<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-12194
ZITEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 94-2566313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47211 Bayside Parkway 94538-6517
Fremont, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-9600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __X__ No _____
The number of shares of the Registrant's Common Stock outstanding as of March
31, 2000 was 26,263,683.
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2000 (unaudited) and September 30, 1999 ..... 3
Condensed Consolidated Statements of
Operations (unaudited) - Three and Six Months
Ended March 31, 2000 and 1999 ........................ 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Six Months Ended
March 31, 2000 and 1999 ............................... 5
Notes to Condensed Consolidated
Financial Statements .................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations .................................. 13
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ................................. 16
PART II. Other Information
Item 1. Legal Proceedings ................................. 18
Item 2. Changes in Securities ............................. 18
Item 3. Defaults Upon Senior Securities ................... 18
Item 4. Submission of Matters to a Vote of
Security Holders .................................. 18
Item 5. Other Information ................................. 19
Item 6. Exhibits and Reports on Form 8-K .................. 25
</TABLE>
Page 2
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's)
Unaudited
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,442 $ 1,670
Accounts receivable, net 2,827 3,719
Refundable taxes 203 205
Other current assets 2,437 1,218
------- -------
Total current assets 7,909 6,812
Fixed assets, net 739 738
Other assets, net 4,232 4,102
------- -------
Total assets $12,880 $11,652
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,729 $ 2,568
Accrued liabilities 1,100 1,114
Deferred revenue 7,027 2,073
------- -------
Total current liabilities 10,856 5,755
Shareholders' equity:
Preferred stock - 2,000
Common stock 73,455 71,340
Accumulated deficit (71,431) (67,443)
------- -------
Total shareholders' equity 2,024 5,897
------- -------
Total liabilities and
shareholders' equity $12,880 $11,652
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 3
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net product sales $ 1,853 $ 1,641 $ 5,033 $ 4,491
Services and others 2,238 2,598 4,578 5,648
------- ------- ------- -------
Net sales 4,091 4,239 9,611 10,139
Cost and expenses:
Cost of products sold 288 215 662 669
Cost of services and others 1,220 1,236 2,688 3,004
Research and development
expenses 701 653 1,352 1,268
Selling, general &
administrative expenses 4,906 3,663 8,757 7,550
Loss from unconsolidated
company - - - 1,512
------- ------- ------- -------
Operating loss (3,024) (1,528) (3,848) (3,864)
Other expense 48 535 140 975
------- ------- ------- -------
Net loss $(3,072) $(2,063) $(3,988) $(4,839)
======= ======= ======= =======
Basic and diluted net loss
per share $ (.12) $ (.09) $ (.16) $ (.22)
======= ======= ======= =======
Shares used in basic and
diluted per share
calculation 25,978 21,908 24,928 21,643
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's)
<TABLE>
<CAPTION>
(UNAUDITED)
Six Months Ended
March 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $(3,988) $(4,839)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Loss from unconsolidated company - 1,512
Discount on subordinated debenture - 555
Interest accrued on convertible
subordinated debenture - 347
Amortization of capitalized financing costs - 308
Depreciation and amortization 1,090 1,040
Provision for doubtful accounts 106 (33)
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable 786 (590)
Refundable income taxes 2 (5)
Increase in other current assets (1,219) (779)
Increase (decrease) in accounts payable 161 (1,286)
Decrease in accrued liabilities (14) (78)
Increase in deferred revenue 4,954 696
------- -------
Net cash provided by (used in)
operating activities 1,878 (3,152)
------- -------
Cash flows provided by (used in) investing activities:
Acquisition of fixed assets (372) (109)
Investment in unconsolidated company - (1,512)
Capitalized software development costs (811) (219)
Purchased technology - (250)
Decrease in (purchase of) other assets (38) 15
------- -------
Net cash used in investing activities (1,221) (2,075)
------- -------
</TABLE>
Page 5
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
($000's)
<TABLE>
<CAPTION>
(UNAUDITED)
Six Months Ended
March 31,
2000 1999
-------- -------
<S> <C> <C>
Cash flows provided by financing activities:
Issuance of common stock $ 115 $ 110
Issuance of subordinated debentures - 4,782
------- -------
Net cash provided by financing activities 115 4,892
------- -------
Net increase (decrease) in cash 772 (335)
Cash and cash equivalents, beginning of year 1,670 6,589
------- -------
Cash and cash equivalents, end of period $ 2,442 $ 6,254
======= =======
Supplemental non-cash investing and
financing activities:
Capitalized financing costs $ - $ 218
======= =======
Common stock purchase warrants $ - $ 128
======= =======
Conversion of subordinated debentures
and accrued interest $ - $ 4,912
======= =======
Conversion of preferred stock $ 2,000 -
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands except per share data)
1. The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and should be read in conjunction with
the audited financial statements of the Company. Certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted although the Company believes the disclosures which are made are
adequate to make the information presented not misleading. Further, the
condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the financial position
and results of operations as of and for the periods indicated. The results of
operations for the period ended March 31, 2000 are not necessarily indicative of
the results expected for the full year.
