such claims or litigation may be time-
consuming and costly, cause product shipment delays, require the Company to
redesign its products or require the Company to enter into royalty or licensing
agreements, any of which could have a material adverse effect on the Company's
business, operating results or financial condition. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop similar technology,
duplicate the Company's products or design around patents issued to the Company
or other intellectual property rights of the Company.
The Company's solution services division relies primarily on proprietary
technology developed and owned by MatriDigm Corporation and the prospects for
the division are dependent on the ability of MatriDigm to maintain and expand a
toolset which provides a relative advantage over competing Year 2000 conversion
service providers for IBM COBOL. In the event that the MatriDigm toolset does
not achieve significant market acceptance, the business of the solution services
division would be materially and adversely affected.
International Sales and Operations
Sales to customers outside the United States have accounted for significant
portions of the Company's net sales, and the Company expects that the recent
acquisition of companies headquartered and operating in the United Kingdom and
The Netherlands, respectively, will result in international sales representing
an increasingly significant portion of the Company's net sales.
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International sales pose certain risks not faced by companies that limit
themselves to domestic sales. Fluctuations in the value of foreign currencies
relative to the U.S. dollar, for example, could make the Company's products less
price competitive. If the Company, in the future, denominates any of its sales
in foreign currencies, this could result in losses from foreign currency
transactions. International sales also could be adversely affected by factors
beyond the Company's control, including the imposition of government controls,
export license requirements, restrictions on technology exports, changes in
tariffs and taxes and general economic and political conditions. The laws of
some countries do not protect the Company's intellectual property rights to the
same extent as the laws of the United States.
Recent Acquisitions
The Company, on June 30, 1997, concluded the acquisition of three companies
primarily engaged in development and marketing of software products: Datametrics
Systems Corporation, headquartered in Fairfax, Virginia; Palmer & Webb Systems,
Limited, headquartered in the United Kingdom; and Palmer & Webb Systems, B.V.,
headquartered in The Netherlands. The operations of these acquired companies
are substantial in relation to the previous operations of the Company and there
remain significant risks involved in integrating the operations and financial
systems of these companies, in part because of the relative size of the acquired
operations and the distance of the headquarters of these companies from the
headquarters of the Company. Acquisitions involve a number of special risks,
including diversion of management's attention, failure to retain key acquired
personnel, unanticipated events or circumstances, legal liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's results of operations and financial
condition.
Dependence on Key Personnel
The Company's future performance depends in significant part upon the continued
service of its key technical and senior management personnel. The Company
provides incentives such as salary, benefits and option grants (which are
typically subject to vesting over four years) to attract and retain qualified
employees. The loss of the services of one or more of the Company's officers or
other key employees could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
success also depends
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on its continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain its key technical and management
employees or that it can attract, assimilate and retain other highly qualified
technical and management personnel in the future.
The future success of the Company's solution services division in particular
will depend to a significant extent on its ability to attract, train, motivate
and retain highly skilled software development professionals, particularly
project managers, software engineers and other senior technical personnel. The
Company believes that in the United States and elsewhere there is a shortage of,
and significant competition for, software development professionals with the
advanced technological skills necessary to perform the services offered by the
solution services division. The increasing recognition of the scope and
significance of the Year 2000 problem has materially increased the competition
for personnel with appropriate skills and salary requirements have increased as
availability of such personnel has declined precipitously. The Company's
ability to maintain and renew existing relationships and obtain new business
depends, in large part, on its ability to hire and retain technical personnel.
An inability to hire such additional qualified personnel could impair the
ability of the solution services division to manage and complete its existing
projects and to bid for or obtain new projects.
Dilution from 5% Convertible Subordinated Debentures
The Company's 5% Convertible Subordinated Debentures (the "Debentures") and the
accrued interest thereon are convertible at any time at the option of the
holders thereof into Common Stock at a conversion price equal to 90% of the
average of the closing bid prices for the Common Stock on the five consecutive
trading days preceding the date of conversion, but in no event greater than
$26.975 per share. In addition, certain penalties may have the effect of
increasing the amounts convertible into Common Stock. The Debentures are not
convertible until the earlier of (a) 90 days following the date of issue or (b)
the effective date of a corporate reorganization to which the Company is a
party, and any Debentures outstanding on November 22, 1999 automatically will be
converted into Common Stock. The Debentures restrict distributions and
repurchases of capital stock.
As of December 9, 1997, 302,875 shares of Common Stock had been issued upon
conversion of Debentures. If the remaining
Page 16
<PAGE>
Debentures were converted on December 9, 1997, approximately 2,200,000 shares of
Common Stock would have been issued. This number of shares could prove to be
greater or lesser in the event of a decrease or increase in the trading price of
the Common Stock. Purchasers of Common Stock could therefore experience
substantial dilution of their investment upon conversion of the Debentures.
Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation, as amended and
restated, and Bylaws, as amended, California law and the Company's
indemnification agreements with certain officers and directors of the Company
may be deemed to have an anti-takeover effect. Such provisions may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
to be in that stockholder's best interests, including attempts that might result
in a premium over the market price for the shares held by stockholders.
The Company's Board of Directors may issue additional shares of Common Stock or
establish one or more classes or series of Preferred Stock, having the number of
shares designations, relative voting rights, dividend rates, liquidation and
other rights, preferences and limitations as determined by the Board of
Directors without stockholder approval.
The Board of Directors of the Company has approved the adoption of a Preferred
Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights Plan
provide for a dividend distribution of one preferred share purchase right (a
"Right") for each outstanding share of common stock, no par value per share (the
"Common Shares"), of the Company. Each Right entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, no par value (the "Preferred Stock"), at an
exercise price of $69.50 per one one-hundredth of a Preferred Share (the
"Purchase Price"), subject to adjustment, and a redemption price of $.01 per
Right. Each one one-hundredth of a share of Preferred Stock has designations
and the powers, preferences and rights, and the qualifications, limitations and
restrictions which make its value approximately equal to the value of a Common
Share.
The Rights are not exercisable until the earlier to occur of (i) 10 days
following a public announcement that a person, entity or group of affiliated or
associated persons (an "Acquiring Person") have acquired beneficial ownership of
15% or more of the
Page 17
<PAGE>
outstanding Common Shares or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any person
or entity becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of such outstanding Common Shares.
