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FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-12194
ZITEL CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2566313
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
47211 Bayside Parkway, Fremont, California 94538-6517
(Address of principal executive offices) (Zip Code)
(510) 440-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates on November 30, 1999 (based upon the closing sale price of
stock on such date) was $36,644,784. As of November 30, 1999, 24,933,811
shares of the Registrant's Common Stock were outstanding.
Documents Incorporated by Reference:
Portions of the Company's 1999 Notice of Annual Meeting of Shareholders and
Proxy Statement are incorporated by reference into Part III hereof.
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This Amendment is filed to amend Item 8 to include "Report of Independent
Accountants" and to add Exhibit 23.1 "Consent of Independent Accountants."
This Report on Form 10-K contains forward-looking statements which are made
in reliance on the Safe Harbor provisions of the Private Securities
Litigation Reform Act. Readers are cautioned that such forward-looking
statements are subject to risks and uncertainties and actual results could
differ materially. Certain of these risks and uncertainties are discussed
herein under the section "Risk Factors" and elsewhere in this Report as well
in the Company's other filings with the Securities and Exchange Commission.
PART I
Item 1: BUSINESS
Zitel Corporation ("Zitel" or the "Company") is an information technology
company specializing in computer and systems optimization, data correlation
and search technology. The Company's wholly-owned subsidiary, Datametrics
Systems Corporation ("Datametrics"), is an information technology company
comprised of a software products and professional services group marketing
multi-platform performance analysis and automatic correlation software used
to optimize performance in E-Business systems, storage, databases and
applications; and a group that provides software-based Internet tools to
monitor and report on performance of World Wide Web ("Web") sites,
Web-hosting services, services offered by Internet Service Providers ("ISPs")
and Application Service Providers ("ASPs"), Cyber-Merchants, as well as
Corporate Intranets (internal resources) and Extranets (links to partners and
business-to-business E-Commerce). The business operates under the
Datametrics-Registered Trademark- Systems name.
The Company was organized in 1979 to develop, market and sell semiconductor
memory systems. It subsequently developed memory algorithms which it
incorporated in high performance data storage systems developed, marketed and
sold by its data storage business. With the acquisition, in June 1997, of the
business of Datametrics Systems Corporation, the Company commenced the
transition to an information technology company. This transition was
substantially accomplished in July 1998, when the Company sold its data
storage business.
The Company's solution services business was launched during fiscal 1997
and provided Year 2000 conversion services. The primary code conversion
methodology was based on MatriDigm Corporation's MAP2000 process. The
Company invested in certain rights to utilize the MAP2000 process. The demand
for such Year
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2000 conversion services emerged more slowly than originally anticipated by
industry sources and the Company suspended its solution services business and
terminated a planned acquisition of MatriDigm in September 1999.
General
Zitel develops and markets E-Business performance management solutions
through its Datametrics' business. Product offerings include: multi-platform
performance analysis and correlation software used to optimize performance in
E-Business infrastructure systems; professional services to enhance its
offerings to existing and new customers; and software-based Internet tools.
The Company markets and supports the high-end performance management suite of
ViewPoint-Registered Trademark- software utilized by E-Businesses for
infrastructure data management that automatically alerts, analyzes,
correlates, investigates, and reports on data center performance for
mainframe computers, open systems, servers, and distributed network elements.
In addition, professional services are provided to solve customers' design,
planning, and implementation needs (including customization). Training is
available to assist customers in preparing their staff for the improved
performance environment, including training on performance products and
methodologies. Products are sold through a direct sales force in the United
States and Europe, and through distributors and partners worldwide. The
Company provides both direct and indirect customer maintenance and support
for its software products.
The Company markets software-based Internet tools to monitor and report on
performance of Web sites, Web-hosting services, services offered by ISPs and
ASPs, Cyber-Merchants, as well as Corporate Intranets (internal resources) and
Extranets (links to partners and business-to-business E-Commerce). These
products and services are primarily marketed and supported via the Web.
An investment in the Company involves a high degree of risk. Please refer to
information included under the caption "Risk Factors", below.
Products and Services
Software Products
The Company, on June 30, 1997, concluded the acquisition of three
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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., to provide automated
performance analysis and correlation software to solve computer performance
problems 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. The ViewPoint product suite automatically
monitors, alerts, analyzes, and reports on potential performance problems before
they happen, hence, improving service levels, minimizing risk, and facilitating
planning for the future.
ViewPoint is a real-time data collector of approximately 2,000 different system
attributes. It operates on select computer mainframes (backend and e-commerce
systems) and all major open systems and server 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 automatic analysis capabilities and an automatic correlation
engine.
The complementary suite of Visual products (including the VisualRoute-TM-,
VisualRoute Server, and VisualPulse-TM- products) provides Internet tools to
monitor and report on service levels and response of Web sites, Web-hosting
services, services offered by ISPs and ASPs, Cyber-Merchants, as well as
Corporate Intranets (internal resources) and Extranets (links to partners and
business-to-business E-Commerce). Included in these products are advanced
technologies, including Java and other Web-based functionality, and significant
features, both newly developed and derived from the intellectual property and
experience associated with the existing ViewPoint product, and years of
experience in the performance management arena.
Marketing
The Company's software products are sold through a direct sales force in the
United States, the United Kingdom and The Netherlands, and through
distributors and partners worldwide. The Company will expand sales of certain
products and services via the Internet in the coming fiscal year. The Company
provides direct customer maintenance and support for its software products.
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Competition
The market for E-Business and Internet performance management tools in which the
Company's software products business competes is intensely competitive. Many of
the companies with which the Company competes such as TeamQuest Corporation,
Computer Associates International, Inc., Hewlett-Packard Company, and BMC
Software, Inc. have substantially larger installed bases and greater financial
resources than the Company. New companies will appear and may compete with
certain of the Company's products and services. The Company believes the
important considerations for software customers are ease of use, automated
functionality, product reliability, quality and price, as well as complementary
services offered. The Company believes that it competes favorably in each of
these areas.
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 and
written materials, including documentation, under trade secret and copyright
laws, which afford only limited protection. The Company has registered its Zitel
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 one United States patent. 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.
Employees
At the end of fiscal 1999, the Company employed 117 persons on a full-time
basis: 22 in research and development, 13 in professional services, 7 in
operations, 50 in sales and marketing, and 25 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.
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Investment in MatriDigm Corporation
The Company invested $7.4 million to acquire a 31% interest in MatriDigm
Corporation ("MatriDigm") from fiscal year 1996 through fiscal year 1998. The
Company recorded approximately $624 thousand in losses under the equity method
from the unconsolidated company during the year ended September 30, 1998. Zitel
also wrote off its investment in MatriDigm and fully reserved certain demand
notes and bank guarantees during fiscal 1998.
Zitel advanced MatriDigm an additional $4.9 million during fiscal year 1999. The
Company paid $250 thousand during the year ended September 30, 1999, for a
non-exclusive, royalty-bearing license for the MatriDigm technology. Zitel also
entered into an agreement to acquire the balance of MatriDigm in August 1999.
This agreement was terminated in September 1999 and MatriDigm filed Chapter 7
bankruptcy in October 1999. The Company recorded approximately $5.1 million
during fiscal year 1999 in the write-off of the license and all advances to the
company.
Risk Factors
Recent Levels of Net Sales Have Been Insufficient
Zitel has not generated net sales sufficient to produce an operating profit in
recent years. The Company has relied on significant financings to support its
activities. Operations in prior years were also partially funded by a stream of
royalty payments under an agreement with IBM. This agreement was terminated in
April 1998 for a lump sum payment of $740,000. Zitel sustained substantial
operating losses and net losses in the fiscal years 1997 through 1999. Zitel
must generate substantial additional net sales and gross margins on its products
and services and must continue to successfully implement programs to manage cost
and expense levels in order to remain a viable operating entity. There is no
assurance that Zitel can achieve these objectives.
Significant Losses
The Company reported a total net loss for fiscal year 1999 of $13,103,000. The
Company reported total net losses of $43,205,00 and $17,501,000 for fiscal years
1998 and 1997, respectively.
The Company has taken a number of steps to attempt to return to profitability,
although there is no assurance that it will be
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successful. A significant portion of the cumulative losses were caused by the
funding of MatriDigm, and operations of the Company's former storage systems
business, which was sold in July 1998. MatriDigm filed Chapter 7 bankruptcy in
October 1999 so there will be no additional funding. The Company began
subleasing a portion of its Fremont, CA headquarters, and is considering a move
to substantially smaller and less costly premises.
The Company continues to consider options and take actions necessary to bring
costs into line with anticipated revenues. There can be no assurance that the
Company will be successful in this effort and remain a viable operating entity.
Fluctuations in Quarterly Results
Zitel'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, cancellation or rescheduling
of significant orders;
-Market acceptance of new products and product enhancements;
-New product announcements or introductions by Zitel's competitors;
-Deferrals of customer orders in anticipation of new products or product
enhancements;
-Changes in pricing by Zitel or its competitors;
-The ability of Zitel to develop, introduce and market new products and
product enhancements on a timely basis;
-Zitel's success in expanding its sales and marketing programs;
-Technological changes in the market for Zitel's products;
-Product mix and the mix of sales among Zitel's sales channels;
-Levels of expenditures on research and development;
-Changes in Zitel's strategy; personnel changes; and,
-General economic trends and other factors.
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Due to all of the foregoing factors, Zitel believes that period-to-period
comparisons of its results of operations are not 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.
Zitel Stock Price Has Been Volatile
The price of Zitel's Common Stock was subject to extreme volatility during
fiscal 1998, as the closing bid price ranged between a low of 2 7/32 and a high
of 23 5/8. Zitel feels that one of the reasons for this volatility was rumored
progress of and rumored problems in the product development program and
marketing efforts of MatriDigm. The price of Zitel's Common Stock during fiscal
year 1999 demonstrated significantly less volatility, ranging from the low
closing bid price of 1 7/32 to the high closing bid price of 6 15/32.
Competition
The market for E-Business and Internet performance management tools in which
the Company's software products business competes is intensely competitive.
Many of the companies with which the Company competes, such as TeamQuest
Corporation, Computer Associates International, Inc., Hewlett-Packard
Company, and BMC Software, Inc. have substantially larger installed bases and
greater financial resources than the Company. There can be no assurance that
the Company's current competitors or new companies 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.
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
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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 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.
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 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 a United States patent on one of its
software technologies. There can be no assurance that this patent 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
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computer industry makes the Company's success depend more on the technical
competence and creative skills of its personnel than on patents.
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.
International Sales and Operations
Sales to customers outside the United States have accounted for significant
portions of the Company's net sales, and the acquisition of companies
headquartered and operating in the United Kingdom and The Netherlands has
resulted in international sales representing an increasingly significant portion
of the Company's net sales. 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
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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. The Company does not believe these additional risks
are significant in the United Kingdom, The Netherlands, or in the recent
acquisition of Datametrics Systems AG in Switzerland. Please refer to
information included in Notes to Consolidated Financial Statements - Subsequent
Events, below.
Dependence on Key Personnel
The Company's future performance depends significantly 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 depends on its continuing ability to 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
key technical and management personnel in the future.
The Company believes there is significant competition for the few software
development professionals with the advanced technological skills necessary to
perform the services offered by the Company's business. The Company's ability to
maintain or 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
business to manage and complete its existing projects and to bid for and obtain
new projects.
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
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prevent a tender offer or takeover attempt that one or more stockholders
consider to be in the best interests of same, 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 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") has acquired beneficial ownership of
15% or more of the 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(s) 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 an Acquiring Person of 15% or more of such outstanding Common
Shares.
The Rights have certain anti-takeover effects, as they would cause substantial
dilution to a potential Acquiring Person 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
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Company at $.01 per Right prior to the earliest of (i) the twentieth day
following the time that an Acquiring Person 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 in Fremont, CA, Fairfax, VA, Leatherhead,
United Kingdom, and Rotterdam, The Netherlands, under non-cancelable operating
leases which expire at various dates through the year 2005. Average annual rent
is approximately $1 million per year, net of sublease income of approximately
$500 thousand per year.
