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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File No. 0-20095
Stac, Inc.
(Exact Name of registrant as specified in its charter)
Delaware 95-3825313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12636 High Bluff Drive, 4th Floor, San Diego, California 92130-2093
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 794-4300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of Class)
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 for 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 __
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K of any amendment to this Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of December 19, 1997 was $89,737,000.*
The number of shares outstanding of the Registrant's Common Stock was 26,159,114
as of December 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to Regulation 14A in connection
with the 1998 Annual Meeting of Shareholders to be held on March 10, 1998 (the
"1998 Annual Meeting") is incorporated herein by reference into Part III of this
Report.
Certain Exhibits filed with the Registrant's Registration Statement on Form S-1
(Registration No. 33-46389), as amended, the Registrant's Annual Report on Form
10-K for the fiscal years ended September 30, 1993, 1994, 1995 and 1996,
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, as amended,
and Current Reports on Form 8-K filed on November 8, 1994 and October 16, 1995,
as amended, are incorporated herein by reference into Part IV of this Report.
- ---------------
* Excludes the Common Stock held by executive officers, directors and
shareholders whose ownership exceeds 5% of the Common Stock outstanding at
December 19, 1997. Exclusion of such shares should not be construed to
indicate that any such person possesses the power, direct or indirect, to
direct or cause the direction of the management or policies of the
Registrant or that such person is controlled by or under common control
with the Registrant.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risk and
uncertainties. The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include but are not limited to, fluctuations in the Company's operating results,
continued new product introductions by the Company, market acceptance of the
Company's new product introductions, new product introductions by competitors,
OEM and distributor inventory levels and customer demand for the products
incorporating Hi/fn semiconductors, customer concentration, technological
changes in the personal computer and communications industries, uncertainties
regarding intellectual property rights and the other factors referred to herein
(including, but not limited to, the factors discussed below under "Revenues,"
"Quarterly Trends and Channel Inventories," "Seasonality," "Operating Systems,"
"Competition and Risks Associated with New Product Introductions" and "Stock
Price Volatility") and in the Company's Forms 10-Q.
Stac, Inc. ("Stac" or the "Company") designs, develops, markets and
supports high-performance, easy to deploy, distributed business systems recovery
software solutions for enterprise customers which implement the Company's
lossless data compression technologies. In addition, through its majority owned
OEM networking products subsidiary Hi/fn, Inc. ("Hi/fn"), the Company designs,
develops and markets semiconductor and software solutions to improve the
efficiency, security and manageability of networks and to enhance the storage
capacity of high-capacity/high-speed storage devices. Stac also supports a
remote access software suite, which is managed as a mature business unit. The
Company intends to focus its development and marketing resources on the business
segments it believes have the highest growth potential, and to continually
evaluate its strategic objectives with respect to its remote access software
business. Stac's products are sold through a variety of domestic and
international channels.
Stac's storage systems recovery software business is comprised of Replica,
a high-performance, easy-to-deploy, distributed business systems recovery
software product, which enables fast PC server replication and disaster
recovery. Replica for NetWare was introduced in February 1996, and Replica for
NT was made available in April 1997. The Company intends to focus on the
development of relationships with key system integration partners and is
investing significant amounts of its product development, marketing and sales
resources in Replica and extensions to Replica.
The Company also develops and markets remote communications software which
is comprised of ReachOut Remote Control software ("ReachOut"), a remote access
software suite which allows users to access a remote PC using another PC through
the Internet, or over ISDN lines, modems or networks. ReachOut works with
Microsoft Corporation's Windows NT, Windows 95, Windows 3.x and DOS operating
systems.
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Hi/fn is focused on improving the efficiency, security and manageability of
networks by providing solutions in software and silicon to packet processing
bottlenecks. Hi/fn implements lossless data compression in software libraries
and semiconductors, which are marketed and sold to manufacturers of routers,
firewalls, remote access servers, ISDN connectivity products, storage systems
and printers. Currently, the majority of Hi/fn's sales are to a single storage
system OEM. Hi/fn has also implemented data encryption standards in software and
semiconductors for use with data compression to provide high-performance,
efficient and secure data transmission capabilities for its customers' products.
Hi/fn's products are sold worldwide to OEMs both directly and through
manufacturers' representatives.
Hi/fn has licensed its data compression software to companies such as
Microsoft, Cisco Systems Inc., Netscape Communications Corporation, Ascend
Communications Inc., 3Com Corporation, and Bay Networks Inc., all of which play
significant roles in the development and marketing of Internet and virtual
private network products. Virtual private networks enable businesses to reduce
their data communications costs by using the public networks, such as the
Internet, as an alternative to private leased data communication links. In
addition, Hi/fn, Digital Equipment Corporation, and Cisco have co-authored a
proposal to the Internet Engineering Task Force (the "IETF") for the
implementation of lossless data compression in the IP Security ("IPSec")
protocol. The IPSec is intended for implementation in a wide variety of
networking equipment and will facilitate the deployment of virtual private
networks. However, there can be no assurance that these proposals will
ultimately be adopted by the IETF, or that alternatives using other data
compression technology will not be proposed and adopted.