2. Recent Accounting Pronouncements:
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting of Certain Transactions involving
Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998, or January 12, 2000.
Management believes that the impact of FIN 44 will not have a material effect on
the financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulleting No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements", which provides guidance on the recognition, presentation
and disclosure of
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<PAGE>
revenue in financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. Management believes that
the impact of SAB 101 will not have a material effect on the financial position
or results of the Company.
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 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.
3. Other Assets:
Other assets consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
------------ -------------
<S> <C> <C>
Goodwill $ 2,768 $ 2,768
Purchased technology 2,588 2,588
Other assets 1,595 1,782
Less accumulated amortization (2,719) (3,036)
------- -------
$ 4,232 $ 4,102
======= =======
</TABLE>
4. Business Combinations:
On October 19, 1999, the Company acquired Telemetrics Systems Corporation, a
company domiciled in Berne, Switzerland. The purchase price consisted of cash
payments totaling $1.2 million
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<PAGE>
in exchange for the net assets of the acquired company. No goodwill was
generated by the transaction. The acquisition was accounted for using the
purchase method of accounting; accordingly, the total purchase price of $1.2
million was allocated to the net assets acquired based upon their estimated fair
values. The operating results of the acquired company from October 19, 1999
through March 31, 2000, are included in the consolidated results of operations.
The wholly-owned subsidiary of the Company is now named Datametrics Systems AG.
5. Common Stock:
Common stock activity for the period from October 1, 1999 through March 31,
2000 is as follows:
<TABLE>
<CAPTION>
Common Stock Common Stock
Shares Amount
------------ ------------
<S> <C> <C>
Balance at September 30, 1999 24,896 $71,340
Conversion of preferred stock 1,306 2,000
Exercise of stock options 24 83
Employee stock purchase 38 32
------ -------
Balance at March 31, 2000 26,264 $73,455
====== =======
</TABLE>
6. During the quarter ended March 31, 2000, the Company entered into a
sublease for the remaining portion of its existing Fremont facilities. The
rental due under this sublease are less than the rental paid by the Company
and, as a result, a loss on the sublease in the amount of $371,000 was
recognized in selling, general and administrative expense during the quarter.
7. Income Taxes:
The benefit for income taxes was fully offset by a valuation allowance due
to the uncertainty surrounding the realization of the various favorable tax
components.
8. Earnings Per Share ("EPS"):
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts) for the three
and six months ended March 31, 2000 and 1999:
Page 9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2000 1999 2000 1999
------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator - Basic and Diluted EPS
Net loss $(3,072) $(2,063) $(3,988) $(4,839)
======= ======= ======= =======
Denominator - Basic EPS
Common stock outstanding 25,978 21,908 24,928 21,643
Common equivalent stock - - - -
------- ------- ------- -------
25,978 21,908 24,928 21,643
------- ------- ------- -------
Basic loss per share $ (.12) $ (.09) $ (.16) $ (.22)
======= ======= ======= =======
Denominator - Diluted EPS
Denominator - Basic EPS 25,978 21,908 24,928 21,643
Effect of Dilutive Securities:
Common stock options - - - -
Convertible preferred stock - - - -
------- ------- ------- -------
25,978 21,908 24,928 21,643
------- ------- ------- -------
Diluted loss per share $ (.12) $ (.09) $ (.16) $ (.22)
======= ======= ======= =======
</TABLE>
For the quarter and six-month period ended March 31, 2000, options to
purchase 852 thousand and 523 thousand shares, respectively, were not included
in the computation of diluted EPS because of the anti-dilutive effect of
including these shares in the calculation for both periods. For the quarter and
six-month period ended March 31, 1999, options to purchase 92 thousand and 108
thousand shares, respectively, were not included in the computation of diluted
EPS because of the anti-dilutive effect of including these shares in the
calculation for both periods.