Item 3: LEGAL PROCEEDINGS
On December 14, 1998, the Company commenced a suit against VLSI Technology, Inc.
in the Superior Court of the State of California in and for the County of Santa
Clara. The complaint alleges that the defendant promised to design and develop
certain application specific integrated circuits ("ASICs") critical to the
Company's planned third-generation data storage system product (CASD-III), that
VLSI failed to design or develop the promised ASICs, and that the Company was
forced to abandon the CASD-III project and dispose of its Intelligent Storage
Systems business. The suit seeks damages with respect to CASD-III development
costs and loss of profits.
On November 29, 1999, Lynx Venture Partners I, LLC filed a complaint for Breach
of Contract, Declaratory Relief and Specific Performance (the "Complaint")
against the Company in the Superior Court of the State of California in and for
the County of Alameda. The Complaint alleges that Zitel breached the Agreement
and Plan of Merger and Reorganization among Zitel, a subsidiary of Zitel and
MatriDigm Corporation by terminating that Agreement and that Lynx was damaged by
that breach. The Complaint seeks damages, attorneys' fees, declaratory relief
and 1,000,000 shares of Zitel's common stock. The Complaint was served on
December 7, 1999. Zitel believes the Complaint is without merit and intends to
defend this action vigorously.
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, 1999.
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Executive Officers of the Registrant
Set forth below is information regarding executive officers of the Company who
are not directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Henry C. Harris 51 Senior Vice President, Strategic Planning
& Alliances; President, Datametrics
Systems Corporation
Anna M. McCann 41 Vice President, Finance & Administration,
Chief Financial Officer, Corporate
Secretary
</TABLE>
Henry C. Harris, Senior Vice President of Strategic Planning & Alliances;
President, Datametrics Systems Corporation Hank Harris, CPA, was named Senior
Vice President of Strategic Planning & Alliances for Zitel in August 1997 and
was named President of Datametrics Systems Corporation, a wholly-owned
subsidiary of Zitel, in January 1999. He has also 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. 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.
Anna M. McCann, Vice President of Finance & Administration, Chief Financial
Officer, Corporate Secretary Anna McCann joined Zitel in August 1982. She was
promoted to Corporate Controller in February 1987. Anna was appointed Assistant
Secretary of the Company in April 1993. She was promoted to Vice President,
Chief Accounting Officer in October 1997 and named Vice President of Finance &
Administration and Corporate Secretary in January 1999. In June 1999, she was
named Chief Financial Officer.
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Zitel is a registered trademark of Zitel Corporation. Datametrics and
ViewPoint are registered trademarks of Datametrics Systems Corporation.
VisualRoute, VisualPulse, VisualProfile, VisualAnalyze, VisualPoint, and the
E-Business Performance Experts are trademarks of Datametrics Systems
Corporation. All other service marks, trademarks and registered trademarks
are the property of their respective holders.
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PART II
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Zitel Corporation's common stock is traded in the over-the-counter market and
is currently listed on the Nasdaq SmallCap Market under the symbol ZITL.
The following table shows the quarterly high and low closing prices of the
Nasdaq National Market System:
<TABLE>
<CAPTION>
FISCAL 1999 1998
------------------- -------------------
High Low High Low
-------- -------- -------- --------
<S> <C> <C> <C> <C>
First Quarter 6 15/32 2 7/32 23 5/8 9 3/8
Second Quarter 5 2 1/16 16 3/4 9 1/2
Third Quarter 2 3/8 1 5/16 14 3/8 4 1/32
Fourth Quarter 2 11/16 1 7/32 8 1/8 2 7/32
</TABLE>
Subsequent to September 30, 1999, the quotation of the Company's common stock is
included on the Nasdaq SmallCap Market.
The Registrant had approximately 656 shareholders of record of its Common Stock
at September 30, 1999.
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)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Total revenue $20,890 $21,700 $17,966 $23,066 $23,714
Net income (loss) (13,103) (43,205) (17,501) 4,049 8,526
Basic net income (loss) per share (.59) (2.48) (1.15) .27 .60
Diluted net income (loss) per share (.59) (2.48) (1.15) .26 .56
Shares used in basic
per share calculation 22,199 17,433 15,222 14,726 14,157
Shares used in
diluted per share calculation 22,199 17,433 15,222 15,626 15,166
At year end:
Working capital 1,057 3,874 18,763 20,445 19,969
Total assets 11,652 18,070 49,294 30,699 26,206
Total long-term liabilities - 4,585 24,161 - -
Shareholders' equity 5,897 6,234 15,946 27,089 22,957
</TABLE>
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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 ("Zitel" or the "Company") is an information technology
company specializing in computer and systems optimization, data correlation
and search technology. The Company's wholly-owned subsidiary, Datametrics
Systems Corporation ("Datametrics"), is an information technology company
comprised of a software products and professional services group marketing
multi-platform performance analysis and automatic correlation software used
to optimize performance in E-Business systems, storage, databases and
applications; and a group that provides software-based Internet tools to
monitor and report on performance of World Wide Web ("Web") sites,
Web-hosting services, services offered by Internet Service Providers ("ISPs")
and Application Service Providers ("ASPs"), Cyber-Merchants, as well as
Corporate Intranets (internal resources) and Extranets (links to partners and
business-to-business E-Commerce).
The Company was organized in 1979 to develop, market and sell semiconductor
memory systems. It subsequently developed memory algorithms which it
incorporated in high performance data storage systems developed, marketed and
sold by its data storage business. With the acquisition, in June 1997, of the
business of Datametrics Systems Corporation, the Company commenced the
transition to an information technology company. This transition was
substantially accomplished in July 1998, when the Company sold its data storage
business.
The Company's solution services business was launched during fiscal 1997 and
provided Year 2000 conversion services. The primary code conversion methodology
was based on MatriDigm
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<PAGE>
Corporation's MAP2000 process. The Company invested in certain rights to utilize
the MAP2000 process. The demand for such Year 2000 conversion services emerged
more slowly than originally anticipated by industry sources and the Company
suspended its solution services business and terminated a planned acquisition of
MatriDigm in September 1999.
Results of Operations
Fiscal 1999 Compared with Fiscal 1998
Total revenue for fiscal year 1999 was $20,890,000 compared with total revenue
of $21,700,000 in fiscal year 1998, a decrease of $810,000 or 3.7%. The decrease
in revenue represents the net impact of an increase in revenue generated by the
Company's software business during the current fiscal year, offset by the lack
of royalty and product revenue from the storage business, which was sold in July
1998. Royalty revenue in the prior year was $1,541,000 versus none for fiscal
year 1999. Revenue generated by the storage unit, prior to its sale in July
1998, was $5,698,000 for fiscal year 1998, compared to none in the current
fiscal year. Net sales for the current year were $20,890,000 versus $20,159,000
in the prior year, an increase of $731,000 or 4%. The increase in net sales is
attributable to an increase of net sales generated by the Company's subsidiary,
Datametrics, and an increase in net sales of the Company's former solution
services business, offset by the loss of revenue from the storage business. Net
sales generated by Datametrics increased 24% from $13,794,000 in fiscal year
1998 to $17,140,000 in fiscal year 1999. The Year 2000 business contributed net
sales of approximately $3,750,000 in the 1999 fiscal year compared to $667,000
in the prior fiscal year.
Gross margin, as a percent of net sales, was 56% for the current year, compared
to 40% in the year ended September 30, 1998. The increase in gross margin
percentage during the current year is attributable to the increase in sales
generated by the higher margin software business which generated a gross margin
of approximately 62% in the current and prior years.
Research and development expenses for the year ended September 30, 1999 were 14%
of net sales compared with 32% in the prior year. Actual dollars decreased
$3,397,000, attributable to the disposal of the storage business in July 1998.
It is anticipated that research and development spending will continue to
decrease slightly as a percentage of net sales due to the increase in revenue
from currently developed software products and services.
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<PAGE>
Selling, general and administrative ("SG&A") expenses were $15,474,000 or 74% of
net sales in the current year versus $24,012,000 or 119% of net sales in the
prior year. Actual spending decreased $8,538,000. The decrease in spending is
attributable to the disposal of the storage business in the prior fiscal year
and the incurred or accrued costs associated with it. Management will continue
to monitor and reduce operating expenses to bring them in line with the current
business operations.
Loss on unconsolidated subsidiary of $5.1 million in fiscal year 1999 includes
the write off of a license acquired from and advances to MatriDigm during fiscal
year 1999. Fiscal year 1998 loss on unconsolidated subsidiary of $10.6 million
includes losses under the equity method, the write off of the Company's
investment in MatriDigm and fully reserving the related demand notes and bank
guarantees.
Interest expense was $1,537,000 for the year ended September 30, 1999,
substantially all of which relates to the discount on 3% convertible
subordinated debentures. Interest expense was $3,466,000 for the fiscal year
1998; $1,111,000 related solely to the discount on the 3% convertible
subordinated debentures and $2,355,000 related to the interest on both the 3%
and 5% debentures. Interest income in the current year is $397,000 versus
$598,000 in fiscal year 1998 due to lower cash and cash equivalent balances in
fiscal year 1999.
Fiscal 1998 Compared With Fiscal 1997
Total revenue for fiscal year 1998 was $21,700,000 compared with total revenue
of $17,966,000 in fiscal year 1997, an increase of $3,734,000 or 21%. The
increase in revenue is directly attributable to an increase in net sales,
partially offset by a decrease in royalty revenue. Net sales for the 1998 fiscal
year were $20,159,000 versus $12,626,000 in fiscal 1997, an increase of
$7,533,000 or 60%. The increase in net sales is directly attributable to the net
sales generated by the Company's software business, which was only included in
the last quarter of the 1997 fiscal year. In July 1998, the Company sold it
storage business, which generated revenue in fiscal 1998 of $5,698,000 compared
with $10,304,000 in fiscal 1997. Royalty revenue for the year ending September
30, 1998 was $1,541,000 versus $5,340,000 in the prior year. The Company
negotiated and received the final payment for all royalty obligations from
International Business Machines Corporation ("IBM") in April 1998.
Gross margin, as a percent of net sales, was 40% for the year
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<PAGE>
ended September 30, 1998 compared to 26% in the prior year. The increase in
gross margin percentage during fiscal year 1998 is primarily attributable to the
increase in sales generated by the software business, which generated a gross
margin of 61% for the 1998 fiscal year.
Research and development expenses for the year ended September 30, 1998 were 32%
of net sales compared with 59% in fiscal year 1997. Actual dollars decreased
$1,085,000.
Selling, general and administrative ("SG&A") expenses were $24,012,000, or 119%
of net sales, in the year ending 1998, versus $14,468,000 or 115% of net sales
in the prior year. Actual spending increased $9,544,000. The increase in
spending is primarily attributable to the added SG&A expenses of the acquired
software companies of approximately $7,250,000 and to severance costs of
$1,110,000 for the storage business personnel. Other additional SG&A costs
included a $861,000 increase in spending of the solution services business, an
increase of $655,000 in legal costs, and a $750,000 estimated loss on excess
capacity at the Fremont, CA facility.
Because of the uncertainties in MatriDigm Corporation's future and their ability
to generate sufficient operating cash flows, the Company wrote off its
investment of $7,414,000 and reserved $3,202,000 for a total loss of
$10,616,000. The reserve of $3,202,000 is comprised of $2,022,000 against demand
notes, a bank guarantee of $1,000,000, and a note and an option from an officer
of MatriDigm in the amount of $180,000.
Interest expense was $3,466,000 for the fiscal year 1998; $1,111,000 related
solely to the discount on the 3% convertible subordinated debentures and
$2,355,000 related to the interest on both the 3% and 5% debentures. Interest
expense in 1997 was $3,532,000 of which $2,778,000 related to a discount on 5%
convertible subordinated debentures issued during that fiscal year. Interest
income in fiscal year 1998 was $598,000 compared to $746,000 in the prior year.
Due to the uncertainty surrounding the realization of the net operating losses
and credit carryforwards in future tax years, the Company established a 100%
valuation allowance against its deferred tax asset in the amount of $6,500,000
during fiscal year 1998.