Stac has received royalties from Microsoft and IBM Corporation for licenses
of its data compression technology since fiscal 1994. The Company expects to
receive $4.0 million in royalties in the December 1997 quarter and $1.1 million
in the March 1998 quarter, after which the license agreements will be fully
paid-up. On an after tax basis, the license fees from Microsoft and IBM have
contributed approximately $2.4 million per quarter to net income.
The following discussion should be read in conjunction with the
consolidated financial statements included elsewhere within this annual report.
Fluctuations in annual and quarterly results may occur as a result of factors
affecting demand for the Company's products such as the timing of the Company's
and competitors' new product introductions and upgrades. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
BACKGROUND
STORAGE MANAGEMENT SOFTWARE
Disaster Recovery and Data Protection
The network server market has grown rapidly as more information is being
shared and processed across networks. Also, the storage capacity of hard disk
drives installed on servers and on workstations has grown dramatically. With
network servers providing shared access to mission critical information
twenty-four hours a day seven days a week, the need for fast, reliable
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data backup and disaster recovery has become acute. Traditionally servers have
been backed up a file at a time. If a lost or deleted file needed to be
recovered, specialized software would have to be run by a network systems
administrator. If a server was lost and the files destroyed, a new server would
have to be formatted and the network operating system reinstalled before going
to tapes to try to recover the data. The result has been costly server down
time.
Stac began shipping Replica for NetWare in February 1996 and Replica for
Windows NT in April 1997. Replica was developed by Stac based on core data
protection and disaster recovery technology purchased from Crossware Development
Corporation and Rememory, Inc. in 1995. Unlike traditional file-by-file backup
technologies, Replica uses Stac's Object Replication Technology to replicate
entire servers or volumes. Replication allows live servers to be backed up and
is dramatically faster than file-by-file software because Replica does not have
to open and close each file as it replicates. A replicated volume can be mounted
directly as a volume so that downtime due to a server crash can be minimized.
Unlike disaster recovery routines provided by file-by-file software, Replica
creates a complete server copy and can restore a server without having to
reinstall networking software or rebuild disk partitions.
Other Storage Management Products
The Company discontinued marketing and sales of its Stacker disk
compression products in September 1997. Stacker products provided the majority
of Stac's software revenues for fiscal years 1991 though 1994. Data compression
utilities provided with Windows NT, Windows 95, MS-DOS and PC-DOS under patent
or software licenses from Stac and the rapidly declining cost per megabyte of
hard disk storage have provided customers with the choice of inexpensively
upgrading their hard disk drives or using compression utilities that are
included with the operating systems sold with most personal computers.
COMMUNICATIONS SOLUTIONS SOFTWARE
The Company purchased ReachOut Remote Control software in October 1994 and
has internally developed releases of ReachOut for Microsoft's Windows 3.x,
Windows 95 and Windows NT operating systems. The remote access market has
developed due to the following trends: i) the need for users to access from
outside the office the programs and data on their work computer; ii) the need to
transfer files from a remote computer to another; iii) the growth in remote
technical support via modem; and iv) the growth in office PC networks and the
need for users to access them remotely.
ReachOut provides a complete remote access solution comprised of remote
control, remote node and file transfer. ReachOut 7.0 supports PCs using Windows
NT, Windows 95, Windows 3.x and DOS. ReachOut remote control effectively allows
one PC to take control of another PC by using a connection made over a modem, an
ISDN line, the Internet or an internal network. The remote PC, or host, is
operated by the user from another PC, the viewer. The host accesses files and
runs programs using keystrokes and mouse directions sent by the user from the
viewer PC. The viewer PC displays what is on the host PC's screen and thus gives
the user a way to
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remotely operate the host PC and see the results of the work. ReachOut includes
a remote access client that allows users to log into a computer network as a
remote node. ReachOut also provides a file transfer utility that performs fast
file transfer from one PC to another and allows a user to efficiently update a
file by transmitting only the changes that have been made since the last time
the file was transferred.
HI/FN
As the need to communicate among and within organizations has increased,
the need for efficient and secure network communications equipment has also
grown. At the same time, Hi/fn's business has evolved from supplying a range of
semiconductors and software libraries to backup tape drive OEMs, to supplying a
range of data compression and data encryption semiconductors and software
libraries to network communications OEMs.
Hi/fn's current semiconductor and software libraries are based on
implementations of Hi/fn's data compression patents in Hi/fn LZS and Microsoft
MPPC lossless data compression technology. These data compression
implementations rapidly, efficiently and transparently compress and decompress
all types of data found on personal computers or transmitted over communications
systems. The amount of compression varies depending on the inherent redundancy
of the data in the files being compressed, with text, spreadsheet, graphics and
database files achieving higher compression ratios than executable files. Hi/fn
has also developed proprietary semiconductor architectures that enable its
semiconductor-based products to achieve faster processing throughputs than those
achievable through software alone.