9. Segment Information
Through October 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 segment
provided service to review software code and identify areas within the
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<PAGE>
code where Year 2000 problems might occur. Following completion of the remaining
contract outstanding at September 30, 1999, the Company ceased providing these
Year 2000 services in October 1999.
The following table presents certain segment financial information (in
thousands) for the quarters ended March 31:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March March
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Datametrics $ 4,091 $ 3,951 $ 9,220 $ 9,372
Year 2000 - 288 391 767
------- ------- ------- -------
Total $ 4,091 $ 4,239 9,611 $10,139
======= ======= ======= =======
Loss from Operations
Datametrics $(3,024) $(1,342) $(3,820) $(3,694)
Year 2000 - (186) (28) (170)
------- ------- ------- -------
Total $(3,024) $(1,528) $(3,848) $(3,864)
======= ======= ======= =======
</TABLE>
The table below presents net sales (in thousands) by geographic area for the
quarters ended March 31:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March March
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales:
North America $ 2,801 $ 2,580 $ 3,284 $ 6,200
International 1,290 1,659 3,327 3,939
------- ------- ------- -------
Total $ 4,091 $ 4,239 $ 9,611 $10,139
======= ======= ======= =======
</TABLE>
The table below presents long-lived asset information (in thousands) by
geographic area for the quarter ended March 31:
Page 11
<PAGE>
<TABLE>
<CAPTION>
2000 1990
------ ------
<S> <C> <C>
Long-lived assets:
US $4,405 $4,178
International 566 662
------ ------
Total $4,971 $4,840
====== ======
</TABLE>
10. Comprehensive Loss
The Company has 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 periods presented in these condensed
consolidated financial statements.
Page 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Result of Operations
The Company recorded a net loss of $3,072,000 ($0.12 per share) for the quarter
ended March 31, 2000 compared with a net loss of $2,063,000 ($0.09 per share)
for the same quarter of the prior year. Weighted average shares outstanding for
the current quarter were 25,978,000 compared to 21,908,000 for the same quarter
of the prior year. For the six months ended March 31, 2000, the net loss was
$3,988,000 ($0.16 per share) compared with a net loss of $4,839,000 ($0.22 per
share) for the same period a year earlier. Year-to-date weighted average shares
were 24,928,000 versus 21,643,000 in the prior year.
Total net sales for the current quarter was $4,091,000 versus total net sales of
$4,239,000 for the same quarter of the prior year, a decrease of $148,000. Prior
year's net sales included $3,470,000 related to the current business of
performance management software. For the six months ended March 31, 2000, total
net sales was $9,611,000 versus total net sales of $10,139,000 for the same
period a year earlier, a decrease of $528,000. Prior year's net sales included
$8,233,000 related to current business.
Gross margin for the quarter ended March 31, 2000 was 63% of net sales compared
to 66% of net sales for the same quarter of the prior year. The decrease in
gross margin percentage is primarily attributable to the increased staffing in
support and services. For the six months ended March 31, 2000, gross margin was
65% of net sales compared to 64% of net sales for the same period a year
earlier. The improvement in gross margin percentage is higher as a result of
increased net sales of software in the first quarter offset, in part, by the
increase in staffing in support and services discussed above. The Company does
not believe that the gross margins reported for the current quarter just ended
are necessarily indicative of the gross margins to be expected. Gross margins
maybe affected by several factors, including the mix of products sold and price
competition.
Research and development expenses for the quarter ended March 31, 2000 were 17%
of net sales compared to 15% for the same quarter of the prior year. For the six
months ended March 31, 2000, research and development expenses were 14% of net
sales compared
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<PAGE>
to 13% of net sales for the same period a year earlier. The percentage increase
as a percent of net sales for the quarter and six month comparison year to year,
is primarily a result of lower net sales during both periods, as spending
increased only $48,000 and $84,000, for the quarter and six month period,
respectively.