The Rights have certain anti-takeover effects, as they would cause substantial
dilution to a person or group that attempted to acquire the Company on terms not
approved by the Company's Board of Directors. The Rights should not interfere
with any merger or other business combination approved by the Board of
Directors, since the Rights may be redeemed by the Company at $.01 per Right
prior to the earliest of (i) the twentieth day following the time that a person
or group has acquired beneficial ownership of 15% or more of the Common Shares
(unless extended for one or more 10 day periods by the Board of Directors), (ii)
a change of control, or (iii) the final expiration date of the rights.
Item 2: PROPERTIES
Zitel leases its operating facilities under non-cancelable operating leases
which expire at various dates through the year 2005. Average annual rent is
approximately $1.4 million per year.
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, 1997.
Executive Officers of the Registrant
Set forth below is information regarding executive officers of the Company who
are not directors.
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<PAGE>
Name Age Position
Arthur L. Chait 50 Vice President & General Manager,
Solution Services Division
John R. Conaway 52 Vice President, Operations
Henry C. Harris 49 Senior Vice President, Strategic Planning
& Alliances
James A. Hogan 40 Vice President & General Manager,
Intelligent Storage Systems Division
Larry B. Schlenoff 51 Vice President, Finance & Administration,
Chief Financial Officer, Secretary
Arthur L. Chait, Vice President and General Manager
Art Chait joined Zitel in January 1997 as vice president and general manager of
the Solution Services Division. Prior to joining Zitel, he was with SRI
International (formerly Stanford Research Institute), from April 1988 to
December 1996, where he was a corporate vice president in the commercial
technology sector and a group vice president of consulting. Prior to his tenure
at SRI, Mr. Chait was vice president of marketing and, later, general manager of
the U.S. operations of PA Consulting, a technology-based services company based
in the United Kingdom. Prior to PA Consulting, he held a senior position in the
Technology Management practice at Booz, Allen & Hamilton and senior management
positions in the technical and customer services units of Dresser Industries.
John R. Conaway, Vice President of Operations
John Conaway joined Zitel in 1979. He has nearly 30 years' experience in the
computer storage industry. He was promoted to vice president of operations in
October 1995. Mr. Conaway has served in many crucial design and production
engineering positions, including integral roles in several high-performance data
storage product development projects.
Henry C. Harris, Senior Vice President of Strategic Planning & Alliances
Hank Harris, CPA, has served as vice president of finance and administration,
chief financial officer and chief accounting officer from December 1986 through
July 1997 and as secretary of the Company from November 1987 through October
1997. He currently holds the position of senior vice president of strategic
planning and alliances. 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.
Page 19
<PAGE>
James A. Hogan, Vice President and General Manager
Jim Hogan joined the Company in October 1996 as Zitel's vice president of
worldwide sales and marketing. In August 1997, he was promoted to general
manager of the Intelligent Storage Systems Division. Prior to joining Zitel,
Mr. Hogan was the senior director of market development at NETCOM from October
1995 to October 1996. From January 1995 to October 1995, he was vice president
of worldwide sales and marketing for CyberSource Corporation. Mr. Hogan was the
director of product marketing for CompuServe, Inc. from January 1993 to January
1995. Prior to CompuServe, Mr. Hogan spent 12 years at IBM Corporation, where he
rose through the sales and marketing management organization in roles of
increasing responsibility.
Larry B. Schlenoff, Vice President of Finance and Administration, Chief
Financial Officer, Corporate Secretary
Larry Schlenoff joined Zitel in July 1997 as vice president of finance and
administration and chief financial officer. In October 1997, he assumed the
role of corporate secretary. Prior to joining Zitel, he held several executive
positions at IBM including director of finance for the IBM Systems Technology
Division, director of financial planning at IBM corporate and director of
business evaluation for the IBM Printing Systems Company. Mr. Schlenoff's
career at IBM spanned 27 years.
Zitel and CASD are registered trademarks of Zitel Corporation. Zitel 2000 is a
service mark of Zitel Corporation. Datametrics is a registered trademark of
Datametrics Systems Corporation. ViewPoint is a trademark of Datametrics
Systems Corporation. MatriDigm is a trademark of MatriDigm Corporation. All
other trademarks are the property of their respective holders.
Page 20
<PAGE>
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:
FISCAL 1997 1996
------------------- -------------------
High Low High Low
-------- -------- -------- --------
First Quarter 61 1/4 10 7/8 6 3/8 4 11/16
Second Quarter 50 1/8 27 7/8 6 15/16 5 1/16
Third Quarter 33 1/8 11 1/2 10 6 1/16
Fourth Quarter 25 9/16 19 1/16 10 1/8 5 1/8
As of September 30, 1997, the Registrant had approximately 486 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)
1997 1996 1995 1994 1993
Total revenue $17,966 $23,066 $23,714 $17,452 $21,780
Net income (loss) (17,501) 4,049 8,526 (6,961) (8,277)
Net income (loss) per share (1.15) .26 .56 (.55) (.67)
Number of shares used in
per share calculation 15,222 15,626 15,166 12,654 12,358
At year end:
Working capital 18,763 20,445 19,969 7,202 15,668
Total assets 49,294 30,699 26,206 13,678 24,230
Long-term liabilities 24,161 - - 13 4,355
Shareholders' equity 15,946 27,089 22,957 10,004 16,203
Page 21
<PAGE>
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this Annual Report contains forward-
looking statements that involve risks and uncertainties. Future trends in
revenues and operating income will be dependent on both external factors and on
the success of the various efforts described in this report. Risks and
uncertainties include, but are not limited to, product and services demand,
market acceptance, the effect of economic conditions, the impact of competitive
products and pricing, product development, capacity and supply constraints or
difficulties, and other risks detailed under the caption "Business - Risk
Factors" and in other reports filed by the Company with the Securities and
Exchange Commission.
General
Zitel Corporation (the "Company") is an Information Technology company
specializing in advanced memory algorithms, systems optimization, and modeling
and search technology. The Company employs these core competencies in three
related lines of business: multi-platform and multi-system performance
measurement and modeling software used to optimize performance in mission-
critical environments; high-performance, enterprise-wide storage systems for
mission-critical applications that include relational database, batch and on-
line transactions; and, Year 2000 services and consulting including project
management, planning, analysis, code conversion and testing using the MatriDigm
technology and other tools.