Hi/fn's family of semiconductors and software libraries are sold to OEMs
for use in network routers, remote access concentrators, ISDN and frame relay
products, high speed tape drives, printers and other applications. Hi/fn's LZS
and MPPC compression technology have become de facto standards for internetwork
communications. Microsoft's Windows 95 and Windows NT operating system products
use Hi/fn's compression technology in their network communications functions.
STRATEGY
STORAGE MANAGEMENT AND COMMUNICATIONS SOFTWARE
Stac's strategy with respect to its storage management and communications
software groups is to provide software solutions for information systems
managers of large enterprises to help them better manage and use their personal
computer storage and communications investments through the use of intranet and
Internet enabled disaster recovery, communications and security capabilities.
The Company is partnering with other software developers, systems integrators
and resellers to provide complete data storage and management solutions for
enterprises.
In March 1995 Stac acquired Novell NetWare server disaster recovery and
data protection technology from Crossware Development and Rememory. The Company
has since made substantial investments in further development of those
technologies and has added features
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together with new, innovative technology. The result of those development
efforts has been Replica for Windows NT and Replica for NetWare. Replica
introduces Stac's Object Replication Technology as a replacement for
file-by-file backup software solutions that do not provide fast, effective
disaster recovery.
In October 1994, Stac purchased ReachOut Remote Control software from Ocean
Isle Software. Following the acquisition of ReachOut, the Company has introduced
new versions of ReachOut, creating a complete remote access software product.
ReachOut now offers high performance remote control, rapid file transfer and
remote node access to networks for Windows NT, Windows 95, Windows 3.x and DOS.
ReachOut was named Editors' Choice by PC Magazine in each of 1995 and 1996 and
has won a number of other awards and recognition. In October 1995 the Company
acquired Internet software and development capability through the purchase of
California Software. The Company's acquisition of California Software has
provided the Company with core technology and development resources to integrate
Internet functionality into its ReachOut and Replica products as well as
providing access to skilled development personnel.
HI/FN
The mission of Hi/fn, Stac's networking products subsidiary, is to offer a
range of products which incorporate the Company's LZS and Microsoft's MPPC data
compression implementations together with industry standard data encryption to
address its customers' security, bandwidth and capacity needs. Today Hi/fn
provides LZS and MPPC data compression implementations in a range of software
and semiconductor products that meet a variety of customer performance needs.
LZS and MPPC data compression have addressed a key issue for today's computer
users: data communications bandwidth. Efficient exchange of electronic data is
vital to the growing ranks of users linked across networks, over
telecommunications channels and via wireless communications systems. LZS and
MPPC data compression significantly streamline this process. By transmitting
data in compressed form, the effective rate of transmission is accelerated, the
expense of data exchanges is cut by half or more, and the volume of traffic that
can be carried over communications channels is doubled or more. LZS
implementations are also used in Quantum Corporation's high-speed/high-capacity
DLT tape drives and by printer OEMs, such as Tektronix, to reduce the cost of
memory in their products.
Hi/fn is addressing the security needs of its communications equipment
customers brought on by the rapid adoption of the Internet as an integrated part
of an enterprise's network infrastructure. Hi/fn has implemented data encryption
standards in software and semiconductors. By combining data encryption with LZS
and MPPC data compression, Hi/fn provides communications equipment OEMs with
software and semiconductor products which not only increase bandwidth through
compression, but also offer security through the more efficient encryption of
compressed data.
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PRODUCTS
The Company currently licenses its storage management and communications
software solutions to enterprises and OEMs. Hi/fn licenses software libraries
and sells semiconductor products to equipment and software OEMs. Software
solution sales consist of the ReachOut and Replica products, while products sold
to Hi/fn's customers consist of semiconductors and LZS and MUM software
libraries.
REPLICA
Replica is a backup and disaster recovery software product currently being
sold as version 3.0 for Windows NT and for Novell NetWare servers. Replica uses
Stac's Object Replication Technology to quickly replicate entire servers or
volumes and to provide easy access to backed up files plus fast, dependable
disaster recovery.
The following table lists each of the principal products in the Replica
family and their current pricing.
<TABLE>
<CAPTION>
DATE OF
PRODUCT DESCRIPTION SUGGESTED PRICE FIRST SHIPMENT
------- ----------- --------------- --------------
<S> <C> <C> <C>
Replica for Windows NT, Secure disaster recovery $624 April 1997
single server edition. and volume backup software
for Windows NT servers.
Replica for Windows NT, Secure disaster recovery, $1,995 December 1997
intranetwork edition. volume backup, and central
management software for
Windows NT servers.
Replica for NetWare, Secure disaster recovery $624 February 1996
single server edition. and volume backup software
for Novell NetWare servers.
Replica for NetWare, Secure disaster recovery, $1,995 March 1996
intranetwork edition. volume backup and central
management software for
Novell NetWare servers.