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<PAGE>
Liquidity and Capital Resources
The Company's principal sources of working capital are product sales and
convertible debt. During the fiscal year ended September 30, 1999, working
capital decreased to $1,057,000 and cash flow utilized by operating activities
was $6,653,000. The utilization of cash in operating activities resulted
primarily from the net loss of $13,103,000, a decrease in accounts payable of
$1,017,000 and an increase in accounts receivable of $422,000. This was
partially offset by amortization of capitalized financing costs of $479,000,
amortization of discount on subordinated debenture of $555,000, an increase in
the provision for doubtful accounts of $282,000, depreciation and amortization
in the amount of $2,511,000, and loss from unconsolidated company of $5,098,000.
During the current year, net cash utilized in investing activities was
$5,764,000. This amount was comprised of the Company's investment in and
advances to unconsolidated company of $5,098,000 and the purchase of fixed
assets and increase in other assets in the amount of $666,000.
Net cash provided by financing activities was $7,498,000 which included
$5,342,000 raised from the issuance of 3% convertible subordinated debentures,
$2,000,000 received from the issuance of Series B preferred stock, and $156,000
from the exercise of employee stock options and for the sale of stock under the
Company's employee stock purchase plan.
Management believes that the Company will meet its cash requirements for the
next twelve months from cash on hand, working capital, and cash flow from
operations. If the Company is unable to generate sufficient cash flow from
operations or should management determine it to be prudent, it may attempt to
raise additional debt or equity. There can be no assurance that management will
be able to raise additional debt or equity financing.
Zitel negotiated a credit facility of a $2 million accounts receivable factoring
agreement, on October 15, 1999. Please refer to information included in Notes to
Consolidated Financial Statements - Subsequent Events, below.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No.
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<PAGE>
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for the Company in fiscal year 2000
and will not require retroactive restatement of prior period financial
statements. The Company has not yet quantified the impact of adopting SFAS No.
133 on its financial statements, but the Company believes there will not be a
significant impact.
In December 1998, Accounting Standards Executive Committee ("AcSEC") released
Statement of Position 98-9 ("SOP 98-9"), "Modification of Statement of Position
97-2 (SOP 97-2), `Software Revenue Recognition', with Respect to Certain
Transactions". SOP 98-9 amends SOP 97-2 to define how an entity recognizes
revenue for multiple element arrangements for each element delivered. The
provisions of SOP 98-9 became effective December 15, 1998. These paragraphs of
SOP 97-2 and SOP 98-9 will be effective for transactions that are entered into
in fiscal years beginning after March 15, 1999. Retroactive application is
prohibited. We do not expect the adoption of SOP 98-9 to have a material effect
on our current revenue recognition policies.
Impact of the Year 2000 Issue
The costs of the planned Year 2000 modifications and the dates by which the
Company expects to complete its plans are based on Management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. Specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer codes, changes in consulting fees and costs to remediate
or replace hardware and software as well as non-incremental costs resulting from
redeployment of internal resources, timely
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<PAGE>
responses to and corrections by third parties such as significant customers and
suppliers, and similar uncertainties.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The issue arises if
date-sensitive software recognizes a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities.
The Company's information technology systems consist primarily of hardware and
software purchased from outside parties. The vendor for the Company's
enterprise-wide software has informed the Company that the version of its
software that the Company is currently utilizing is Year 2000 compliant. The
Company utilized a seven step process in addressing compliance of other
non-enterprise hardware and software systems: (1) awareness; (2) inventory of
all systems and documentation; (3) assessment to identify any areas of
noncompliance; (4) remediation/renovation of any noncompliant systems; (5)
verification of compliance through testing and/or vendor certification; (6)
implementation of any necessary changes revealed during verifications; and (7)
monitoring of the results of implementation. The Company has completed the
entire process for its non-enterprise software and hardware as of November 30,
1999.
The Company has identified and made inquiries of its significant suppliers and
large public and private sector customers to determine the extent to which the
Company is vulnerable to those third parties' failure to solve their own Year
2000 issues. There can be no guarantee that the systems of other companies or
public agencies with which the Company does business will be timely converted,
or that failure to convert by another company or public agency would not have a
material adverse effect on the Company.
The Company's most likely worst-case Year 2000 scenario would be an interruption
in work or cash flow resulting from unanticipated problems encountered with the
information systems of the Company, or of any of the significant third parties
with whom the Company does business. The Company believes that the risk of
significant business interruption due to unanticipated problems with its own
systems is low based on the completion of the Year 2000 project. If unforeseen
internal disruptions occur, the Company believes
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<PAGE>
that its existing disaster recovery program, which includes the manual
processing of certain key transactions, would significantly mitigate the impact.
The Company's highest risk relates to significant suppliers or customers failing
to remediate their Year 2000 issues in a timely manner. Relating to its
suppliers, the Company has identified and will continue to identify alternative
suppliers. The Company's suppliers are generally locally or regionally based,
which tends to lessen the Company's exposure from the lack of readiness of any
single supplier. The risk relating to the Company's customers relates primarily
to any delay in receipt of payment due to a customer's unresolved Year 2000
issue. The Company's existing financial resources will help to mitigate such an
impact and the Company will continue to assess this risk as it receives
communications about the Year 2000 status of its customers.
The Company estimates that costs to address the Year 2000 issue will be
insignificant, including costs already incurred. Estimates consider consulting
fees and costs to remediate or replace hardware and software as well as
non-incremental costs resulting from redeployment of internal resources. The
Company's Year 2000 costs will be funded from its operating cash flows.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
The Company considered the provision of Financial Reporting Release No. 48,
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Company
had no holdings of derivative financial or commodity instruments at September
30, 1999. A review of other financial instruments and risk exposures at that
date revealed the Company did not have exposure to interest rate risk.
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<PAGE>
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September 30,
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,670 $ 6,589
Accounts receivable, less allowance for doubtful
accounts of $280 in 1999 and $122 in 1998 3,719 3,579
Refundable taxes 205 208
Other current assets 1,218 749
-------- --------
Total current assets 6,812 11,125
Fixed assets-net 738 1,311
Intangible assets-net 3,118 4,070
Other assets-net 984 1,564
-------- --------
Total assets $ 11,652 $ 18,070
======== ========
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable $ 2,568 $ 3,585
Accrued liabilities 1,114 1,527
Deferred revenue 2,073 2,139
-------- --------
Total current liabilities 5,755 7,251
Convertible subordinated debenture - 4,585
-------- --------
Total liabilities 5,755 11,836
-------- --------
Commitments (See note)
Shareholders' equity:
Preferred stock, no par value; 1,000 shares
authorized, Issued and Outstanding; 200
and none at September 30, 1999 and 1998, respectively
(liquidation value $2,000) 2,000 -
Common stock, no par value; 40,000 shares authorized:
Issued and outstanding; 24,896 shares and 20,601
shares at September 30, 1999 and 1998, respectively 71,340 60,574
Accumulated deficit (67,443) (54,340)
-------- --------
Total shareholders' equity 5,897 6,234
-------- --------
Total liabilities and shareholders' equity $ 11,652 $ 18,070
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 25
<PAGE>
Consolidated Statements of Operations
(In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net product sales $ 12,148 $ 12,480 $ 11,075
Services and other revenue 8,742 7,679 1,551
-------- -------- --------
Net sales 20,890 20,159 12,626
Royalty revenue - 1,541 5,340
-------- -------- --------
Total revenue 20,890 21,700 17,966
Costs and expenses:
Cost of products sold 5,924 9,709 8,976
Cost of services and other 3,363 2,446 325
Research and development 3,022 6,419 7,504
Selling, general and administrative 15,474 24,012 14,468
Loss on impairment of assets - 2,061 -
Loss from unconsolidated company 5,098 10,616 -
Acquisition of in-process research
& development - - 6,600
-------- -------- --------
Operating loss (11,991) (33,563) (19,907)
Interest income (397) (598) (746)
Interest expense 1,537 3,466 3,532
Other (income) and expense, net (28) 274 (689)
-------- -------- --------
Loss before income taxes (13,103) (36,705) (22,004)
Provision (benefit) for income taxes - 6,500 (4,503)
-------- -------- --------
Net loss $(13,103) $(43,205) $(17,501)
======== ======== ========
Basic net loss per share $ (0.59) $ (2.48) $ (1.15)
======== ======== ========
Diluted net loss per share $ (0.59) $ (2.48) $ (1.15)
======== ======== ========
Shares used in basic per share calculation 22,199 17,433 15,222
======== ======== ========
Shares used in diluted per share calculation 22,199 17,433 15,222
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
Consolidated Statements of Shareholders' Equity
(In thousands except per share data)
<TABLE>
<CAPTION>
Retained
Preferred Preferred Common Common Earnings Total
Stock Stock Stock Stock (Accumulated Shareholders'
Shares Amount Shares Amount (Deficit) Equity
--------- --------- ------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
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 debenture - - 174 3,664 - 3,664
Net loss - - - - (17,501) (17,501)
--- ------ ------ ------- -------- --------
Balances at September 30, 1997 - - 15,603 27,081 (11,135) 15,946
Issuance of common stock:
Stock options exercised ($0.34-$9.88
per share) - - 367 915 - 915
Employee stock purchase plan ($6.28 and $10.70
per share) - - 65 528 - 528
Conversion of subordinated debenture - - 4,566 30,325 - 30,325
Discount on $10 million convertible
subordinated debenture - - - 1,111 - 1,111
Valuation of stock warrants issued in
connection with $10 million convertible
subordinated debenture - - - 614 - 614
Net loss - - - - (43,205) (43,205)
--- ------ ------ ------- -------- --------
Balances at September 30, 1998 - - 20,601 60,574 (54,340) 6,234
Issuance of Series B preferred stock 200 2,000 - - - 2,000
Issuance of common stock:
Stock options exercised ($1.38-$2.00
per share) - - 35 27 - 27
Employee stock purchase plan ($1.33 and $3.37
per share) - - 60 129 - 129
Conversion of subordinated debenture - - 4,200 9,927 - 9,927
Discount on $5 million convertible
subordinated debenture - - - 555 - 555
Stock warrants issued in connection with a
$5 million convertible subordinated debenture - - - 128 - 128
Net loss - - - - (13,103) (13,103)
--- ------ ------ ------- -------- --------
Balances at September 30, 1999 200 $2,000 24,896 $71,340 $(67,443) $ 5,897
=== ====== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $(13,103) $(43,205) $(17,501)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Acquisition of in-process research & development expenses - - 6,600
Sale of storage business - (200) -
Loss on impairment of assets - 2,061 -
Loss from unconsolidated company 5,098 10,616 -
Writedown of inventory - 1,095 -
Writeoff of patents - 387 -
Writeoff of capitalized software - 103 -
Adjustment of goodwill and purchased technology - 909 -
Amortization of capitalized financing costs 479 1,322 -
Discount amortization on subordinated debenture 555 1,111 2,778
Depreciation and amortization 2,511 3,036 1,404
Provision for doubtful accounts 282 122 87
Provision for inventory allowances - 160 480
Realized gains on marketable securities - - (777)
Deferred and refundable income taxes 3 6,509 (4,743)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (422) 2,846 (1,092)
Decrease in inventories - 1,795 681
Decrease (increase) in other current assets (469) 244 (513)
Increase (decrease) in accounts payable (1,017) (1,183) 2,702
Increase (decrease) in accrued liabilities (504) (1,727) 1,775
Increase (decrease) in deferred revenue (66) 1,039 1,100
-------- -------- -------
Net cash used in operating activities (6,653) (12,960) (7,019)
-------- -------- -------
Cash flows provided by (used in) investing activities:
Acquisition of fixed assets (189) (723) (2,650)
Investment in and advances to unconsolidated company (5,098) (1,559) (2,024)
Purchase of short-term investments - - (9,596)
Proceeds from sale of short-term investments - 9,596 3,159
Notes receivable from unconsolidated company - (2,022) -
Bank guarantee for unconsolidated company - (1,000) -
Proceeds from sale of storage business - 200 -
Increase in other assets (477) (1,351) (1,089)
Purchase of companies net of cash acquired - - (11,062)
-------- -------- -------
Net cash provided by (used in) investing activities (5,764) 3,141 (23,262)
-------- -------- -------
Cash flows provided by (used in) financing activities:
Issuance of preferred stock 2,000 - -
Issuance of common stock 156 1,443 1,494
Issuance of subordinated debenture 5,342 10,741 23,795
-------- -------- -------
Net cash provided by financing activities 7,498 12,184 25,289
-------- -------- -------
Net increase (decrease) in cash (4,919) 2,365 (4,992)
Cash and cash equivalents, beginning of year 6,589 4,224 9,216
-------- -------- -------
Cash and cash equivalents, end of year $ 1,670 $ 6,589 $ 4,224
======== ======== =======
Supplemental cash flow information:
Income taxes paid $ 5 $ 27 $ 265
Interest paid 57 35 -
Supplemental non-cash investing and financing activities:
Issuance of common stock in business combination $ - - $ 1,200
Capitalized financing costs $ 219 $ 558 $ 1,038
Conversion of subordinated debenture and accrued interest $ 9,927 $ 30,325 $ 3,664
Conversion of note receivable to investment in
unconsolidated company $ - - $ 300
Common stock purchase warrants $ 128 $ 614 -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
Notes to Consolidated Financial Statements
(In thousands except per share data)
Summary of Significant Accounting Policies:
Zitel Corporation ("Zitel" or the "Company") is an information technology
company specializing in computer and systems optimization, data correlation and
search technology. Zitel acquires, develops and markets E-Business performance
management solutions. Product offerings include multi-platform performance
analysis and automatic correlation software used to optimize performance in
E-Business infrastructure systems, professional services for existing and new
customers, and software-based Internet tools.