Results of Operations
Fiscal 1997 Compared With Fiscal 1996
Revenues for fiscal 1997 decreased by $5,100,000 or 22%, from fiscal year 1996.
Royalty revenue decreased $9,133,000 or 63% while net sales increased $4,033,000
or 47%. It is anticipated that royalty income from the third party will
continue to decline as the Company's technology is phased out of the third
party's future products. The increase in product sales in fiscal 1997 was
related to the sale of both storage products and software products acquired on
June 30, 1997. Storage product sales competition remained high during the year
with average sales prices declining 45% during fiscal 1997 versus 1996. The
Company anticipates that software sales will increase during fiscal 1998,
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<PAGE>
as only one quarter of software revenue from the three acquired companies was
included in fiscal 1997 revenue. The Company's Year 2000 remediation division
did not produce revenue during the year but the Company anticipates revenue
generation from this division during fiscal 1998.
Cost of goods sold, as a percentage of net sales, was 74% in fiscal 1997 as
compared to 77% in 1996. The three-percentage point improvement in gross
margins is attributable to higher margins from the sale of software products
during the fourth quarter of the year.
Research and development expenses were 59% of net sales in the current year as
compared to 76% in fiscal 1996. Actual dollars increased $953,000. Spending
continued to increase in support of efforts to enhance existing products and for
the development of the next generation of products; however, the majority of the
spending increase was to support software products for the newly-acquired
division.
Selling, general and administrative costs were $14,468,000 or 115% of net sales
in fiscal 1997 versus $8,002,000 or 93% in the prior fiscal year. The
transition in the storage business to the open systems marketplace required a
major restructuring of sales and marketing and the hiring of additional
personnel which increased spending by $2,959,000. In addition, the Solution
Services Division, which began during the year, added $779,000 in operating
expenses. The acquisition of the software companies on June 30, 1997 added
operating expenses of $2,428,000 during the fourth quarter. The Company's
intent is to more aggressively manage all operating expenses in order to realize
an acceptable expense-to-revenue relationship.
The Company incurred a charge of $6,600,000 for in-process research and
development expenses related to the acquisition of companies on June 30, 1997.
The amount of the purchase price allocated to purchased research and
development, which had no alternative future use and relates to products for
which technological feasibility had not been established, was expensed at the
acquisition date.
Interest expense totaled $3,532,000 during fiscal year 1997, $2,778,000 of which
was related to the discount on the convertible subordinated debentures issued
during the year. Interest income was $746,000 in fiscal 1997 compared to
$482,000 in the prior year. Included in other income in the current year
Page 23
<PAGE>
is $777,000 of realized gains from the sale of marketable securities as compared
to $4,177,000 in the prior fiscal year.
The tax benefit for fiscal 1997 was 20% of the loss before taxes and the Company
established a valuation allowance of $2,475,000 during the year. In 1996, the
tax provision was 38% of income before income taxes.
Fiscal 1996 Compared With Fiscal 1995
Total revenue for 1996 was $23,066,000 compared with revenue of $23,714,000 in
the prior year. The decrease in total revenue is attributable to a decrease in
royalty revenue from $15,421,000 to $14,473,000.
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 systems market were not a material portion of the Company's sales
until the fourth quarter of the year.
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 76% of net sales versus 69% of net sales
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 93% of net sales versus 84% of
net sales 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 other income and expense of $4,188,000 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
Page 24
<PAGE>
$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 Statement of Financial
Accounting Standards (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.
Liquidity and Capital Resources
The Company's principal sources of working capital are product sales and royalty
revenue. Working capital declined $1,682,000 during the year. Cash flows used
in operating activities totaled $7,019,000. The utilization of cash in
operating activities resulted primarily from the net loss of $17,501,000, an
increase in gross accounts receivable of $1,289,000, an increase in deferred and
refundable taxes of $4,743,000, an increase in accounts payable of $2,702,000,
and an increase in accrued liabilities of $2,875,000. This was offset by the
acquisition of in-process research and development of $6,600,000 and the
discount amortization related to the convertible subordinated debentures of
$2,778,000.
During the current fiscal year, $23,262,000 was used in investing activities.
On June 30, 1997, the Company purchased three companies for $11,062,000 in cash
and $1,200,000 in common stock. Also during the year, the Company invested an
additional $2,000,000 in an unconsolidated company. Additionally, $2,650,000
was invested in capital equipment. Proceeds from the sale of marketable
securities in the amount of $3,159,000 were generated in the current year.
Net cash provided by financing activities in the current fiscal year totaled
$25,289,000. $23,795,000 was raised from the issuance of 5% Convertible
Subordinated Debentures and $1,494,000 was generated from the exercise of
employee stock options and
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<PAGE>
from the sale of stock under the Company's employee stock purchase plan. The
Company currently has a $3,000,000 bank line of credit. The line will expire on
January 31, 1998. The Company did not utilize the line during fiscal 1997.
Management believes that the Company will be able to meet its cash requirements
for the next twelve months from cash on hand, other working capital, cash flow
from operations, and the utilization of the line of credit.