</TABLE>
ReachOut is a communications software program that allows one PC to
remotely control another PC by replicating the visual display and controlling
the keyboard and mouse. Using ReachOut and a modem, ISDN line or the Internet,
you can use your keyboard and mouse to operate a distant PC, synchronize it with
your local PC, transfer files or establish a remote node connection. Using
ReachOut over a network connection, you can control or monitor another PC on the
same Local Area Network (LAN) or Wide-Area Network (WAN).
ReachOut gives users, support personnel and administrators new tools with
which to do their jobs better. For example: i) telecommuters may access and
operate their desktop PC from home or while traveling for business; ii)
manufacturers' product support personnel can dial into a computer and diagnose
software or hardware problems without the expense and inconvenience of a product
return or an on-site visit by a technician; iii) corporate helpdesk personnel
can use ReachOut to instantly connect to any workstation on their internal
network to support Windows and DOS applications; iv) product demonstration
computers can be operated remotely to give
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demonstrations of software products without having to load and configure each
computer with the application that is being demonstrated; v) files can be
quickly and easily transferred from a distant computer over a modem connection;
or vi) using a ReachOut gateway, any workstation on your corporate LAN or WAN
can be accessed.
The following table lists each of the principal products in the ReachOut
family and their current pricing:
<TABLE>
<CAPTION>
DATE OF
PRODUCT DESCRIPTION SUGGESTED PRICE FIRST SHIPMENT
------- ----------- --------------- --------------
<S> <C> <C> <C>
ReachOut modem/network Remote access software for $189 September 1991
with host and viewer. Windows NT, Windows 95,
Windows 3.x and DOS-based
computers.
ReachOut modem/network Remote access software for $118 September 1991
with host or viewer. Windows NT, Windows 95,
Windows 3.x and DOS-based
computers.
ReachOut modem/network Same as above, but available Various N/A
version with host and/or in multiple licenses.
viewer.
</TABLE>
ReachOut modem and network version, currently sold as release 7.0, is a
communications software program that allows a user to connect to a PC by modem
or ISDN, through the Internet or over a network to access another PC in order to
remotely control that computer, transfer files between computers, synchronize
computers, or establish a remote node connection. The software is sold with both
the host and viewer software in one package for users who need a one-to-one
remote connection. The host only software is sold for applications such as for
manufacturers whose technical support personnel need to view many hosts from
their support location. The viewer only software is for users such as sales
persons giving demonstrations who need to view one host from many remote
locations.
HI/FN PRODUCTS
Hi/fn technology is available in both software and semiconductors. Hi/fn
supplies OEMs with data compression coprocessors and software libraries for
applications in routers, remote access concentrators, ISDN and frame relay
products and for peripheral devices such as back-up storage devices and
printers. Hi/fn products accounted for 30% and 28% of revenues in fiscal 1997
and 1996 respectively.
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The following table lists each of the principal products that Hi/fn sells
to OEMs:
<TABLE>
<CAPTION>
DATE OF
PRODUCT DESCRIPTION FIRST SHIPMENT
------- ----------- --------------
<S> <C> <C>
7711 Data compression, encryption and October 1997
authentication coprocessor for use on
communications devices.
9610 Very high-speed data compression coprocessor May 1997
for use with high speed tape storage
devices, printers and T3 communications
links.
9710 Data compression coprocessor for high speed September 1996
applications. Provides LZS multi-history
support.
9711 Data compression coprocessor for high speed February 1997
applications. Provides LZS and/or MPPC
multi-history
support.
9732 Very high speed data compression for storage June 1994
and
printer applications.
MUM 1.0 Application program interface for developing June 1997
networking security software that is
compatible with data compression and data
encryption internetworking and security
standards.
LZS221 Compression software libraries licensed November 1988
for November 1988 operation with various
microprocessors.
MPPC Compression software libraries licensed July 1996
for July 1996 operation with various
microprocessors.
</TABLE>
The 7711 coprocessor is the network communication industry's first
single-chip compression/encryption coprocessor. This on-chip integration has two
main advantages. First, it guarantees that processing takes place in the proper
order-compression first, encryption second. Second, the single-chip approach
makes more efficient use of the system bus, and improves performance under peak
traffic conditions. The 7711 implements LZS and MPPC data compression, DES,
Triple-DES and RC4 data encryption, and SHA and MD5 authentication in compliance
with IPSec, SSL/TLS, PPP, PPTP and L2TP networking protocols. The 7711, which
implements multi-history support, encodes at 8 megabytes per second and decodes
at 12 megabytes per second, sufficient for 4 to 8 full-duplex T1 or E1 lines,
depending upon the compression ratio.
The 9610 data compression coprocessor implements LZS data compression and
is used for very high-speed applications such as tape storage devices, printers
and T3 communications links. The 9610 allows compression and decompression rates
of 50 megabytes per second.
The 9710 data compression coprocessor is used in communications products.