The following is a summary of Zitel's significant accounting policies:
Basis of Presentation:
These consolidated financial statements contemplate the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company has incurred losses in each of the last three fiscal years and has an
accumulated deficit. Fiscal year 1998 included losses from the storage business,
which was sold in July 1998 and the write off of the Company's investment in
MatriDigm Corporation ("MatriDigm"). Fiscal year 1999 losses included amounts
advanced to MatriDigm during 1999. MatriDigm filed Chapter 7 bankruptcy in
October 1999 and no further advances will be made.
Management's plans to reverse the recent trend of losses are to increase
revenues and gross margins while controlling costs. If the Company is unable to
generate adequate cash flows from operations, the Company may need to seek
additional sources of capital. There can be no assurance that the Company will
be able to obtain such funding, if necessary, on acceptable terms or at all.
Principles of Consolidation:
The consolidated financial statements include the accounts of Zitel Corporation
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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<PAGE>
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.
Fixed Assets:
Fixed assets are stated at cost less accumulated depreciation, other than
leasehold improvements, and are depreciated on a straight-line basis over their
estimated useful lives (three years). Leasehold improvements are amortized over
the lesser of their useful life or remaining term of the related lease. When
assets are disposed of, the cost and related accumulated depreciation are
removed from the accounts and the resulting gains and losses are included in the
results of operations.
Deferred Software Implementation Costs:
The Company capitalizes substantially all costs related to the purchase of
software and its implementation, which includes the cost of purchased software,
consulting fees and the use of certain specified Company resources. Zitel
amortizes such costs on a straight-line basis over the estimated life of the
computer software, which is five years. The Company evaluates the fair value of
the deferred software implementation costs at each balance sheet date and
records write-downs to the recoverable costs. In June 1998, the Company wrote
down the net book value of amounts capitalized, which related to all the
manufacturing modules of the recently sold storage business. No such write-downs
were deemed necessary in fiscal year 1999. As of September 30, 1999 and 1998,
$351 thousand in costs have been capitalized and are included in other long-term
assets. Amortization in the amount of $94 thousand and $193 thousand was charged
to expense during fiscal years 1999 and 1998, respectively. American Institute
of Certified Public Accountants SOP 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal
Page 30
<PAGE>
Use", issued on March 4,1998, became effective for the Company in fiscal year
1999. The Company believes there was no impact on the Financial Statements.
Revenue Recognition:
The Company adopted the provisions of Statement of Position 97-2 ("SOP 97-2"),
"Software Revenue Recognition", as amended by SOP 98-4, "Deferral of the
Effective Date of Certain Provisions of SOP 97-2", effective October 1, 1998.
SOP 97-2 delineates the accounting for software products, products including
software that is not incidental to the product, and maintenance revenues. Under
SOP 97-2, the Company recognizes product license revenue upon shipment if a
signed contract exists, the fee is fixed and determinable, collection of the
resulting receivables is probable and the product returns can be reasonably
estimated.
For contracts with multiple obligations (e.g., maintenance and consulting
services), revenue from product licenses are recognized when delivery has
occurred, collection of the resulting receivables is probable, the fee is fixed
and determinable and the vendor-specific objective evidence exists to allocate
the total fee to all delivered and undelivered elements of the arrangement. The
Company recognizes revenue allocated to maintenance and support fees, for
ongoing customer support and product updates, ratably over the period of the
relevant contract. For revenue allocated to consulting services and for
consulting services sold separately, the Company recognizes revenue as the
related services are performed. Maintenance and consulting services are included
in services and other revenue.
Prior to the adoption of SOP 97-2, effective October 1, 1998, the Company
recognized revenue from the sale of product licenses upon shipment if remaining
obligations were insignificant and collection of the resulting receivables was
probable. Revenue from software maintenance contracts, including amounts
unbundled from product sales, were deferred and recognized ratably over the
period of the contract.
The Company recognizes revenue from Year 2000 conversion services when the
conversion services are completed. Revenue from Year 2000 conversion services
are included in services and other revenue.
Revenue from the storage business was recognized at the time products were
shipped to customers.
Page 31
<PAGE>
Warranty:
All of the Company's storage products were covered by a one-year limited
warranty. Estimated future costs of repair, replacement or customer
accommodation were accrued and charged to cost of sales based upon estimates of
future product returns and repair costs derived from historical product sales
information and analyses of historical data. In estimating the level of accrual,
the Company's management makes assumptions relating to the level of product
returns and costs of repair. Management reviews the adequacy of these
assumptions based on historical experience.
Research and Development Expenditures:
Research and development expenditures are charged to operations as incurred.
Software Development Costs:
SFAS No. 86 provides for the capitalization of certain software development
costs after technological feasibility of the software is attained. Capitalized
costs are amortized using the greater of the amount computed using the ratio
that current gross revenues for a product bear to the total of current and
anticipated gross revenues for that product, or on a straight-line basis over
the estimated product life cycle (approximately three years). The Company
evaluates the estimated net realizable value of each software product at each
balance sheet date and records write-downs to net realizable value for any
products with a net book value in excess of net realizable value. Software
development costs capitalized in fiscal years 1999 and 1998 were $381 thousand
and $562 thousand, respectively. Amortization of $410 thousand was charged to
expense for the fiscal year 1999. Amortization expense was $62 thousand and zero
for fiscal years 1998 and 1997, respectively.
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
Page 32
<PAGE>
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 six 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 impairment, if any, is measured based on
projected discounted future operating cash flows and is recognized as a write
down of the asset. In fiscal year 1998, the Company reassessed the amortization
period for goodwill and reduced the life from seven to six years based on future
projections.
Income Taxes:
Deferred income taxes are recognized for temporary differences by applying
enacted statutory rates applicable to future years to differences between the
financial statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation allowances
are established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Comprehensive Loss:
Effective October 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". There were no differences between
comprehensive loss and net loss as reported for each of the fiscal years 1997,
1998 and 1999.
Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes
Page 33
<PAGE>
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for the Company in fiscal year 2000
and will not require retroactive restatement of prior period financial
statements. The Company has not yet quantified the impact of adopting SFAS No.
133 on its financial statements, but the Company believes there will not be a
significant impact.
In December 1998, Accounting Standards Executive Committee ("AcSEC") released
Statement of Position 98-9 ("SOP 98-9"), "Modification of Statement of Position
97-2 (SOP 97-2), `Software Revenue Recognition', with Respect to Certain
Transactions". SOP 98-9 amends SOP 97-2 to define how an entity recognizes
revenue for multiple element arrangements for each element delivered. The
provisions of SOP 98-9 became effective December 15, 1998. These paragraphs of
SOP 97-2 and SOP 98-9 will be effective for transactions that are entered into
in fiscal years beginning after March 15, 1999. Retroactive application is
prohibited. We do not expect the adoption of SOP 98-9 to have a material effect
on our current revenue recognition policies.
Net Loss Per Share:
SFAS No. 128, "Earnings per Share", requires the presentation of basic and
diluted loss per common share. Basic loss per common share is computed by
dividing net loss by the weighted average number of common shares outstanding
for the period. Diluted loss per common share is computed giving effect to all
potentially dilutive common shares that were outstanding during the period.
Dilutive common shares consist of the incremental common shares issuable upon
the conversion of convertible subordinated debt (using the "if converted"
method) and exercise of stock options and warrants for all periods.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables. The Company
places its cash investments with high credit quality financial institutions and
limits the amount of exposure to any one financial institution. Concentrations
of credit risk with respect to accounts receivables are limited due
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<PAGE>
to the diversity of the Company's customers, both geographically and within
different industry segments. The Company performs ongoing evaluations of its
customers' financial condition and generally does not require collateral. The
Company maintains allowances for potential credit losses.
Fair Value of Financial Instruments:
Carrying value amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable,
subordinated debentures, and other accrued liabilities approximate fair value
due to their short maturities.
Sale of Storage Business:
Due to the lack of performance of the storage business, on July 24, 1998, the
Company completed the sale of the net assets of the business, which totalled
$2.1 million, for cash and a note totalling $1.0 million and royalties of up to
$4.0 million, payable over four years based on the sales performance of the new
company. Fixed assets in the amount of $1.3 million and deferred software
implementation costs of $800 thousand, which related to manufacturing modules
that would no longer be used, were taken as a loss on impairment of assets
during fiscal year 1998. Inventory in the amount of $1.7 million and patents in
the amount of $400 thousand were charged against cost of sales during fiscal
year 1998.
Fixed Assets:
<TABLE>
<CAPTION>
September 30,
1999 1998
------- -------
<S> <C> <C>
Fixed Assets:
Office furniture and equipment $ 3,044 $ 3,105
Engineering equipment 21 10
Leasehold improvements 651 661
------- -------
3,716 3,776
Less accumulated depreciation
and amortization (2,978) (2,465)
------- -------
$ 738 $ 1,311
======= =======
</TABLE>
Page 35
<PAGE>
Depreciation expense was $762 thousand, $1,600 thousand and $1,316 thousand for
fiscal years 1999, 1998 and 1997, respectively.
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 the unaudited pro-forma financial
information with respect to the combined companies as described above,
disclosing pro-forma results of operations for the fiscal year 1997, as though
the entities had been combined as of October 1, 1997. 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.
<TABLE>
<CAPTION>
Fiscal Year
1997
-----------
<S> <C>
Revenue $ 28,263
Net loss $(13,624)
Net loss per share $ (0.90)
</TABLE>
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 six and five years, respectively. The
Company periodically assesses the recoverability of the intangible assets by
determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future
Page 36
<PAGE>
operating cash flows of the acquired operation. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows and
is recognized as a write down of the asset. At June 30, 1998, a write-down of a
combined total of $658 thousand was made to goodwill and purchased technology.
In addition, the amortization period of goodwill was adjusted to six years from
seven years. Intangible assets consist of the following as of:
<TABLE>
<CAPTION>
September 30,
1999 1998
------ ------
<S> <C> <C>
Goodwill $ 2,768 $ 2,768
Purchased technology 2,588 2,588
Less accumulated amortization (2,238) (1,286)
------- -------
$ 3,118 $ 4,070
======= =======
Other Assets:
Deferred software implementation costs $ 351 $ 351
Capitalized financing costs on
subordinated debt - 273
Purchased software 550 550
Other 881 716
------- -------
1,782 1,890
Less accumulated amortization (798) (326)
------- -------
$ 984 $ 1,564
======= =======
</TABLE>
Investment in Unconsolidated Company:
The Company invested $7.4 million to acquire a 31% interest in MatriDigm
Corporation ("MatriDigm") from fiscal year 1996 through fiscal year 1998.