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<PAGE>
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30,
1997 1996
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,224 $ 9,216
Marketable securities - 2,382
Short-term investments 9,596 -
Accounts receivable, less allowance for doubtful
accounts of $175 in 1997 and $88 in 1996 6,547 5,542
Inventories 3,050 4,211
Deferred and refundable taxes 3,540 2,224
Other current assets 993 480
-------- --------
Total current assets 27,950 24,055
Fixed assets-net 3,700 2,253
Intangible assets-net 5,846 -
Other assets-net 11,798 4,391
-------- --------
Total assets $ 49,294 $ 30,699
======== ========
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable $ 4,768 $ 2,066
Accrued liabilities 4,419 1,544
-------- --------
Total current liabilities 9,187 3,610
Convertible subordinated debenture 24,161 -
Commitments (See note)
Shareholders' equity:
Preferred stock, no par value; 1,000 shares
authorized, none issued
Common stock, no par value; 40,000 shares authorized:
Issued and outstanding; 15,603 shares and 14,820 shares
at September 30, 1997 and 1996, respectively 27,081 20,723
Retained earnings (deficit) (11,135) 6,366
-------- --------
Total shareholders' equity 15,946 27,089
-------- --------
Total liabilities and shareholders' equity $ 49,294 $ 30,699
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
Consolidated Statements of Operations
(In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 12,626 $ 8,593 $ 8,293
Royalty revenue 5,340 14,473 15,421
-------- ------- -------
Total revenue 17,966 23,066 23,714
Costs and expenses:
Cost of goods sold 9,301 6,630 6,807
Research and development 7,504 6,551 5,754
Selling, general and administrative 14,468 8,002 6,944
Acquisition of in-process research
& development 6,600 - -
-------- ------- -------
Operating income (loss) (19,907) 1,883 4,209
Interest income (746) (482) (399)
Interest expense 3,532 25 156
Other income and expense (689) (4,188) (19)
-------- ------- -------
Income (loss) before income taxes (22,004) 6,528 4,471
Provision (benefit) for income taxes (4,503) 2,479 (4,055)
-------- ------- -------
Net income (loss) $(17,501) $ 4,049 $ 8,526
======== ======= =======
Net income (loss) per share $ (1.15) $ .26 $ .56
======== ======= =======
Number of shares used in per share calculation 15,222 15,626 15,166
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 28
<PAGE>
Consolidated Statements of Shareholders' Equity
(In thousands except per share data)
<TABLE>
<CAPTION>
Common Common Retained Total
Stock Stock Earnings Shareholders'
Shares Amount (Deficit) Equity
<S> <C> <C> <C> <C>
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
Issuance of common stock:
Stock options exercised ($0.81 - $9.50
per share) 498 1,104 - 1,104
Employee stock purchase plan ($7.87 and $16.58
per share) 35 390 - 390
Stock warrants 15 - - -
Common stock issued for acquisition 61 1,200 - 1,200
Conversion of subordinated debt 174 3,664 - 3,664
Net loss - - (17,501) (17,501)
------ ------- -------- -------
Balances at September 30, 1997 15,603 $27,081 $(11,135) $15,946
====== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 29
<PAGE>
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $(17,501) $ 4,049 $ 8,526
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Acquisition of in-process research & development expenses 6,600 - -
Discount amortization on subordinated debt 2,778 - -
Depreciation and amortization 1,404 935 1,384
Loss on disposal of fixed assets - 15 111
Provision for doubtful accounts 284 185 114
Provision for inventory allowances 480 480 176
Unrealized gains on marketable securities - (2,041) -
Realized gains on marketable securities (777) (2,136) -
Deferred and refundable income taxes (4,743) 2,124 (4,104)
Change in operating assets and liabilities:
Increase in accounts receivable (1,289) (1,527) (529)
Decrease (increase) in inventories 681 (1,770) 1,825
Decrease (increase) in other current assets (513) (62) 418
Increase (decrease) in accounts payable 2,702 341 (298)
Increase (decrease) in accrued liabilities 2,875 33 (50)
-------- ------- -------
Net cash provided by (used in) operating activities (7,019) 626 7,573
-------- ------- -------
Cash flows provided by (used in) investing activities:
Acquisition of fixed assets (2,650) (1,676) (1,222)
Investment in unconsolidated company (2,024) (3,497) -
Purchase of short-term investments (9,596) - -
Proceeds from sale of marketable securities 3,159 2,795 -
Purchase of other assets (1,089) (367) (446)
Purchase of companies net of cash acquired (11,062) - -
-------- ------- -------
Net cash used in investing activities (23,262) (2,745) (1,668)
-------- ------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 1,494 989 4,427
Repurchase of common stock - (906) -
Proceeds from borrowings - - 3,646
Repayments of borrowings - (13) (3,723)
Issuance of subordinated debenture 23,795 - -
-------- ------- -------
Net cash provided by financing activities 25,289 70 4,350
-------- ------- -------
Net increase (decrease) in cash (4,992) (2,049) 10,255
Cash and cash equivalents, beginning of year 9,216 11,265 1,010
-------- ------- -------
Cash and cash equivalents, end of year $ 4,224 $ 9,216 $11,265
======== ======= =======
Supplemental cash flow information:
Interest paid - - $ 57
Income taxes paid $ 265 $ 82 $ 136
Supplemental non-cash investing and financing activities:
Issuance of common stock in business combination $ 1,200 - -
Capitalized financing costs $ 1,038 - -
Conversion of subordinated debt and accrued interest $ 3,664 - -
Conversion of note receivable to investment in
unconsolidated company $ 300 - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 30
<PAGE>
Notes to Consolidated Financial Statements
(In thousands except per share data)
Summary of Significant Accounting Policies:
Zitel Corporation (the "Company") is an Information Technology Company that
specializes in advanced memory algorithms, systems optimization, and modeling
and search technology. The Company employs these core competencies in three
related lines of business: multi-platform and multi-system performance
measurement and modeling software used to optimize performance in mission-
critical environments; high-performance, enterprise-wide storage systems for
mission-critical applications that include relational database, batch and on-
line transactions; and, Year 2000 services and consulting including project
management, planning, analysis, code conversion and testing using the MatriDigm
technology and other tools. 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 an
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.
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<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. Those
securities were sold in January 1997. The gain on the sale of such securities
is included in other income.
Short-Term Investments:
At September 30, 1997, the Company's short-term investments, which were
classified as available-for-sale securities, consisted entirely of 120-day high-
grade commercial paper with a maturity date of October 2, 1997. The Company's
short-term investments are carried at cost, which approximates fair value.
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
internal-use software and its implementation which includes the cost of
purchased software, consulting fees and the use of certain specified Company
resources. As of September 30, 1997 and 1996, $1,092 thousand and $238
thousand, respectively, in costs have been capitalized and are included in other
long-term assets. Amortization in the amount of $111 thousand has been charged
during fiscal year 1997. No amortization had been charged in fiscal year 1996.
Revenue Recognition:
Revenue is recognized at the time products are shipped to
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customers and at the time services are rendered. Royalty revenue is recognized
when earned and receipt is assured. Software revenue is recognized in
accordance with the American Institute of Certified Public Accountants Statement
of Position (SOP) 91-1, "Software Revenue Recognition". The effect of the new
SOP 97-2, "Software Revenue Recognition", issued on October 27, 1997, has yet to
be determined.