The 9710 is the first of Hi/fn's newest generation of communications-oriented
compression products. It may be configured for 16-bit or 32-bit data transfers,
and compresses data at approximately 8 megabytes per second and decompresses
data at approximately 15 megabytes per second. The 9710 implements LZS
multi-history support. The 9711 data compression coprocessor has the same
performance characteristics as the 9710, but also implements MPPC multi- history
support.
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The 9732 data compression coprocessor is used in printers and peripheral
storage products. The 9732 allows compression rates of 12 megabytes per second
and decompression rates of 16 megabytes per second and has on-chip RAM for a
single-chip Hi/fn LZS solution.
MUM 1.0 provides a processor independent software implementation of
industry standard DES and Triple DES data encryption, HMAC-SHA, HMAC-MD5 keyed
hash functions, and LZS and MPPC compression for Internet, intranet and
client-server networks. The MUM 1.0 API may also be accelerated with a Hi/fn
hardware coprocessor.
The LZS221 family is the Company's software implementation of its LZS data
compression technology in C source code and in optimized assembly for OEM
applications based on Intel's 80x86 and i960 processors as well as Motorola's
680x0 processors. MPPC software is licensed from Microsoft Corporation and
implements in C source code the Company's compression technology for use with
Microsoft's Windows NT operating system.
The Company currently grants annual, renewable licenses for both the LZS
and MPPC software to software developers and equipment OEMs. Pricing for the
licenses is based on volume and related revenue from an OEM's licensed
application.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid
technological change, requiring continuous investment to develop and bring to
market new products. The Company believes that significant factors in its future
success will be its ability to identify and respond to customer needs, to
enhance its existing products, to introduce new products on a timely and
cost-effective basis, to extend its core technology into new platforms and
applications, and to anticipate and respond to emerging standards and other
technological changes.
The Company intends to continue to develop both its software products and
semiconductor products as market conditions warrant and to invest in the
development of new products. Foreign language versions of products will be
developed as market conditions warrant. The Company has developed fully
translated German and Japanese versions of its ReachOut and Replica software
products for sale in foreign markets and intends to work with partners in other
countries to produce other language translations as market conditions warrant.
The Company's research and development is conducted primarily by its
internal product development staff and through contractors. Research and
development expenses were $11.6 million in 1997 and $8.4 million in 1996, which
represented 24% and 18% of revenues in those periods, respectively.
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MARKETING AND SALES
The Company markets and sells its storage management and communications
software products domestically through: i) its internal direct sales and
marketing staffs which, directly and together with partners, corporate
resellers, value added resellers and systems integrators, sell to corporations,
government entities and other enterprises and ii) distributors that sell
primarily to software resellers. The Company's domestic distributors resell the
Company's products in North America on a nonexclusive basis pursuant to
distribution agreements that have one-year terms with automatic one-year renewal
periods. The Company retains ownership of its proprietary rights associated with
its products and agrees to indemnify the distributor for third-party claims of
proprietary rights infringement to the extent such claims are brought against
the distributor.
The Company's current software return policy allows its distributors to
return any new, unused product in the distributor's inventory within a
contractually defined period of up to 180 days from the notice of discontinuance
of any product, or of any new version of a product, for a credit against
balancing orders for other products of the Company. In addition, distributors
may participate quarterly in a stock balancing program which, subject to certain
limitations, allows them to return purchased products within the second month of
each calendar quarter for credit towards future purchases or a cash refund. The
Company believes that this stock balancing provision is customary in the
industry and should not materially increase risks associated with the
relationship. End users may return defective products pursuant to policies
established by their dealer or directly to the Company within ninety days of
purchase. The Company reviews its allowances for returns and distributor
inventory levels on a monthly basis and believes its allowances for returns are
adequate. However, due to uncertainty regarding end user demand and competitive
product introductions, there can be no assurance that actual returns in excess
of recorded allowances will not occur and result in a material adverse effect on
the Company's business, operating results or financial condition.
The Company sells its ReachOut and Replica products internationally through
a number of distributors in Europe and the Pacific Rim. The European
distributors are managed by sales personnel located in Stac's sales office in
the United Kingdom ("Stac UK"). Distributors in the Pacific Rim are managed by
sales personnel at the Company's headquarters in California. International sales
accounted for revenues of $5.1 million and $4.8 million in each of fiscal 1997
and 1996, respectively. Technical support for Stac products sold in foreign
markets is provided by Stac UK, Stac or through contracts with third parties.
The Company's international operations are subject to certain risks common to
international activities, such as changes in foreign governmental regulations,
currency exchange rates, tariffs and taxes, export license requirements, the
imposition of trade barriers, difficulties in staffing and managing foreign
operations, and political and economic instability.
In addition to the above channels used for marketing and selling the
Company's software products, the Company licenses its software products to
software and hardware OEMs for incorporation into their own products.
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Hi/fn sells its semiconductor products and software libraries directly to
OEMs and also utilizes a domestic network of independent manufacturer's
representatives who are compensated on a commission basis to introduce Hi/fn's
products to OEMs and provide local sales support for existing OEM customers.