The Company recorded approximately $624 thousand in losses under the equity
method from the unconsolidated company during the year ended September 30, 1998.
Zitel also wrote off its investment in MatriDigm and fully reserved certain
demand notes and bank guarantees during fiscal 1998.
Zitel advanced MatriDigm an additional $4.9 million during fiscal year 1999. The
Company paid $250 thousand during the year ended September 30, 1999, for a
non-exclusive, royalty-bearing license for the MatriDigm technology. Zitel also
entered into an
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<PAGE>
agreement to acquire the balance of MatriDigm in August 1999. This agreement was
terminated in September 1999 and MatriDigm filed Chapter 7 bankruptcy in October
1999. The Company recorded approximately $5.1 million during fiscal year 1999 in
the write-off of the license and all advances to the company.
The following is a summary of unaudited financial information with respect to
MatriDigm, as of and for the year ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 5,479 $ 123
Gross profit 2,194 38
Net loss (13,256) (14,549)
Current assets 2,160 3,816
Non-current assets 3,363 4,009
Current liabilities 7,990 1,533
Non-current liabilities 5,172 5,479
</TABLE>
MatriDigm filed Chapter 7 bankruptcy in October 1999 and did not provide the
Company with financial statements for the year ended September 30, 1999.
Accrued Liabilities:
<TABLE>
<CAPTION>
September 30,
1999 1998
------ ------
<S> <C> <C>
Accrued payroll and related $ 432 $ 788
Accrued vacation 539 523
Accrued commissions 35 52
Other accrued liabilities 108 164
------ ------
$1,114 $1,527
====== ======
</TABLE>
Commitments:
The Company leases its operating facilities in Fremont, CA, Fairfax, VA,
Leatherhead, United Kingdom, and Rotterdam, The Netherlands, 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 $1,279 thousand, net of sublease income of $173 thousand in fiscal year
1999, $1,763 thousand in fiscal year 1998 and $789 thousand in fiscal year 1997.
Page 38
<PAGE>
Future minimum obligations under all facility leases at September 30, 1999
aggregate approximately $6.2 million, without regard to potential sublease
income, and are payable as follows:
<TABLE>
<CAPTION>
Facility Sublease
Lease Income
Fiscal Year Amount Amount
----------- -------- --------
<S> <C> <C>
2000 $1,508 $ 565
2001 1,546 647
2002 1,580 461
2003 1,034 377
Thereafter 518 -
</TABLE>
5% Convertible Subordinated Debentures:
On May 22, 1997, the Company issued a $25 million principal amount of 5%
Convertible Subordinated Debentures (the "5% Debentures") which were due
November 22, 1999. The Consolidated Statement of Operations for fiscal year 1997
included a charge to interest expense in the amount of $2,778 thousand related
to the amortization of the total discount on the 5% Debentures. During fiscal
year 1997, approximately $3.7 million of principal and accrued interest were
converted to 174 thousand shares of common stock at prices ranging from $20.28
to $22.74 per share. During fiscal year 1998, the remaining $25.2 million of
principal and accrued interest were converted to 3.3 million shares of common
stock at prices ranging from $4.20 to $13.95 per share.
3% Convertible Subordinated Debentures:
On June 16, 1998, the Company issued a $10 million principal amount of 3%
Convertible Subordinated Debentures (the "3% Debentures") which were due June
15, 1999, and five-year common stock purchase warrants for 150,000 shares of the
Company's common stock at an exercise price of $5.10. The fair value of the
warrants was determined using the Black Scholes option pricing model. The
Consolidated Statement of Operations for fiscal year 1998 includes a charge to
interest expense in the amount of $1.1 million related to the amortization of
the total discount on the 3% Debentures. During fiscal 1998, approximately $5.1
million of principal and accrued interest were converted to 1.3 million shares
of common stock. During fiscal year 1999, approximately $4.9 million was
converted into 1.3 million shares of common stock.
Page 39
<PAGE>
3% Convertible Subordinated Debentures:
On February 3, 1999, the Company issued a $5 million principal amount of 3%
Convertible Subordinated Debentures (the "1999 Debentures") which would
automatically convert on February 1, 2000; and five-year common stock purchase
warrants to acquire 75,000 shares of the Company's common stock at an exercise
price of $1.71. The fair value of the warrants was determined using the Black
Scholes option pricing model. The 1999 Debentures accrued interest at the rate
of 3% per annum. Principal and accrued interest were convertible into Common
Stock of the Company at a price of $1.70 per share.
Interest expense and amortization of the debt issuance costs in the amount of
$555 thousand are included in the Consolidated Statement of Operations for the
fiscal year 1999. The Debentures and accrued interest were fully converted into
2.9 million shares of common stock as of September 30, 1999.
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. As of September 30, 1999, 200 thousand shares of Series B
preferred stock had been issued.
The Series B preferred stock are non-voting; entitled to annual dividends at
$0.30 per share when and if declared by the Board of Directors; and are
convertible into common stock. The initial conversion price is equal to the
average closing price of the common stock on the ten trading days preceding the
issuance of Series B preferred stock. The conversion price changes pursuant to
the agreement; however, the maximum number of shares of common stock issuable
upon conversion is 4,695,897 unless and until the shareholders of the Company
have approved the issuance of additional shares. Series B automatically converts
upon the vote of at least 75% of the Series B holders or July 2, 2000. Upon any
liquidation, as defined in the agreement, the holders of Series B are entitled
to receive, prior and in preference to any distribution of any assets of the
Company to the holders of common stock a value of $10 per share plus declared
and unpaid dividends. The Company has the right to redeem the Series B at a
Page 40
<PAGE>
redemption price equal to $10 per share plus declared and unpaid dividends.
Stock Option Plans:
At September 30, 1999, the Company had reserved 6.7 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, 1999 and 1998, there were 795
thousand and 338 thousand shares reserved for future grants, respectively.
Activity in the Company's option plans during fiscal years 1997, 1998 and 1999
is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Number Average Options
of Price Price Total
Shares Per Share Per Share Amount
------ --------- ------------- -------
<S> <C> <C> <C> <C>
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
Granted 1,471 $11.51 $ 2.53-$16.63 16,928
Cancelled (1,024) $17.30 $ 1.50-$33.00 (17,712)
Exercised (367) $ 2.49 $ .34-$ 9.88 (915)
----- ------------- -------
Balances, September 30, 1998 2,090 $ 9.09 $ 1.38-$23.25 18,991
Granted 1,092 $ 2.41 $ 1.22-$ 4.09 2,522
Cancelled (1,059) $ 9.94 $ 1.56-$23.25 (10,714)
Exercised (35) $ 1.56 $ 1.38-$ 2.00 (27)
----- ------------- -------
Balances, September 30, 1999 2,088 $ 5.16 $ 1.22-$16.63 $10,772
===== ====== ============= =======
</TABLE>
At September 30, 1999, 1998 and 1997, respectively, options for 1.0 million, 1.3
million and 867 thousand shares were exercisable at a weighted exercise price
per share of $5.56, $8.48, and $3.66, respectively.
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
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<PAGE>
grants of options to purchase an aggregate of 200 thousand shares of common
stock. In March 1999, the number of shares reserved for issuance under the
Directors' Plan increased by 200 thousand. Options in the amount of 30
thousand, 24 thousand, 24 thousand, 24 thousand and 70 thousand were granted
in fiscal years 1995, 1996, 1997, 1998, and 1999, respectively. Options were
granted in fiscal years 1999, 1998 and 1997 at a weighted average exercise
price of $3.42, $10.81 and $11.58, respectively. Options totalling 21
thousand shares were exercised during fiscal year 1997 with prices ranging
from $5.88 to $6.22. No options were exercised during fiscal year 1998 or
fiscal year 1999. At September 30, 1999, 228 thousand shares are available
for future grant. At September 30, 1999, 144 thousand shares were exercisable
at prices ranging from $1.22 to $33.00. At September 30, 1998, 69 thousand
shares were exercisable at prices ranging from $5.88 to $33.00. At September
30, 1997, 38 thousand shares were exercisable at prices ranging from $5.88 to
$33.00.
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
Page 42
<PAGE>
compensation. At the end of each offering period, shares are purchased by the
participants at 85% of the lower of the fair market value at the beginning or
the end of the offering period. The 15% discount is treated as equivalent to the
cost of issuing stock for financial reporting purposes. During fiscal years
1999, 1998 and 1997, shares issued under the Plan were 60 thousand, 65 thousand
and 35 thousand shares, respectively. Since inception of the Plan, approximately
1.8 million shares have been issued.
Pro Forma Stock-Based Compensation:
As of September 30, 1999, options outstanding under both the stock option plans
and 1995 Non-Employees Directors' Stock Option Plan were as follows:
<TABLE>
<CAPTION>
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
- ------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.22-$ 1.66 344 7.75 $ 1.50 129 $ 1.65
$ 1.69-$ 1.69 4 0.49 $ 1.69 4 $ 1.69
$ 1.75-$ 1.75 350 9.82 $ 1.75 75 $ 1.75
$ 2.00-$ 2.56 277 4.32 $ 2.26 201 $ 2.14
$ 2.84-$ 4.06 257 8.24 $ 3.54 83 $ 3.56
$ 4.09-$ 5.63 270 5.47 $ 4.96 266 $ 4.96
$ 5.88-$ 7.98 226 5.29 $ 6.38 130 $ 6.41
$ 8.19-$10.69 228 8.05 $10.21 89 $ 9.75
$10.81-$13.88 253 6.77 $13.57 171 $13.42
$14.19-$33.00 30 7.88 $23.33 30 $29.04
----- ---- ------ ----- ------
$ 1.22-$33.00 2,239 7.10 $ 5.48 1,178 $ 6.18
</TABLE>
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 consistent with the provisions of SFAS No.
123, the Company's net loss and net loss per share for fiscal years 1999, 1998
and 1997 would have been modified to the pro forma amounts indicated below (in
thousands, except per share amounts):
Page 43
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss - as reported $(13,103) $(43,205) $(17,501)
======== ======== ========
Net loss - pro forma $(15,461) $(51,574) $(22,138)
======== ======== ========
Basic and diluted net loss per share - as reported $ (0.59) $ (2.48) $ (1.15)
======== ======== ========
Basic and diluted net loss per share - pro forma $ (0.69) $ (2.96) $ (1.45)
======== ======== ========
</TABLE>
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 1999, 1998 and 1997 were $1.9 million, $5.3 million and $13.4
million and $1.58, $6.75 and $12.99, 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 1999,
1998 and 1997:
<TABLE>
<S> <C>
Expected volatility 76% - 118%
Risk-free interest rate 4.77% - 6.22%
Expected life .50 - 9.62 years
Expected dividend yield 0.0%
</TABLE>
The aggregate fair value and weighted average fair value of each purchase under
the employee stock purchase plan in fiscal years 1999, 1998 and 1997 were $73
thousand, $229 thousand and $214 thousand and $2.76, $5.71 and $6.45,
respectively 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 1999, 1998 and 1997:
<TABLE>
<S> <C>
Expected volatility 65% - 122%
Risk-free interest rate 4.62% - 5.63%
Expected life .49 years
Expected dividend yield 0.0%
</TABLE>
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 $10 thousand per year, of their earnings on a
pre-
Page 44
<PAGE>
tax basis through contributions to the Plan. The Plan provides for employer
contributions at the discretion of the Board of Directors; however, no such
contributions were made in fiscal years 1999, 1998 or 1997.