Research and Development Expenditures:
Research and development expenditures are charged to operations as incurred.
Software Development Costs:
Statement of Financial Accounting Standards (SFAS) No. 86 provides for the
capitalization of certain software development costs after technological
feasibility of the software is attained. Software development costs capitalized
in fiscal year 1997 were $189 thousand. No amortization has been charged as of
September 30, 1997.
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
remeasurement (which have not been material in the aggregate), are included in
the accompanying statements of operations.
Intangible Assets:
Intangible assets include goodwill and purchased technology, recorded in
connection with the acquisition of the three software companies, which are being
amortized on a straight-line basis over seven and five years, respectively. The
Company periodically assesses the recoverability of intangible assets by
determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of
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impairment, if any, is measured based on projected discounted future operating
cash flows and is recognized as a write down of the asset to a net realizable
value.
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 Pronouncements:
The Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings
Per Share", in February 1997 effective for periods ending after December 15,
1997. SFAS No. 128 was issued to simplify the computation of Earnings Per Share
(EPS) and to make the U.S. standard more compatible with the EPS standards of
other countries. Prior period EPS will be restated after the effective date of
this statement. The effect of the adoption of SFAS No. 128 has yet to be
determined.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The impact of adopting SFAS No. 130,
which is effective for the Company beginning in fiscal year 1999, has not been
determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-producing
segments of the entity for which such information is available and is utilized
by the chief operations decision maker. Specific information to be reported for
individual segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements would be provided. SFAS No. 131 is
effective for the Company beginning in fiscal year 1999 and the impact of
adoption has not been determined.
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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, marketable securities and trade
receivables. The Company places its cash investments and marketable securities
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.
Fair Value of Financial Instruments:
Carrying value amounts of certain of the Company's financial instruments,
including cash and cash equivalents, marketable securities, short-term
investments, accounts receivable, accounts payable, subordinated debentures, and
other accrued liabilities approximate fair value due to their short maturities.
September 30,
1997 1996
Inventories:
Raw materials $ 953 $ 1,515
Work in progress 576 738
Finished goods 1,521 1,958
------- -------
$ 3,050 $ 4,211
======= =======
Fixed Assets:
Manufacturing equipment $ 3,965 $ 3,666
Office furniture and equipment 4,162 2,250
Engineering equipment 4,576 4,334
Leasehold improvements 683 666
------- -------
13,386 10,916
Less accumulated depreciation
and amortization (9,686) (8,663)
------- -------
$ 3,700 $ 2,253
======= =======
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Depreciation expense was $1,316 thousand, $827 thousand and $1,281 thousand for
the fiscal years ended September 30, 1997, 1996 and 1995, respectively.
September 30,
1997 1996
Other Assets:
Investment in unconsolidated companies $ 5,879 $ 3,563
Deferred software implementation costs 1,092 238
Deferred taxes, net 3,177 -
Capitalized financing costs on
subordinated debt 1,038 -
Other 947 1,014
------- -------
12,133 4,815
Less accumulated amortization (335) (424)
------- -------
$11,798 $ 4,391
======= =======
Business Combinations:
On June 30, 1997, the Company acquired Datametrics Systems Corporation, Palmer &
Webb Systems Limited, and Palmer & Webb Systems B.V. The purchase price
consisted of a cash payment of $11.1 million, the issuance of shares of the
Company's common stock valued at $1.2 million and transaction costs of
approximately $500 thousand. The acquisition has been accounted for under the
purchase method of accounting. Accordingly, the total purchase price of $12.8
million was allocated to the net assets acquired based upon their estimated fair
values. In addition, $6.6 million of the purchase price was allocated to
purchased in-process research and development that has not reached technological
feasibility and that has no alternative future use. The operating results of
the acquired companies from July 1, 1997 through September 30, 1997, are
included in the consolidated results of operations.
The following table is a summary of pro-forma financial information with respect
to the combined companies as described above, disclosing pro-forma results of
operations for the fiscal years ended September 30, 1997 and 1996, as though the
entities had been combined as of October 1, 1997 and 1996. The pro-forma
results do not reflect any non-recurring charges which resulted directly from
the transaction, such as the $6.6 million write-off of purchased research and
development.
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Year ended September 30,
1997 1996
Revenue $ 28,263 $36,095
Net income (loss) $(13,624) $ 2,929
Net income (loss) per share $ (0.90) $ 0.19
Investment in Unconsolidated Companies:
At September 30, 1996, Zitel had a $2.4 million investment in a company,
classified as a trading marketable security, which was accounted for under the
cost method. During fiscal year 1997, the Company liquidated its investment in
the company.
In November 1995, Zitel purchased 9.6 million shares of preferred stock 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. 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. 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. During fiscal year 1997, the Company purchased an additional one
million shares of preferred stock of the company in exchange for $2.0 million in
cash. The Company also exercised an option to purchase 500 thousand shares of
the company's common stock from a shareholder of the company for $300 thousand.
Refer to "Note Receivable from Related Party" footnote.
The following is a summary of financial information with respect to the company,
as of September 30, 1997 and 1996:
1997 1996
unaudited
Net sales $ 123 $ -
Gross profit 38 -
Net loss (14,549) (1,873)
Current assets 3,816 2,612
Non-current assets 4,009 1,009
Current liabilities 1,504 324
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Note Receivable from Related Party:
The Company held a note receivable from an officer of an unconsolidated company
with a principle balance of $300 thousand. At September 30, 1996, the note was
included in other long-term assets. During fiscal year 1997, the note was
converted to a common stock investment in the unconsolidated company. This
investment is included in other long-term assets.
September 30,
1997 1996
Accrued Liabilities:
Accrued payroll and related $ 1,062 $ 435
Accrued vacation 886 594
Accrued commissions 170 24
Deferred revenue 1,100 -
Deferred warranty costs 1,023 -
Other accrued liabilities 178 491
------- -------
$ 4,419 $ 1,544
======= =======
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 (8.50% at September 30, 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 September 30, 1997.
As of September 30, 1997, the Company had no borrowings outstanding under the
line of credit.
Commitments:
The Company leases its operating facilities under non-cancelable operating
leases that expire at various dates through the year 2005. Rent expense
incurred under all operating leases and charged to operations was $789 thousand
in 1997, $574 thousand in 1996 and $606 thousand in 1995.