Selling, general and administrative ("SG&A") expenses for the quarter ended
March 31, 2000 were 120% of net sales versus 86% of net sales for the same
period a year earlier. Actual spending increased $1,243,000. For the six months
ended March 31, 2000, SG&A expenses were 91% of net sales compared to 74% of net
sales for the same period a year earlier. Actual spending increased $1,207,000.
The increased spending in both periods is attributable to increased salaries and
related benefits related to additional sales and marketing personnel, increased
travel and entertainment, increased consulting and professional services and
higher distributor commissions. In addition, during the current quarter, a loss
of approximately $371,000 was incurred in the sublease of the Company's facility
in Fremont (CA).
Other expense was $48,000 for the quarter just ended versus $535,000 in the same
quarter of the prior year. For the current quarter, other expense was primarily
due to the interest expense incurred on the factoring of accounts receivable.
For the comparable quarter of the prior year, other expense was primarily
attributable to $633,000 interest and related expense on the 3% convertible
subordinated debentures, partially offset by interest income of $155,000.
For the six months ended March 31, 2000, other expense was $140,000 versus
$975,000 for the same period a year earlier. For the current six-month period,
other expense consisted primarily of translation losses. For the comparable
period of the prior year, other expense included $1,127,000 interest expense
related to the convertible subordinated debentures, partially offset by interest
income of $323,000.
Liquidity and Capital Resources
During the six-month period ended March 31, 2000, working capital decreased
$4,004,000 and cash flow provided by operating activities was $1,878,000. Cash
provided by operating activities resulted primarily from an increase in deferred
revenue of $4,954,000, a decrease in accounts receivable of $786,000 and
depreciation and amortization charges of $1,090,000, offset by the net loss of
$3,988,000 and an increase in other current assets of $1,219,000.
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<PAGE>
Net cash used in investing activities of $1,221,000 is primarily made up of
$811,000 in capitalized software development costs and $372,000 in acquisition
of fixed assets. Net cash provided by financing activities of $115,000 was
comprised of $32,000 from the sale of stock under the Company's employee stock
purchase plan and $83,000 from stock options exercised.
Non-cash transactions consisted of the conversion of 200,000 shares of preferred
stock for 1,306,122 shares of common stock.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting of Certain Transactions involving
Stock Compensation an interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion 25 for (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. Management
believes that the impact of FIN 44 will not have a material effect on the
financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulleting No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of the Company.
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
Page 15
<PAGE>
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.
Item 3. 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 March 31,
2000. A review of other financial instruments and risk exposures at that date
revealed the Company did not have exposure to interest rate risk.
Page 16
<PAGE>
=======================================================
This Report on Form 10-Q 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.
- -------------------------------------------------------------
Zitel is a registered trademark of Zitel Corporation. All other product names
and brand names are trademarks or registered trademarks of their respective
holders.
Page 17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning pending legal proceedings, see report on Form 10-K
for the year ended September 30, 1999.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders of the Company was held on March 9, 2000. A
total of 24,227,717 shares of the Company's Common Stock out of a total
24,938,811 shares outstanding on the record date for the meeting were
represented and voted in person or by proxy.
At the annual meeting, all eight directors were nominated and re-elected to the
Board of Directors by a vote of at least 23,918,638 shares in favor and at least
298,921 shares withholding authority to vote.
The shareholders approved the adoption of an amendment to the 1990 Stock Option
Plan, as amended. To ensure that the Company can continue to grant options and
other stock-based awards to employees, directors and consultants at levels
determined appropriate by the Board and Compensation Committee of the Board, on
November 2, 1999, the Board approved the 2000 Equity Incentive Plan (the
"Incentive Plan"). The total number of shares authorized for issuance under the
Incentive Plan is 1,000,000. The motion was carried by a vote of 23,260,692
shares voting for, 832,149 dissenting votes and 135,153 abstaining votes.
The shareholders approved the adoption of an amendment to the 1995 Non-Employee
Directors' Stock Option Plan, as amended, to provide that the number of shares
of Common Stock reserved for issuance under such Plan be increased by 150,000
shares. The motion was carried by a vote of 23,140,678 shares voting for,
962,922 dissenting votes and 124,394 abstaining votes.