Earnings Per Shares ("EPS") Disclosures:
In accordance with the disclosure requirements of SFAS 128, a reconciliation of
the numerator and denominator of basic and diluted EPS is provided as follows
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Fiscal Years
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Numerator - basic and diluted EPS
Net loss $(13,103) $(43,205) $(17,501)
-------- -------- --------
Denominator - basic EPS
Common stock outstanding 22,199 17,433 15,222
-------- -------- --------
Total shares used in calculation of basic EPS 22,199 17,433 15,222
-------- -------- --------
Basic net loss per share $ (0.59) $ (2.48) $ (1.15)
-------- -------- --------
Denominator - diluted EPS
Denominator - basic EPS 22,199 17,433 15,222
Effect of dilutive securities:
Common stock options - - -
-------- -------- --------
Total shares used in calculation of diluted EPS 22,199 17,433 15,222
-------- -------- --------
Diluted net loss per share $ (0.59) $ (2.48) $ (1.15)
======== ======== ========
</TABLE>
Stock options to purchase 2.3 million, 2.1 million and 2.0 million shares of
common stock in fiscal years 1999, 1998 and 1997, respectively, at prices
ranging from $1.22 to $33.00 and warrants to purchase 225,000, 150,000 and zero
shares of common stock in fiscal years 1999, 1998 and 1997, respectively, at
prices ranging from $1.71 to $5.10, were outstanding but not included in the
computation of diluted net loss per share as they were antidilutive.
In addition, the Company had $3 million, $4.9 million and $21.7 million of
convertible debentures outstanding in 1999, 1998 and 1997, respectively, which
were convertible into approximately 4.2 million, 1.2 million and 990 thousand
shares of common stock but were not included in the computation of diluted net
loss per share as they were antidilutive.
Page 45
<PAGE>
Income Taxes:
The provision (benefit) for income taxes for the fiscal years 1999, 1998 and
1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current expense:
Federal $ - $ - $ -
State - - -
Foreign - 189 -
------- ------- -------
- 189 -
------- ------- -------
Deferred tax expense (benefit):
Federal - - (3,989)
State - - (514)
------- ------- -------
- - (4,503)
------- ------- -------
Change in valuation allowance - 6,311 -
------- ------- -------
$ - $ 6,500 $(4,503)
======= ======= =======
</TABLE>
The Company's effective tax rate for fiscal years 1999, 1998 and 1997 differs
from the U.S. federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Federal income tax (benefit) at statutory rate (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit (2.2) (3.4) (4.1)
Tax credits (0.1) (1.5) (2.3)
Non-deductible interest expense - - 5.1
Other, net 3.1 2.4 3.6
Change in valuation allowance - 17.2 -
Net operating losses not benefited 33.2 37.0 11.2
---- ---- -----
0.0% 17.7% (20.5)%
==== ==== =====
</TABLE>
The following table shows the major components of the deferred tax asset as of
September 30, 1999 and 1998:
Page 46
<PAGE>
<TABLE>
<S> <C> <C>
Deferred tax assets and liabilities:
Current:
Accounts receivable, inventory and
other accruals $ 7,355 $ 1,634
Accrued liabilities 368 45
Net operating loss carryforwards 16,211 13,597
Tax credit carryforwards 3,592 3,399
------- -------
Total before valuation allowance 27,526 18,675
Valuation allowance (27,526) (18,675)
------- -------
Net deferred tax asset $ - $ -
======= =======
</TABLE>
At September 30, 1999, the Company has federal and state net operating loss
("NOL") carryforwards of 45.6 million and 10.3 million, respectively, to reduce
future taxable income. The Company has federal and state general business credit
carryforwards of $2.5 million and $1.1 million, respectively, to reduce future
taxable income. These carryforwards expire in 2000 through 2020 if not utilized.
In addition, the Company has $6.3 million of NOLs related to stock option
exercises, the benefit of which will be credited to equity when utilized.
Due to the net loss incurred in fiscal year 1999, accumulated deficit and lack
of alternative tax planning strategies, there is uncertainty surrounding the
realization of the favorable tax attributes in future tax returns. Accordingly,
the Company placed a valuation allowance against its otherwise recognizable net
deferred tax assets.
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 received a royalty based on sales by the third party of
the product developed. Royalties totalling approximately $1.5 million and $5.3
million were received from the third party in fiscal years 1998 and 1997,
respectively. During fiscal year 1998, the Company negotiated and received the
final payment for all royalty obligations from the third party.
Page 47
<PAGE>
Segment Information:
During fiscal year 1999, the Company had two reportable segments - Datametrics
and Year 2000 Services. The Datametrics business segment develops and markets
E-business performance management software solutions. The Year 2000 business
segment provides services which review software code and identify areas within
the code where year 2000 problems may occur.
During fiscal years 1998 and 1997, the Company also had the data storage
business segment. The data storage segment was disposed of in July 1998. The
data storage segment developed memory algorithms which it incorporated and sold
in high performance data storage systems.
The following table presents certain segment financial information for the
fiscal years 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
Datametrics Year 2000 Storage Total
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Fiscal Year 1997
Revenues from external customers $ 2,322 $ - $ 15,644 $ 17,966
Inter segment revenues - - - -
------- ------- -------- --------
Total revenues $ 2,322 $ - $ 15,644 $ 17,966
======= ======= ======== ========
Segment loss from operations $ (828) $ (779) $(11,700) $(13,307)
======= ======= ======== ========
Segment assets $12,884 $ - $ - $ 12,884
======= ======= ======== ========
Fiscal Year 1998
Revenues from external customers $13,794 $ 667 $ 7,239 $ 21,700
Inter segment revenues 635 - - 635
------- ------- -------- --------
Total revenues $14,429 $ 667 $ 7,239 $ 22,335
======= ======= ======== ========
Segment loss from operations $(2,543) $(1,703) $(16,640) $(20,886)
======= ======= ======== ========
Segment assets $ 9,933 $ - $ - $ 9,933
======= ======= ======== ========
Fiscal Year 1999
Revenues from external customers $17,140 $ 3,750 $ - $ 20,890
Inter segment revenues 1,697 - - 1,697
------- ------- -------- --------
Total revenues $18,837 $ 3,750 $ - $ 22,587
======= ======= ======== ========
Segment income (loss) from operations $ 48 $(6,941) $ - $ (6,893)
======= ======= ======== ========
Segment assets $ 9,017 $ - $ - $ 9,017
======= ======= ======== ========
</TABLE>
Page 48
<PAGE>
During each of the fiscal years presented, the Company's financial system did
not produce separate asset information for the Year 2000 and Data Storage
segments.
Reconciliations of the segment financial information to the consolidated totals
as of and for each of the fiscal years 1997, 1998 and 1999 are provided below
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year
l997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Net revenues from reportable segments $ 17,966 $ 22,335 $ 22,587
Elimination of intersegment - (635) (1,697)
-------- -------- --------
Total consolidated net revenues $ 17,966 $ 21,700 $ 20,890
======== ======== ========
Loss from operations:
Loss from operations for reportable segments $(13,307) $(20,886) $ (6,893)
Acquisition of in-process R&D (6,600) - -
Loss on impairment of assets - (2,061) -
Loss from unconsolidated company - (10,616) (5,098)
-------- -------- --------
Consolidated loss from operations $(19,907) $(33,563) $(11,991)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
September 30,
l997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Assets:
Assets of Datametrics segment $ 12,884 $ 9,933 $ 9,017
Unallocated assets 50,496 23,611 17,668
Eliminations
Intercompany receivables (1,773) (3,161) (2,720)
Investments in and advances to related parties (12,313) (12,313) (12,313)
-------- -------- --------
Consolidated assets $ 49,294 $ 18,070 $ 11,652
======== ======== ========
</TABLE>
Net revenues to external customers are based on the location of the customer.
Geographic information for fiscal years 1997, 1998 and 1999 is presented in the
table below (dollars in thousands):
Page 49
<PAGE>
<TABLE>
<CAPTION>
United
States Europe Australia Other Total
------- ------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Fiscal Year 1997
Net revenues $11,191 $ 4,530 $ 6 $2,239 $17,966
Long-term assets 19,381 1,964 - - 21,345
Fiscal Year 1998
Net revenues $ 7,660 $10,681 $ 33 $3,326 $21,700
Long-term assets 6,243 702 - - 6,945
Fiscal Year 1999
Net revenues $ 9,296 $ 7,340 $ 2,908 $1,346 $20,890
Long-term assets 4,295 545 - - 4,840
</TABLE>
Sales to one customer approximated 10.6% of net sales in 1999. There were no
sales to one customer that exceeded 10% of net sales in 1998. Sales to one
customer amounted to 14.6% of net sales in 1997.
Subsequent Events:
Credit Facility:
Zitel negotiated a $2 million accounts receivable factoring agreement, on
October 15, 1999. Borrowings are based on 80% of certain eligible receivables
which are aged 90 days or less. The commitment fee is 1% of the credit facility.
The administration fee is 1/2 of one percent of each amount factored. The
interest rate approximates 18% per annum calculated on the average daily balance
outstanding, if any.
Acquisition of Telemetrics Systems Corporation:
On October 19, 1999, Zitel Corporation purchased all outstanding shares of
Telemetrics Systems Corporation, a company domiciled in Berne, Switzerland, for
approximately $1.2 million. The transaction was accounted for as a purchase. The
wholly-owned subsidiary of the Company is now named Datametrics Systems AG.
Litigation:
On November 29, 1999, Lynx Venture Partners I, LLC filed a Complaint for Breach
of Contract, Declaratory Relief and Specific
Page 50
<PAGE>
Performance against the Company in the Superior Court of the State of
California in and for the County of Alameda. The Complaint alleges that Zitel
breached the Agreement and Plan of Merger and Reorganization among Zitel, a
subsidiary of Zitel and MatriDigm Corporation by terminating that Agreement
and that Lynx was damaged by that breach. The Complaint seeks damages,
attorneys' fees, declaratory relief and 1,000,000 shares of Zitel's common
stock. The Complaint was served on December 7, 1999. While Zitel believes the
Complaint is without merit and intends to defend this action vigorously,
there can be no assurance the Lynx Complaint will be resolved without costly
litigation, or in a manner that is not adverse to the Company's financial
position, results of operations or cash flows. No estimate can be made of the
possible loss or range of loss associated with the resolution of this matter.
Page 51
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders
Zitel Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 54 present fairly, in all material
respects, the financial position of Zitel Corporation and subsidiaries at
September 30, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended September 30,
1999, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 54 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
December 13, 1999
San Jose, California
Page 52
<PAGE>
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors under the caption "Election of Directors"
of the Proxy Statement for the Annual Meeting of Shareholders to be held
March 9, 2000, is incorporated herein by reference. The information regarding
executive officers under the caption "Executive Officers of the Registrant"
is included herein on page 14.
Item 11: EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" of the Proxy
Statement for the Annual Meeting of Shareholders to be held on March 9, 2000,
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 March 9, 2000, 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 PricewaterhouseCoopers LLP, appear in Item 8 in this Form 10-K.
Financial statement schedules not included in this Form 10-K have been omitted
because they are not applicable or the required information is shown in the
financial statements or the notes thereto.
Page 53
<PAGE>
(1) Financial Statements:
ZITEL CORPORATION:
Consolidated Balance Sheets (p. 25)
Consolidated Statements of Operations (p. 26)
Consolidated Statements of Shareholders' Equity (p. 27)
Consolidated Statements of Cash Flows (p. 28)
Notes to Consolidated Financial Statements (pgs. 29-51)
Report of Independent Accountants (p. 52)
(2) Financial Statement Schedule:
SCHEDULE VIII-Valuation and Qualifying Accounts (p. 61)
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
(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.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Restated Articles of Incorporation. (3)
3.2 Bylaws. (1)
3.3 Certificate of Determination of Preferences of Series A Junior
Participating Preferred Stock (6)
3.4 Certificate of Amendment of Articles of Incorporation
3.5 Certificate of Determination of Series B Convertible Preferred Stock
10.1 1982 Incentive Stock Option Plan, as amended, and form of Stock
Option Grant. (2)
10.2 1984 Supplemental Stock Option Plan and form of Stock Option Grant.
(2)
</TABLE>
Page 54
<PAGE>
<TABLE>
<S> <C>
10.3 1984 Stock Purchase Plan, as amended through November 1987. (3)
10.27 Lease Agreement dated February 16, 1995 between the Company and
Renco Investment Company. (4)
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.) (5)
10.29 Rights Agreement, dated as of June 12, 1996, between Zitel
Corporation and American Stock Transfer & Trust Company, with
exhibits. (6)
10.30 Preferred Stock Purchase and Put Option among MatriDigm Corporation,
BRC Holdings, Inc., and the Company dated December 2, 1996. (7)
10.31 Sales Representative Agreement between MatriDigm Corporation and the
Company dated August 22, 1996. (8)
10.35 Placement Agency Agreement. (9)
10.36 Asset Purchase Agreement dated as of June 25, 1997, by and among
Zitel World Trade, Datametrics Systems Corporation and John C.