Future minimum obligations under all facility leases at September 30, 1997
aggregate approximately $9.0 million, payable as follows:
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Fiscal Year
1998 $1,407
1999 1,481
2000 1,495
2001 1,512
2002 1,549
Thereafter 1,519
Convertible Subordinated Debentures:
On May 22, 1997, the Company issued $25 million principal amount of 5%
Convertible Subordinated Debentures (the "Debentures") which are due November
22, 1999. The Debentures accrue interest at the rate of 5% per annum and
principal and accrued interest are convertible into Common Stock of the Company
at a price equal to 90% of the average of the closing bid prices for the Common
Stock on the five consecutive trading days preceding the date of conversion, but
in no event greater than $26.975 per share. The Debentures are not convertible
until the earlier of (a) 90 days following the date of issue or (b) the
effective date of a corporate reorganization to which the Company is a party,
and any Debentures outstanding on November 22, 1999 automatically will be
converted into Common Stock. The Debentures restrict distributions and
repurchases of capital stock.
The current year Consolidated Statement of Operations includes a charge to
interest expense in the amount of $2,778 thousand related to the amortization of
the total discount on the 5% Convertible Subordinated Debentures. During
September 1997, approximately $3.3 million was converted to 174 thousand shares
of common stock at prices ranging from $20.28 to $22.74 per share.
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
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common stock in a private placement. Net proceeds from this transaction were
$2.9 million. Common stock purchase warrants totaling approximately 45 thousand
were issued as a part of this transaction. The warrants have been fully
exercised.
Stock Option Plans:
At September 30, 1997, the Company had reserved 5.5 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 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, 1997, there were
34 thousand shares reserved for future grants. At September 30, 1996, there
were no shares reserved for future grant.
Activity in the Company's option plans during fiscal years 1995, 1996 and 1997
is summarized as follows:
Weighted
Number Average Options
of Price Price Total
Shares Per Share Per Share Amount
Balances, September 30, 1994 1,996 $ 1.92 $ .34-$ 9.50 $ 3,819
Granted 544 $ 5.99 $ 3.94-$ 9.50 3,263
Cancelled (136) $ 3.39 $ 1.44-$ 7.94 (462)
Exercised (544) $ 2.28 $ .34-$ 4.56 (1,243)
----- ------------- -------
Balances, September 30, 1995 1,860 $ 2.89 $ .34-$ 9.50 5,377
Granted 260 $ 7.10 $ 4.82-$ 9.88 1,851
Cancelled (40) $ 4.69 $ 1.19-$ 7.94 (190)
Exercised (310) $ 2.13 $ .82-$ 7.94 (660)
----- ------------- -------
Balances, September 30, 1996 1,770 $ 3.60 $ .34-$ 9.88 6,378
Granted 1,008 $23.47 $13.63-$44.38 23,662
Cancelled (291) $28.75 $ 1.06-$44.38 (8,372)
Exercised (477) $ 2.05 $ .81-$ 9.50 (978)
----- ------------- -------
Balances, September 30, 1997 2,010 $10.29 $ .34-$44.38 $20,690
===== ====== ============= =======
At September 30, 1997 and 1996, respectively, options for 867 thousand and 1,044
thousand shares were exercisable at prices ranging from $0.34 to $17.44.
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1995 Non-Employee Directors' Stock Option Plan:
In April 1995, the Board of Directors approved the adoption of a Directors' plan
which provides for automatic, non-discretionary grants of options to purchase an
aggregate of 200 thousand shares of common stock. Options in the amount of 30
thousand, 24 thousand, and 24 thousand were granted in fiscal years 1995, 1996
and 1997, respectively, at prices ranging from $5.88 to $33.00 per share.
Options totaling 21 thousand shares were exercised during fiscal 1997 with
prices ranging from $5.88 to $6.22. 122 thousand shares are available for
future grant. At September 30, 1997, 38 thousand shares were exercisable at
prices ranging from $5.88 to $33.00. At September 30, 1996, 25 thousand shares
were exercisable at prices ranging from $5.88 to $6.22.
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.
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.
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
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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. 35
thousand and 66 thousand shares were issued under the Plan during fiscal years
1997 and 1996, respectively. Since inception of the Plan, approximately 1,635
thousand shares have been issued.
Pro Forma Stock-Based Compensation:
As of September 30, 1997, options outstanding were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- ---------------------
Weighted
Range Average Weighted Weighted
of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$ 0.34 - $ 1.31 206 0.58 $ 1.22 206 $ 1.22
$ 1.38 - $ 2.00 115 3.75 $ 1.67 112 $ 1.67
$ 2.06 - $ 2.06 204 2.83 $ 2.06 204 $ 2.06
$ 2.31 $ 5.63 344 7.38 $ 4.73 185 $ 4.55
$ 5.69 - $ 7.94 276 7.73 $ 6.50 119 $ 6.51
$ 8.19 - $17.44 317 8.91 $14.24 78 $11.42
$19.13 - $19.63 230 9.40 $19.36 - -
$20.13 - $22.50 300 9.56 $21.35 - -
$23.25 - $24.50 49 9.84 $23.90 - -
$33.00 - $33.00 26 9.41 $33.00 12 $33.00
--------- ---- ------ ------- ------
$ 0.34 - $33.00 2,067 6.91 $10.29 916 $ 3.82
The Company has elected to continue to follow the provisions of Accounting
Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees", for
financial reporting purposes and has adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no
compensation cost has been recognized for the Company's stock option plans or
employee stock purchase plan. Had compensation cost for the Company's stock
option plans and employee stock purchase plan been determined based on the fair
value at the grant date for awards in fiscal years 1997 and 1996 consistent with
the provisions of SFAS No. 123, the Company's net income (loss) and net income
(loss) per share for fiscal years 1997 and 1996 would have been modified to the
pro forma amounts indicated below (in thousands, except per share amounts):
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Year ended September 30,
1997 1996
Net income (loss) applicable to
common stockholders - as reported $(17,501) $4,049
======== ======
Net income (loss) applicable to
common stockholders - pro forma $(22,138) $3,637
======== ======
Net income (loss) per share - as reported $ (1.15) $ .26
======== ======
Net income (loss) per share - pro forma $ (1.45) $ .23
======== ======
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
The aggregate fair value and weighted average fair value of each option granted
in fiscal years 1997 and 1996 were $13.4 million and $1.2 million, and $12.99
and $4.23, respectively. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes Option Pricing Model with the
following weighted average assumptions for fiscal years 1997 and 1996:
Expected volatility 76% - 91%
Risk-free interest rate 5.07% - 6.22%
Expected life .88 - 5.12 years
Expected dividend yield 0.0%
The Company has also estimated the fair value for the purchase rights under the
employee stock purchase plan using the Black-Scholes Model, with the following
assumptions for fiscal years 1997 and 1996:
Expected volatility 65% - 136%
Risk-free interest rate 5.51% - 5.63%
Expected life .50 years
Expected dividend yield 0.0%
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
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Directors; however, no such contributions were made in fiscal 1997, 1996, or
1995.