These manufacturer's representatives are managed and supported by Hi/fn's
internal sales and support staff. Hi/fn selects its representatives on the basis
of their reputation, industry knowledge and the product lines they represent.
Hi/fn also sells its semiconductor products in Japan and Hong Kong through
industrial distributors and directly elsewhere.
COMPETITION AND RISKS ASSOCIATED WITH NEW PRODUCT INTRODUCTIONS
The market for the Company's products is intensely competitive. Increased
competition could result not only in a decline in sales volume, but also in
price reductions that could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company began shipping Replica back-up and disaster recovery software
for Novell NetWare during the second quarter of fiscal 1996 and Replica for
Windows NT in April 1997. Replica competes with well established back-up
products from Cheyenne Software, Inc., recently purchased by Computer
Associates, Inc., and Seagate Software, Inc. (owned by Seagate Technologies,
Inc.), Legato Systems, Inc. and Veritas Software Corporation, all of which have
established channels of distribution and installed customer bases. Resellers
could choose not to sell Replica over competitors' products with the result that
significant sales of Replica could fail to materialize, or products similar to
Replica could be successfully introduced to resellers by the Company's
competitors. In addition, Microsoft's current operating systems incorporate
back-up functionality and future operating systems are expected to include some
disaster recovery functionality. Also, Replica is being introduced into
sophisticated server environments and, while the Company has invested
significant resources in testing Replica under a variety of conditions,
configurations and circumstances, there are likely to be environments which have
not been anticipated for which additional development of Replica will be
necessary.
The Company's ReachOut product competes in the remote control software
market against more established products such as Symantec Corporation's
pcAnywhere and Traveling Software, Inc.'s Laplink. ReachOut also competes
against remote access products from companies such as Citrix, Inc. and Shiva
Corporation. Further, Microsoft could elect to incorporate remote control or
additional remote access capabilities into its operating systems which are
pre-installed on most personal computers. The Company believes that the growth
of the remote control market has decreased from the prior years' growth rate and
will have a negative effect on the Company's ability to increase its remote
control revenues.
The Company's license agreement with IBM Corporation grants IBM the right
to implement, but not sublicense, the Company's patented data compression
technology in IBM hardware and software products. Also, microprocessor and chip
set suppliers, customers and others could seek to expand their product offerings
by designing and selling products using competitive data
13
<PAGE> 14
compression, or could rely on software implementations of data compression and
data encryption, or use other technologies, any of which could render obsolete
or adversely affect sales of Hi/fn's semiconductor and software products.
MANUFACTURING AND BACKLOG
Hi/fn's semiconductor products are manufactured by third-party
semiconductor manufacturers. In the past, most recently during fiscal 1995, the
lead times required by Hi/fn's manufacturers have increased due to growing
world-wide demand for semiconductor products. In addition, future worldwide
semiconductor capacity may not always be able to service demand. Lead times from
Hi/fn's manufacturers are currently from ten to fourteen weeks, but have been as
high as twenty weeks during times of capacity shortages. Hi/fn has instituted
programs to have its principal semiconductor products manufactured by two
different manufacturers where feasible. However, if Hi/fn has difficulty
procuring sufficient quantities of its semiconductor products to meet customer
demands, resulting shortages could have a material adverse affect on the
Company's financial results.
Hi/fn quotes lead times for its semiconductor products of twelve weeks from
receipt of order and generally ships semiconductor products within one week of
the quoted lead times. Hi/fn has a backlog of approximately three to five months
of semiconductor sales, representing order lead times. Backlog for semiconductor
products is subject to rescheduling and cancellation by customers and is not
necessarily indicative of future demand for semiconductor products.
The majority of the Company's software products are manufactured in
accordance with the Company's specifications by third parties that specialize in
the duplication and assembly of software products. The principal materials and
components used in the Company's software products include diskettes and CD's,
used for distribution of the software code, and user manuals. The software
manufacturing process involves the duplication of media, the printing of user
manuals, assembly of components, and final packaging. The Company believes there
is an adequate supply of and source for the raw materials used in its software
products and that multiple sources are available for media duplication, manual
printing and final packaging.
The Company generally ships software products within ten days after the
receipt of an order, although rapid increases in demand as the result of the
release of a new product or a product upgrade could cause shipping delays.
Generally, the Company has relatively little, if any, backlog of orders for its
software products at any given time and does not consider backlog to be a
measure of sales for any future period.
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<PAGE> 15
PATENTS, TRADEMARKS AND PRODUCT PROTECTION
The Company attempts to protect its products with a combination of trade
secret, patent, copyright, maskwork and trademark laws and with license
agreements. The Company or its subsidiaries own ten issued United States patents
relating to data compression, which expire from 2006 to 2013. One or more of the
patents are employed in the Company's data compression coprocessors and
ReachOut, and LZS221 and MPPC software products. The company also owns one
patent relating to data compression in each of the United Kingdom, Germany and
Belgium and has other patents pending.