Kelly. (10)
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. (10)
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. (10)
10.39 Lease Office Building for One Monument Place between Upland
Industries Corporation and Collins Equities, Inc. and Datametrics
Systems Corporation dated July 31, 1992. (10)
10.40 First Amendment to Lease between CMD Realty Investment Fund, L.P.
and Datametrics Systems Corporation dated October 16, 1996. (10)
10.41 Form of Palmer & Webb Lease. (10)
</TABLE>
Page 55
<PAGE>
<TABLE>
<S> <C>
10.43 Form of Common Stock Purchase Warrant. (11)
10.44 Registration Rights Agreement. (11)
10.45 Securities Purchase Agreement. (11)
10.46 Placement Agency Agreement. (11)
10.47 Agreement and Plan of Reorganization and Merger, dated as of October
5, 1998, by and among Zitel Corporation, Millennium Holding Corp.,
Zenith Acquisition Corp., Millennium Acquisition I Corp., and
MatriDigm Corporation. (12)
10.48 Form of Shareholder Agreement, dated as of October 5, 1998, by and
between, in each case, Zitel Corporation and a certain specified
shareholder of MatriDigm Corporation. (12)
10.49 Form of Lock-Up Letter, dated as of October 5, 1998, addressed, in
each case, to Millennium Holding Corp. from a certain specified
shareholder of MatriDigm Corporation. (12)
10.50 Selected Summary Financial Data for the period ended June 30, 1998.
(12)
10.51 Joint Press Release of Zitel Corporation and MatriDigm Corporation,
dated October 5, 1998. (12)
22.1 Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
27 Financial Data Schedule.
</TABLE>
- ----------
(1) 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.
(2) 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.
(3) Incorporated by reference to the indicated exhibits to the Company's Annual
Report on Form 10-K filed December 17, 1987.
(4) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed May 11, 1995.
Page 56
<PAGE>
(5) 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.
(6) Incorporated by reference to the indicated exhibits to the Company's Current
Report on Form 8-K filed on June 25, 1996.
(7) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed February 12, 1997.
(8) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed May 14, 1997.
(9) Incorporated by reference to the indicated exhibits to the Company's Current
Report on Form 8-K filed May 29, 1997.
(10) Incorporated by reference to the indicated exhibits to the Company's
Current Report on Form 8-K filed July 14, 1997.
(11) Incorporated by reference to the indicated exhibits to the Company's
Current Report on Form 8-K filed June 25, 1998.
(12) Incorporated by reference to the indicated exhibits to the Company's
Current Report on Form 8-K filed October 6, 1998.
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).
Page 57
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Page 58
<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
Asa W. Lanum
By: Asa W. Lanum
President and Director
Chief Executive Officer
December 29, 1999
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Asa W. Lanum and Anna M. McCann, jointly and
severally, his or her attorneys-in-fact, each with the power of substitution,
for him or her 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 59
<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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Asa W. Lanum President and Director December 29, 1999
Asa W. Lanum (Chief Executive Officer)
Anna M. McCann Vice President of Finance and December 29, 1999
Anna M. McCann Administration, Chief Financial
Officer and Corporate Secretary
Tsvi Gal Director December 29, 1999
Tsvi Gal
Jack H. King Director December 29, 1999
Jack H. King
Philip J. Koen Director December 29, 1999
Philip J. Koen
Catherine P. Lego Director December 29, 1999
Catherine P. Lego
William R. Lonergan Director December 29, 1999
William R. Lonergan
William M. Regitz Director December 29, 1999
William M. Regitz
</TABLE>
Page 60
<PAGE>
SCHEDULE VIII
ZITEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS 1997, 1998 AND 1999
<TABLE>
<CAPTION>
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
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
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
Reserve for excess capacity $ - $ - $ - $ -
1998
- --------------
Allowance for Doubtful
Accounts $ 175,000 $ 122,000 $175,000 $ 122,000
Provision for Obsolete
Inventory $ 639,000 $ 160,000 $799,000 $ -
Valuation Allowance on
Deferred Tax Assets $ 2,475,000 $16,200,000 $ - $18,675,000
Reserve for excess capacity $ - $ 750,000 $225,000 $ 525,000
1999
- --------------
Allowance for Doubtful
Accounts $ 122,000 $ 282,000 $124,000 $ 280,000
Valuation Allowance on
Deferred Tax Assets $18,675,000 $ 8,851,000 $ - $27,526,000
Reserve for excess capacity $ 525,000 $ - $339,000 $ 186,000
</TABLE>
Page 61
<PAGE>
CERTIFICATE OF AMENDMENT OF THE
ARTICLES OF INCORPORATION OF
ZITEL CORPORATION [STAMP]
a California Corporation
JACK H. KING AND HENRY C. HARRIS certify as follows:
1. They are the duly elected and acting President and Secretary,
respectively, of Zitel Corporation, a California corporation (the
"Corporation").
2. The Corporation has one class of shares outstanding which is Common
Stock. No shares of Preferred Stock are outstanding.
3. Article III of the Restated Articles of Incorporation of this
Corporation is amended to read in full as follows:
This corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares that the
corporation is authorized to issue is forty-one million
(41,000,000). Forty million (40,000,000) shares shall be
Common Stock. One million (1,000,000) shares shall be
Preferred Stock.
The Preferred Stock may be divided into such number of
series as the Board of Directors may determine. The Board
of Directors is authorized to determine or alter the rights,
preferences, privileges, and restrictions granted to and
imposed upon the Preferred Stock or any series of the
Preferred Stock with respect to any wholly unissued class or
series of Preferred Stock, and to fix the number of shares
of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors,
within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing
the number of shares constituting any series, may increase or
decrease (but not below the number of shares of series then
outstanding) the number of shares of any series subsequent
to the issue of shares of that series. In case the number of
shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which
they had prior to the time the number of shares of such
series was originally fixed.
<PAGE>
4. The foregoing amendment has been approved by the Board of Directors of
the Corporation.
5. The foregoing amendment has been duly approved by the required vote of
shareholders in accordance with Section 902 of the California Corporations
Code. The corporation has one class of stock outstanding which is Common
Stock. The total number of outstanding shares of Common Stock of the
Corporation entitled to vote on this amendment was 15,166,691. The number
of shares voting in favor of the amendment exceeded the vote required. The
percentage vote required was more than fifty percent (50%).
The undersigned further declare under penalty of perjury under the laws
of the State of California that the matters set forth in this Certificate are
true and correct of their own knowledge.
Executed this 15 day of May, 1997 at Fremont, California.
/s/ Jack H. King
--------------------------
Jack H. King, President
/s/ Henry C. Harris
--------------------------
Henry C. Harris, Secretary
2.
<PAGE>
CERTIFICATE OF AMENDMENT OF THE
ARTICLES OF INCORPORATION OF
ZITEL CORPORATION [STAMP]
a California Corporation
JACK H. KING AND HENRY C. HARRIS certify as follows:
1. They are the duly elected and acting President and Secretary,
respectively, of Zitel Corporation, a California corporation (the
"Corporation")
2. The Corporation has one class of shares outstanding which is Common
Stock. No shares of Preferred Stock are outstanding.
3. Article III of the Restated Articles of Incorporation of this
Corporation is amended to read in full as follows:
This corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares that the
Corporation is authorized to issue is twenty-one million
(21,000,000). Twenty million (20,000,000) shares shall be
Common Stock. One million (1,000,000) shares shall be
Preferred Stock. Upon the amendment of this Article to read
as herein set forth, each outstanding share of Common Stock
is split up and converted into two (2) shares of Common Stock.
The Preferred Stock may be divided into such number of
series as the Board of Directors may determine. The Board
of Directors is authorized to determine or alter the rights,
preferences, privileges, and restrictions granted to and
imposed upon the Preferred Stock or any series of the
Preferred Stock with respect to any wholly unissued class or
series of Preferred Stock, and to fix the number of shares
of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors,
within the limits and restrictions stated in any resolution
or resolutions of the Board of Directors originally fixing
the number of shares constituting any series, may increase or
decrease (but not below the number of shares of series then
outstanding) the number of shares of any series subsequent
to the issue of shares of that series. In case the number of
shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which
they had prior to the time the number of shares of such
series was originally fixed.
<PAGE>
4. The foregoing amendment has been approved by the Board of Directors of
the Corporation.
5. The Corporation has only one class of shares outstanding and this
amendment effects only a stock split of the Common Stock and an increase in
the authorized number of shares of Common Stock in proportion thereto so that
this amendment may be adopted by the Board of Directors alone.
The undersigned further declare under penalty of perjury under the laws
of the State of California that the matters set forth in this Certificate are
true and correct of their own knowledge.
Executed this 13th day of November, 1996 at Fremont, California.
/s/ Jack H. King
--------------------------
Jack H. King, President
/s/ Henry C. Harris
--------------------------
Henry C. Harris, Secretary
2.
<PAGE>
CERTIFICATE OF DETERMINATION OF SERIES B CONVERTIBLE
PREFERRED STOCK OF ZITEL CORPORATION
(Pursuant to Section 401 of the California General Corporation Law)
The undersigned, JACK H. KING and ANNA M. MCCANN, hereby certify that:
I. They are the duly elected and acting Vice President and Secretary,
respectively, of Zitel Corporation (the "Corporation").
II. Pursuant to authority given by the Corporation's Articles of
Incorporation, the Board of Directors of the Corporation has duly adopted the
following resolutions at a meeting duly called and held on July 29, 1999:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of the Corporation in accordance with the provisions of its
Restated Articles of Incorporation, the Board of Directors hereby creates a
series of Preferred Stock, without par value, of the Corporation and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges and restrictions thereof, as follows:
SERIES B CONVERTIBLE PREFERRED STOCK:
SECTION 1. DESIGNATION AND AMOUNT. Two Hundred Thousand (200,000)
shares of Preferred Stock, without par value, are designated "Series B
Convertible Preferred Stock" with the rights, preferences, privileges and
restrictions specified herein (the "Series B Preferred"). Such number of shares
may be increased or decreased by resolution of the Board of Directors; PROVIDED,
that no decrease shall reduce the number of shares of Series B Preferred to a
number less than the number of shares then outstanding.
A. LIQUIDATION PREFERENCE.
1. Upon any liquidation (as defined below), dissolution or winding up of
the Corporation, whether voluntary or involuntary, the Holders of Series B
Preferred shall be entitled to receive, prior and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of Series A Junior Participating Preferred Stock and Common Stock of the
Corporation by reason of their ownership thereof, (A) property or cash with a
value of Ten Dollars (the "Liquidation Preference") plus (B) declared and unpaid
dividends until the date of payment (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares) for each share of Series B Preferred. If the assets of the Corporation
are insufficient to make payment in full to all holders of Series B Preferred
pursuant to this Section A.1, then such assets shall be distributed among the
holders of Series B Preferred at the time outstanding ratably in proportion to
the full amounts to which they would otherwise be entitled under this
Section A.1.
1.
<PAGE>
2. The following events shall be considered a liquidation under this
Section:
(a) any consolidation or merger of the Corporation with or into any
other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the Corporation immediately prior
to such consolidation, merger or reorganization, own less than fifty percent
(50%) of the Corporation's voting power immediately after such consolidation,
merger or reorganization, or any transaction or series of related transactions
in which in excess of fifty percent (50%) of the Corporation's voting power is
transferred (an "Acquisition"); or
(b) a sale, lease, or other disposition of all or substantially all
of the assets of the Corporation (an "Asset Transfer").