Income Taxes:
The provision (benefit) for income taxes for the years ended September 30, 1997,
1996 and 1995 is as follows:
1997 1996 1995
Current expense:
Federal $ - $ 77 $ 125
State - 23 -
Foreign - - 7
------- ------- -------
- 100 132
Deferred tax expense (benefit):
Federal (3,989) 2,091 (3,735)
State (514) 288 (452)
------- ------- -------
$(4,503) $ 2,479 $(4,055)
======= ======= =======
The Company's effective tax rate for the years ended September 30, 1997 and 1996
differs from the U.S. federal statutory income tax rate as follows:
1997 1996
Federal income tax at statutory rate (34.0)% 34.0%
State taxes, net of federal benefit (4.1) 6.1
Tax credits (2.3) (2.7)
Non-deductible interest expense 5.1 -
Other, net 3.6 .6
Change in valuation allowance 11.2 -
------- -------
(20.5)% 38.0%
======= =======
The following table shows the major components of the deferred tax asset as of
September 30, 1997 and 1996:
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1997 1996
Deferred tax assets and liabilities:
Current:
Accounts receivable, inventory and
other reserves $ 1,109 $ 694
Accrued liabilities 330 286
Net operating losses 3,975 373
Tax credit carryforwards 2,391 1,015
Appreciation of marketable securities - (819)
Other 981 259
------- -------
Total before valuation allowance 8,786 1,808
Valuation allowance (2,475) -
------- -------
Net deferred tax asset $ 6,311 $ 1,808
======= =======
At September 30, 1997, the Company has federal and state net operating loss
(NOL) carryforwards of $10.5 million and $5.2 million, respectively, to reduce
future taxable income. The Company has federal and state general business
credit carryforwards of $1.9 million and $.5 million, respectively, to reduce
future taxable income. These carryforwards expire in 1998 through 2012 if not
utilized.
In addition, the Company has $6.2 million of NOLs related to stock option
exercises, the benefit of which will be credited to equity when utilized.
Due to the uncertainty surrounding the realization of the NOL and credit
carryforwards in future tax returns, a valuation allowance has been established
to reduce the deferred tax assets to the amount expected to be realized. The
valuation allowance increased by $2.5 million during the year ended September
30, 1997.
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. Royalties totaling approximately $5.3 million,
$14.5 million and $15.4 million were received from the third party in fiscal
years 1997, 1996 and 1995, respectively.
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Foreign Operations:
The Company's foreign operations are those of its European branches and
subsidiaries. All of their sales are made to unaffiliated European customers.
The following table summarizes the Company's European operations:
1997 1996 1995
Net sales $ 4,530 $2,924 $1,566
Operating income (loss) (1,080) 585 (124)
Total assets 6,693 1,368 386
Export Sales:
Export sales from domestic operations were $2.2 million, $1.4 million and $1.5
million in 1997, 1996 and 1995, respectively.
Major Customers:
Sales to one customer amounted to 14.6% and 14.3% of net sales in 1997 and 1995,
respectively. Sales to two customers amounted to 13% and 11.8% of net sales in
1996.
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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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
San Jose, California
October 28, 1997
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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 January
29, 1998, is incorporated herein by reference. The information regarding
executive officers under the caption "Executive Officers of the Registrant" is
included herein on pages 18 through 20.
Item 11: EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation of the Proxy Statement
for the Annual Meeting of Shareholders to be held January 29, 1998, 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 January 29, 1998, 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 L.L.P., 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.
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<PAGE>
(1) Financial Statements:
Consolidated Balance Sheets (p. 27)
Consolidated Statements of Operations (p. 28)
Consolidated Statements of Shareholders' Equity (p. 29)
Consolidated Statements of Cash Flows (p. 30)
Notes to Consolidated Financial Statements (pgs. 31-46)
Report of Independent Accountants (p. 47)
(2) Financial Statement Schedules:
Report of Independent Accountants (p. 59)
SCHEDULE VIII-Valuation and Qualifying Accounts (p. 60)
(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)
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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 50
<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 51
<PAGE>
10.29 Rights Agreement, dated as of June 12, 1996, between Zitel Corporation
and American Stock Transfer & Trust Company, with exhibits. (17)
10.30 Preferred Stock Purchase and Put Option among MatriDigm Corporation, BRC
Holdings, Inc., and the Company dated December 2, 1996. (18)
10.31 Sales Representative Agreement between MatriDigm Corporation and the
Company dated August 22, 1996. (19)
10.32 Form of Convertible Subordinated Debenture. (20)
10.33 Registration Rights Agreement. (20)
10.34 Securities Purchase Agreement. (20)
10.35 Placement Agency Agreement. (20)
10.36 Asset Purchase Agreement dated as of June 25, 1997, by and among Zitel
World Trade, Datametrics Systems Corporation and John C. Kelly. (21)
10.37 Asset Purchase Agreement dated as of June 30,1997, by and among Zitel
Corporation, Zitel Limited, Palmer & Webb Systems Limited, Reginald Webb and
Julian Palmer and Moebius Business Training Limited. (21)
10.38 Stock Purchase Agreement dated as of June 30, 1997, by and among Zitel
Corporation, Zitel World Trade, Hell Sails B.V. and Palmer and Webb Systems B.V.