The status of patents covering technology is highly uncertain, involving
complex legal and factual questions. There can be no assurance that patent
applications filed by the Company will result in patents being issued or that
its patents, and any patents that may be issued to it in the future, will afford
protection against competitors with similar technology; nor can there be any
assurance that patents issued to the Company will not be infringed upon or
designed around by others or that others will not obtain patents that the
Company would need to license or design around or that the Company's competitors
will not independently develop non-infringing technologies or products that are
equivalent or superior in function or performance. If patents held by
competitors or others are upheld by the courts and found to be infringed by
Stac's products, the holders of such patents might be in a position to require
the Company to stop manufacturing, using or selling the infringing products and
to pay up to three times damages to the holders of the infringed patents. There
can be no assurance that any licenses that might be required for the Company's
products would be available on reasonable terms, if at all.
The Company generally licenses its software products to end user customers
by use of a "shrink-wrap" license (a "shrink-wrap" license agreement is a
printed license agreement included within packaged software that sets forth the
terms and conditions under which the end user can use the product). The terms of
this license agreement determine how the software may be used and generally
limit the user to use of the software on a single computer and to make a back-up
copy and prohibit the end user from providing the product or copies to multiple
users. Shrink-wrap licenses are unenforceable under the laws of certain
jurisdictions. Judicial enforcement of copyright laws is also uncertain.
Policing unauthorized use of computer software is difficult, and software piracy
is a persistent problem for the packaged software industry. These problems may
be particularly acute in international markets. There can be no assurance that
misappropriation will not occur.
The Company's trademark rights include rights associated with its use of
its trademarks and rights obtained by registrations of its trademarks. The
Company has obtained United States trademark registrations for certain
trademarks, and has applied for or obtained registration in various
international jurisdictions. The Company's rights to register and use its
trademarks do not ensure that the Company has superior rights to others that may
have registered or used identical or related trademarks on related goods or
services, nor that such registrations or uses will not be used to attempt to
foreclose use of a particular trademark by the Company.
Because the personal computer industry is characterized by rapid
technological change, the policing of the unauthorized use of personal computer
software is a difficult task and software
15
<PAGE> 16
piracy is expected to continue to be a persistent problem for the packaged
software industry. Despite steps taken by Stac to protect its software products,
third parties may still make unauthorized copies of Stac's products for their
own use or for sale to others. The Company believes that the knowledge,
abilities and experience of its employees, its timely product enhancements and
upgrades and the availability and quality of its support services provided to
users are more significant factors in influencing end users to buy its products
than are patent, trade secret and copyright protection laws.
EMPLOYEES
As of November 30, 1997, Stac employed approximately 170 full-time
employees, of whom approximately 85 were employed in research and development,
55 in sales, marketing and customer support and 30 in operations and
administration. None of the Company's employees is represented by a labor union
or subject to a collective bargaining agreement. Stac has never experienced a
work stoppage due to labor difficulties and believes that its employee relations
are good.
ITEM 2. PROPERTIES
The Company's principal domestic administrative, marketing, sales and
product development activities are located in approximately 46,000 square feet
of leased facilities in San Diego, California. The space is occupied under lease
agreements that expire in March 2000. The Company has options to renew the
leases for an additional five year period on terms specified in the current
lease agreements. The Company leases approximately 1,600 square feet of
warehouse space in Carlsbad, California on a quarter-to-quarter basis and
approximately 2,000 square feet of office space in San Jose, California. The
Company's subsidiary in the United Kingdom leases 2,600 square feet of office
space near London under a ten year lease cancelable by either party after
November 1998. See Note 8 of Notes to Financial Statements for information
regarding the Company's obligations under its facilities leases.
ITEM 3. LEGAL PROCEEDINGS
In July 1992, separate shareholder class action complaints were filed in
the United States District Court for the Southern District of California,
alleging substantially identical violations of the federal securities laws
against the Company and certain of its Directors for allegedly misstating and
omitting material facts required to be stated in the Company's May 7, 1992
prospectus and in subsequent public announcements in order to artificially
inflate the price of the Company's stock. Each suit was purportedly brought on
behalf of all persons who purchased the Company's common stock during the period
May 7, 1992 through July 9, 1992, inclusive. Each suit sought compensatory
damages in unspecified amounts and other relief. A motion to consolidate the two
actions was granted and a consolidated complaint filed. A motion to dismiss the
complaint was granted on September 20, 1993 with leave to amend the complaint.
On November 18, 1993, plaintiffs amended the complaint and named additional
Directors and
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<PAGE> 17
Officers of the Company as defendants. The amended complaint alleged
substantially the same violations as the complaint first filed in July 1992.