B. DIVIDEND RIGHTS.
The Holders of Series B Preferred, prior to and in preference to the
holders of Series A Junior Participating Preferred Stock or Common Stock of the
Corporation, shall be entitled to receive dividends at the rate of $.30 per
share per annum (as adjusted for any stock dividends, combinations or splits
with respect to such shares), payable out of funds legally available therefor.
Such dividends shall be payable only when, as, and if declared by the Board of
Directors and shall be noncumulative.
C. VOTING RIGHTS.
The Holders of the Series B Preferred shall have no voting rights except
with respect to matters as to which the Corporations Code of the State of
California requires that such Holders have the right to vote.
D. REDEMPTION RIGHTS.
1. The Corporation shall have the right to redeem all, but no less than
all, of the outstanding shares of Series B Preferred at a redemption price per
share equal to the Liquidation Preference plus any declared and unpaid
dividends. The Holders of Series B Preferred shall have no right to cause the
Corporation to redeem all or any shares of Series B Preferred.
2. In the event the Company elects to redeem the Series B Preferred, it
shall give notice pursuant to Section N hereof. The notice shall be effective
on the fifth day following the date of deposit in the United States mail
pursuant to Section N. Any outstanding shares of Series B Preferred on such
effective date shall be redeemed in accordance with Section E.2(b).
E. CONVERSION RIGHTS.
The holders of the Series B Preferred shall have the following rights with
respect to the conversion of the Series B Preferred into shares of Common Stock
(the "Conversion Rights").
1. OPTIONAL CONVERSION. Subject to and in compliance with the provisions
of this Section E.1, any shares of Series B Preferred may, at the option of the
Holder, be converted at any time into fully-paid and nonassessable shares of
Common Stock. The number of shares of
2.
<PAGE>
Common Stock to which a holder of Series B Preferred will be entitled upon
conversion with respect to each share of Series B Preferred being converted
will be the quotient obtained by dividing the Liquidation Preference by the
Conversion Price then in effect (determined as provided in Section E.3.).
The maximum number of shares of Common Stock issuable upon conversion of the
Series B Preferred is 4,659,897 shares and conversions under Sections E.1 and
E.2 will be suspended, unless and until the shareholders of the Company have
approved the issuance of additional shares.
2. CONVERSION PRICE.
(a) Until the effective date (the "Effective Date") of a Registration
Statement on Form S-3 under the Securities Act of 1933, as amended, registering
the Common Stock issuable upon conversion of the Series B Preferred for resale
(the "Registration Statement"), the Series B Conversion Price shall be equal to
the average of the closing prices of the Common Stock on the NASD National
Market System, as reported in the Wall Street Journal, on the ten trading days
preceding but not including the date upon which shares of Series B Preferred are
first issued by the Corporation. On the Effective Date the average of the
closing prices of the Common Stock on the NASDAQ National Market System, as
reported in the Wall Street Journal on the ten trading days preceding but not
including the Effective Date shall be calculated. The amount so calculated, as
it may be adjusted from time to time pursuant to Sections I, J, and K hereof,
shall be referred to herein as the "Baseline Price."
(b) Commencing on the Effective Date and for 180 calendar days
thereafter (the "Adjustment Period") the Conversion Price shall be equal to the
closing price of the Common Stock on the NASDAQ National Market System on the
trading day prior to the date of conversion (the "Unadjusted Conversion Price");
PROVIDED, HOWEVER,
(i) The Conversion Price shall not be less than 70% of the
Baseline Price and
(ii) The Conversion Price shall not be greater than (x) the
Baseline Price plus (y) 50% of the amount by which the Unadjusted Conversion
Price exceeds 130% of the Baseline Price.
For example:
(A) If the Baseline Price is $2.00 per share and the
Unadjusted Conversion Price is $5.00, then the Conversion Price would be $3.20,
calculated as follows:
$2.00 plus 50% of ($5.00 minus ($2.00 times 130%)) equals
$3.20.
(iii) If the Baseline Price is $2.00 per share and the Unadjusted
Conversion Price is $1.20, then the Conversion Price would be $1.40, calculated
as follows:
$2.00 times 70% equals $1.40.
3.
<PAGE>
(iv) If the Baseline Price is $2.00 per share and the Unadjusted
Conversion Price is between $1.40 per share and $2.60 per share, there would be
no adjustment and the Conversion Price would be equal to the Unadjusted
Conversion Price.
(c) Commencing on the day following the end of the Adjustment Period,
the Conversion Price shall be equal to the Unadjusted Conversion Price;
PROVIDED, HOWEVER, the Conversion Price shall not be less than the Baseline
Price.
(d) In the event that during the Adjustment Period, the holders of
Series B Preferred are not able to sell Common Stock pursuant to the
Registration Statement for more than five consecutive trading days or for more
than fifteen trading days in the aggregate because (i) of a blackout period or
blackout periods declared by the Corporation, (ii) because effectiveness of the
Registration Statement is suspended, or (iii) a stop order has been issued by
the Securities and Exchange Commission, then the Adjustment Period shall be
extended by one day for each day a blackout period, suspension or stop order is
in effect beyond (x) such five-day period or (y) such fifteen-day period.
(e) In the event that conversions of Series B Preferred are suspended
pursuant to Section E.1, then the Adjustment Period and the automatic conversion
date shall be extended by one day for each day of the period during which
conversions are suspended.
F. MECHANICS OF CONVERSION.
Each holder of Series B Preferred who desires to convert the same into
shares of Common Stock shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or any transfer agent for the
Series B Preferred and shall give written notice to the Corporation at such
office that such holder elects to convert the same. Such notice shall state the
number of shares of Series B Preferred being converted. Thereupon, the
Corporation shall promptly issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common Stock to which
such holder is entitled. Such conversion shall be deemed to have been made at
the close of business on the date of such surrender of the certificates
representing the shares of the Series B Preferred to be converted, and the
person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date.
G. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS.
If the Corporation at any time or from time to time after the date that the
first share of Series B Preferred is issued (the "Original Issue Date") effects
a subdivision of the outstanding Common Stock, the Conversion Price of each
series of Preferred Stock in effect immediately before that subdivision shall be
proportionately decreased. Conversely, if the Corporation at any time or from
time to time after the Original Issue Date combines the outstanding shares of
Common Stock into a smaller number of shares, the Conversion Price of each
series of Preferred Stock in effect immediately before the combination shall be
proportionately increased. Any adjustment under this Section G shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
4.
<PAGE>
H. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS.
If the Corporation at any time or from time to time after the Original
Issue Date makes, or fixes a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation, in each such event provision shall be made so
that the holders of the Series B Preferred shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of other securities of the Corporation which they would
have received had their Series B Preferred been converted into Common Stock on
the date of such event and had they thereafter, during the period from the date
of such event to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period hereunder with respect to the rights
of the holders of the Series B Preferred or with respect to such other
securities by their terms.
I. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION.
If at any time or from time to time after the Original Issue Date the
Common Stock issuable upon the conversion of the Series B Preferred is changed
into the same or a different number of shares of any class or classes of stock,
whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend or a reorganization,
merger, consolidation or sale of assets provided for elsewhere herein), in any
such event each holder of Series B Preferred shall have the right thereafter to
convert such stock into the kind and amount of stock and other securities and
property receivable upon such recapitalization, reclassification or other change
by holders of the maximum number of shares of Common Stock into which such
shares of Series B Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.
J. REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS.
If at any time or from time to time after the Original Issue Date there is
a capital reorganization, merger, consolidation or sale of all or substantially
all of the Corporation's assets (a "Capital Reorganization") or the Common Stock
(other than a recapitalization, subdivision, combination, reclassification,
exchange or substitution of shares provided for elsewhere herein), as a part of
such Capital Reorganization, provision shall be made so that the holders of the
Series B Preferred shall thereafter be entitled to receive upon conversion of
the Series B Preferred the number of shares of stock or other securities or
property of the Corporation to which a holder of the number of shares of Common
Stock deliverable upon conversion would have been entitled on such Capital
Reorganization, subject to adjustment in respect of such stock or securities by
the terms thereof. In any such case, appropriate adjustment shall be made in
the application of the provisions of this Section J with respect to the rights
of the holders of Series B Preferred after the Capital Reorganization to the end
that the provisions of this Section J (including adjustment of the Conversion
Price applicable to such series then in effect and the number of shares issuable
upon conversion of the Series B Preferred) shall be applicable after that event
and be as nearly equivalent as practicable.
5.
<PAGE>
K. CERTIFICATE OF ADJUSTMENT.
In each case of an adjustment or readjustment of the Conversion Price with
respect to any series of Preferred Stock or the number of shares of Common Stock
or other securities issuable upon conversion of the Series B Preferred, the
Corporation, at its expense, shall compute such adjustment or readjustment in
accordance with the provisions hereof and prepare a certificate showing such
adjustment or readjustment, and shall mail such certificate, by first class
mail, postage prepaid, to each registered holder of Series B Preferred at the
holder's address as shown in the Corporation's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (A) the
Conversion Price with respect to such Series B at the time in effect, and
(B) the type and amount, if any, of other property that at the time would be
received upon conversion of the Series B Preferred.
L. FRACTIONAL SHARES.
No fractional shares of Common Stock shall be issued upon conversion of the
Series B Preferred. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series B Preferred by a
holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of any
fractional share, the Corporation shall, in lieu of issuing any fractional
share, pay cash equal to the product of such fraction multiplied by the
Conversion Price.
M. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series B Preferred, such number of
its shares of Common Stock as will from time to time be sufficient to effect the
conversion of all outstanding shares of the Series B Preferred. If at any time
the number of authorized but unissued shares of Common Stock is not sufficient
to effect the conversion of all then outstanding shares of the Series B
Preferred, the Corporation shall take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as will be sufficient for such
purpose.
N. NOTICES.
Any notice required by the provisions of this Section 1 to be given to the
holders of Series B Preferred shall be deemed given upon the earlier of actual
receipt or three days after the same has been deposited in the United States
mail, by certified or registered mail, return receipt requested, postage
prepaid, and addressed to each holder of record at the address of such holder
appearing on the books of the Corporation.
O. PROTECTIVE PROVISIONS.
1. So long as any shares of Series B Preferred are outstanding, the
Corporation shall not, without the vote or written consent of the holders of not
less than seventy-five percent (75%)
6.
<PAGE>
of the issued and outstanding shares of the Series B Preferred, alter or
change the preferences or privileges of the shares of the Series B Preferred
so as to affect adversely the shares of the Series B Preferred.
2. So long as at least an aggregate of Fifty Thousand (50,000) shares of
Series B Preferred (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to such shares) remain issued and
outstanding, the Corporation shall not, without the vote or written consent of
the holders of at least a majority of the shares of the Series B Preferred,
authorize or issue any class of security senior to the Series B Preferred;
provided, however, that any security with a dividend or liquidation preference
that is greater than that of the Series B Preferred solely as a result of, or in
connection with, a higher per share initial purchase price of such security
shall not be deemed senior for purposes hereof; payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Junior
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
7.
<PAGE>
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
III. The authorized number of shares of Preferred Stock of this Corporation
is 1,000,000, and the number of shares of Preferred Stock constituting Series B
Convertible Preferred Stock, none of which has been issued, is 200,000.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
August 9, 1999.
Jack H. King
----------------------------------------------
JACK H. KING
Vice President
Anna M. Mccann
----------------------------------------------
ANNA M. MCCANN
Secretary
The undersigned Jack H. King, Vice President of Zitel Corporation, and
Anna M. McCann, Secretary of said Corporation, each certifies under penalty of
perjury that the matters set forth in the foregoing Certificate of Determination
are true of their own knowledge.
Executed at Fremont, California on August 9, 1999.
Jack H. King
----------------------------------------------
JACK H. KING
Vice President
Anna M. Mccann
----------------------------------------------
ANNA M. MCCANN
Secretary
8.
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF ZITEL CORPORATION
1. Zitel International Corporation
47211 Bayside Parkway
Fremont, CA 94538-6517
2. Zitel International (Luxembourg) S.A.
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 hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 33-47697) of Zitel Corporation of our report
dated December 13, 1999, relating to the consolidated financial statements
and financial statement schedule which appears in this Form 10-K.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
December 30, 1999
San Jose, California
Page 63
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