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<PAGE>
Item 5. Other Information
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. Zitel sustained substantial operating losses and net losses in
fiscal years 1997 through 1999. The Company 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 level in order to
remain a viable operating entity. There is no assurance that Zitel can achieve
these objectives.
Significant Losses
For the first half of fiscal year 2000, the Company reported a net loss of
$3,988,000. The Company reported a total net loss for fiscal year 1999 of
$13,103,000. The Company reported total net losses of $43,205,000 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 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 has subleased its Fremont, CA headquarters and,
in April 2000, moved 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:
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.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.
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 has been subject to extreme volatility during
fiscal year 1998, as the closing bid price has 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
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the high closing bid price of 6 15/32. In the first half of fiscal year 2000,
such price ranged between a low of 21/32 and a high of 6 5/8.
Competition
The market for system management tools in which the Company's software products
business unit 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 competitors will not
develop products comparable or superior to those developed by the Company or
adapt more quickly than the Company to new technologies, evolving industry
standards, new product introductions, or changing customer requirements.
Dependence on New Products; Rapid Technological Change
The markets in which the Company operates are characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. The introduction of products
embodying new technologies and/or the emergence of new industry standards could
render the Company's existing products and services obsolete and unmarketable.
The Company's future success will depend upon its ability to develop and to
introduce new products and services on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of its customers. There can be no assurance
that the Company will be successful in developing and marketing products or
services that respond to technological changes or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of new products or
services, or that its new products or services will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
products or services in a timely manner in response to changing market
conditions or customer requirements, the Company's business, operating results
and financial condition will be materially and adversely affected.
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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 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.
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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 Company expects that the
acquisition of companies headquartered and operating in the United Kingdom, The
Netherlands, Germany, and Switzerland, respectively, will result 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 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,
Germany, or Switzerland.
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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 also depends on its continuing ability to attract and retain highly
qualified technical and management personnel. Competition for such personnel is
intense, and there can be no assurance that the Company can retain its key
technical and management employees or that it can attract, assimilate and retain
other highly qualified technical and management personnel in the future.
The 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 prevent a tender offer or takeover attempt that a stockholder might consider
to be in that stockholder's best interests, including attempts that might result
in a premium over the market price for the shares held by stockholders.
The Company's Board of Directors may issue additional shares of Common Stock or
establish one or more classes or series of Preferred Stock, having the number of
shares designations, relative voting rights, dividend rates, liquidation and
other rights, preferences and limitations as determined by the Board of
Directors without stockholder approval.
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The Board of Directors of the Company has approved the adoption of a Preferred
Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights Plan provide
for a dividend distribution of one preferred share purchase right (a "Right")
for each outstanding share of common stock, no par value per share (the "Common
Shares"), of the Company. Each Right entitles the registered holder to purchase
from the Company one one-hundredth of a share of Series A Junior Participating
Preferred Stock, no par value (the "Preferred Stock"), at an exercise price of
$69.50 per one one-hundredth of a Preferred Share (the "Purchase Price"),
subject to adjustment, and a redemption price of $.01 per Right. Each one
one-hundredth of a share of Preferred Stock has designations and the powers,
preferences and rights, and the qualifications, limitations and restrictions
which make its value approximately equal to the value of a Common Share.
The Rights are not exercisable until the earlier to occur of (i) 10 days
following a public announcement that a person, entity or group of affiliated or
associated persons (an "Acquiring Person") have acquired beneficial ownership of
15% or more of the outstanding Common Shares or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors prior to
such time as any person or entity becomes an Acquiring Person) following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of such outstanding Common Shares.
The Rights have certain anti-takeover effects, as they would cause substantial
dilution to a person or group that attempted to acquire the Company on terms not
approved by the Company's Board of Directors. The Rights should not interfere
with any merger or other business combination approved by the Board of
Directors, since the Rights may be redeemed by the Company at $.01 per Right
prior to the earliest of (i) the twentieth day following the time that a person
or group has acquired beneficial ownership of 15% or more of the Common Shares
(unless extended for one or more 10 day periods by the Board of Directors), (ii)
a change of control, or (iii) the final expiration date of the rights.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
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<PAGE>
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the second
quarter ended March 31, 2000.
Page 26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ZITEL CORPORATION
Date: April 25, 2000 /s/ Anna M. McCann
Anna M. McCann
Chief Financial Officer
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