(21)
10.39 Lease Office Building for One Monument Place between Upland Industrities
Corporation and Collins Equities, Inc. and Datametrics Systems Corporation dated
July 31,1992. (21)
10.40 First Amendment to Lease between CMD Realty Investment Fund, L.P. and
Datametrics Systems Corporation dated October 16, 1996. (21)
10.41 Form of Palmer & Webb Lease. (21)
11.1 Statement regarding computation of earnings per share.
22.1 Subsidiaries of the Company.
Page 52
<PAGE>
23.1 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.
(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.
Page 53
<PAGE>
(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.
(17) Incorporated by reference to the indicated exhibits to the Company's
Current Report on Form 8-K filed on June 25, 1996.
(18) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed February 12, 1997.
(19) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed May 14, 1997.
(20) Incorporated by reference to the indicated exhibits to the Company's
Current Report on Form 8-K filed May 29, 1997.
(21) Incorporated by reference to the indicated exhibits to the Company's
Current Report on Form 8-K filed July 14, 1997.
(b) Reports on Form 8-K
On July 14,1997, the Company filed a report on Form 8-K with respect to
the acquisition, on June 30, 1997, of Datametrics Systems Corporation, Palmer &
Webb Systems Limited and Palmer & Webb Systems B.V. The following financial
statements were filed with the report:
(1) Financial Statements of Businesses Acquired
Filed as a part of the report were the following financial
statements:
(i) The financial statements and report thereof, for
Datametrics Systems Corporation for the years ended December 31, 1996 and 1995.
(ii) The financial statements and report thereof, for Palmer &
Webb Systems Limited for the years ended December 31, 1996 and 1995.
Page 54
<PAGE>
(iii) The financial statements and report thereof, for Palmer &
Webb Systems B.V. for the years ended December 31, 1996 and 1995.
(2) Unaudited Pro Forma Financial Information
The following listed unaudited pro forma financial information for
the acquisitions were filed as a part of the report:
(i) Introductory Paragraph
(ii) Notes to Unaudited Pro Forma Combined Financial Statements
(iii) Unaudited Pro Forma Combined Balance Sheet as of March 31,
1997
(iv) Unaudited Pro Forma Combined Statement of Operations for
the Year Ended September 30, 1996
(v) Unaudited Pro Forma Combined Statement of Operations for
the Six Months Ended March 31, 1997
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,
Page 55
<PAGE>
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 56
<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
Jack H. King
By: Jack H. King
President and Director
Chief Executive Officer
December 19, 1997
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 57
<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 19, 1997
Jack H. King (Chief Executive Officer)
Larry B. Schlenoff Vice President of December 19, 1997
Larry B. Schlenoff Finance, Chief Financial
Officer and Secretary
Catherine P. Lego Director December 19, 1997
Catherine P. Lego
William R. Lonergan Director December 19, 1997
William R. Lonergan
William M. Regitz Director December 19, 1997
William M. Regitz
Robert H. Welch Director December 19, 1997
Robert H. Welch
Anna M. McCann Vice President and December 19, 1997
Anna M. McCann Chief Accounting Officer
Page 58
<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 28, 1997 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 28, 1997
Page 59
<PAGE>
SCHEDULE VIII
ZITEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS 1995, 1996 AND 1997
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
----------- ---------- ----------- ---------- ----------
1995
- --------------
Allowance for Doubtful
Accounts $ 496,000 $ (408,000) - $ 88,000
Provision for Obsolete
Inventory $ 551,000 $ 278,000 $ 520,000 $ 309,000
Valuation Allowance on
Deferred Tax Assets $6,222,000 - $6,222,000 -
1996
- --------------
Allowance for Doubtful
Accounts $ 88,000 - - $ 88,000
Provision for Obsolete
Inventory $ 309,000 $ 480,000 $ 289,000 $ 500,000
Valuation Allowance on
Deferred Tax Assets - - - -
1997
- --------------
Allowance for Doubtful
Accounts $ 88,000 $ 87,000 - $ 175,000
Provision for Obsolete
Inventory $ 500,000 $ 480,000 $ 341,000 $ 639,000
Valuation Allowance on
Deferred Tax Assets - $2,475,000 - $2,475,000
Page 60
<PAGE>
EXHIBIT 11.1
ZITEL CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
Year Ended September 30,
--------------------------------------------
1995 1996 1997
---------- ---------- ------------
Average common shares
outstanding 14,158,000 14,726,000 15,222,000
Computation of incremental
outstanding shares
Net effect of dilutive
stock options based
on treasury stock
method 1,008,000 900,000 -
---------- ---------- ----------
15,166,000 15,626,000 15,222,000
========== ========== ==========
Net income (loss) $8,526,000 $4,049,000 $(17,501,000)
========== ========== ============
Net income (loss) per share $ 0.56 $ 0.26 $ (1.15)
========== ========== ============
Primary and fully diluted income (loss) per share differ by less than one cent
in all periods.
Page 61
<PAGE>
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. Datametrics Systems Corporation
47211 Bayside Parkway
Fremont, CA 94538-6517
5. Datametrics Systems Limited
47211 Bayside Parkway
Fremont, CA 94538-6517
6. Datametrics Systems Nederland B.V.
47211 Bayside Parkway
Fremont, CA 94538-6517
Page 62
<PAGE>
EXHIBIT 23.1
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
reports dated October 28, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Zitel Corporation as of
September 30, 1997 and 1996 and for the years ended September 30, 1997, 1996
and 1995, which reports are included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
San Jose, California
December 19, 1997
Page 63
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 4,224
<SECURITIES> 9,596
<RECEIVABLES> 5,984
<ALLOWANCES> 175
<INVENTORY> 3,050
<CURRENT-ASSETS> 27,950
<PP&E> 13,386
<DEPRECIATION> 9,686
<TOTAL-ASSETS> 49,294
<CURRENT-LIABILITIES> 9,187
<BONDS> 24,161
0
0
<COMMON> 27,081
<OTHER-SE> (11,135)
<TOTAL-LIABILITY-AND-EQUITY> 49,294
<SALES> 12,626
<TOTAL-REVENUES> 17,966
<CGS> 9,301
<TOTAL-COSTS> 28,572
<OTHER-EXPENSES> (1,435)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,532
<INCOME-PRETAX> (22,004)
<INCOME-TAX> (4,503)
<INCOME-CONTINUING> (17,501)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,501)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
</TABLE>