In July 1994 the San Diego Federal District Court dismissed the action,
with prejudice. The plaintiffs' appeals of the District Court's decision were
denied by the Ninth Circuit Court of Appeals and the District Court's decision
affirmed and entered. The United States Supreme Court declined to review the
Appellate Court's decision with the result that the suit has been dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended September 30, 1997.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Common Stock of Stac is traded on the Nasdaq National Market ("NNM")
under the symbol "STAC." The following table sets forth the range of high and
low sales prices on the NNM for the Common Stock for the periods indicated and
since January 1, 1995. Such quotations represent inter-dealer prices without
retail markup, markdown or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
Common Stock Prices
High Low
------ -------
<S> <C> <C>
Calendar Year 1995:
First Quarter $ 6.38 $ 4.88
Second Quarter $ 8.13 $ 5.38
Third Quarter $10.25 $ 7.25
Fourth Quarter $15.13 $ 6.75
Calendar Year 1996:
First Quarter $14.50 $ 8.75
Second Quarter $13.88 $ 9.88
Third Quarter $11.25 $ 6.88
Fourth Quarter $ 8.63 $ 6.38
Calendar Year 1997:
First Quarter $ 7.13 $ 4.75
Second Quarter $ 5.13 $ 3.38
Third Quarter $ 5.31 $ 3.19
Fourth Quarter (through December 19, 1997) $ 7.38 $ 4.75
</TABLE>
The Company has not paid dividends on its Common Stock and presently
intends to continue this policy in order to retain earnings for use in its
business. The Company had approximately 452 shareholders of record as of
December 19, 1997. The Company believes it has in excess of 500 beneficial
shareholders. The last sales price for the Company's Common Stock, as reported
on the NNM on December 19, 1997, was $4.75.
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<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to each of the fiscal years 1993
through 1997, have been derived from audited financial statements, including the
balance sheet at September 30, 1997 and 1996 and the related statements of
operations for each of the three years ended September 30, 1997 and notes
thereto included herein. This data should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto for
the corresponding periods.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues $ 47,417 $ 46,765 $ 45,804 $ 31,325 $ 36,984
Operating income (loss) 5,985 2,352 (1,035) (750) (234)
Net income (loss) 5,660 (1,675) 1,496 333 415
Net income (loss) available for
common shareholders 5,660 (1,843) (102) (116) 415
Net income (loss) per common share $ 0.18 $ (0.06) $ 0.00 $ 0.00 $ 0.02
Common shares used to compute per share data 30,926 30,068 25,391 24,643 25,013
Balance Sheet:
Working capital $ 52,107 $ 68,498 $ 65,186 $ 71,800 $ 31,053
Total assets 71,924 83,690 80,611 77,952 37,674
Common stock and other
shareholders' equity 64,123 78,999 36,395 34,705 33,001
</TABLE>
The Company has never declared or paid any cash dividends on its common
stock. The company currently intends to retain remaining future earnings to
finance the growth and development of its business.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risk and
uncertainties. The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include but are not limited to, fluctuations in the Company's operating results,
continued new product introductions by the Company, market acceptance of the
Company's new product introductions, new product introductions by competitors,
OEM and distributor inventory levels and customer demand for the products
incorporating Hi/fn semiconductors, customer concentration, technological
changes in the personal computer and communications industries, uncertainties
regarding intellectual property rights and the other factors referred to herein
(including, but not limited to, the factors discussed below under "Revenues,"
"Quarterly Trends and Channel Inventories," "Seasonality," "Operating Systems,"
"Competition and Risks Associated with New Product Introductions" and "Stock
Price Volatility") and in the Company's Forms 10-Q.
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<PAGE> 20
Stac, Inc. ("Stac" or the "Company") designs, develops, markets and
supports high-performance, easy to deploy, distributed business systems recovery
software solutions for enterprise customers which implement the Company's
lossless data compression technologies. In addition, through its majority owned
OEM networking products subsidiary Hi/fn, Inc. ("Hi/fn"), the Company designs,
develops and markets semiconductor and software solutions to improve the
efficiency, security and manageability of networks and to enhance the storage
capacity of high-capacity/high-speed storage devices. Stac also supports a
remote access software suite, which is managed as a mature business unit. The
Company intends to focus its development and marketing resources on the business
segments it believes have the highest growth potential, and to continually
evaluate its strategic objectives with respect to its remote access software
business. Stac's products are sold through a variety of domestic and
international channels.
Stac's storage systems recovery software business is comprised of Replica,
a high-performance, easy-to-deploy, distributed business systems recovery
software product, which enables fast PC server replication and disaster
recovery. Replica for NetWare was introduced in February 1996, and Replica for
NT was made available in April 1997. The Company intends to focus on the
development of relationships with key system integration partners and is
investing significant amounts of its product development, marketing and sales
resources in Replica and extensions to Replica.
The Company also develops and markets remote communications software which
is comprised of ReachOut Remote Control software ("ReachOut"), a remote access
software suite which allows users to access a remote PC using another PC through
the Internet, or over ISDN lines, modems or networks. ReachOut works with
Microsoft Corporation's Windows NT, Windows 95, Windows 3.x and DOS operating
systems.
Hi/fn is focused on improving the efficiency, security and manageability of
networks by providing solutions in software and silicon to packet processing
bottlenecks. Hi/fn implements lossless data compression in software libraries
and semiconductors, which are marketed and sold to manufacturers of routers,
firewalls, remote access servers, ISDN connectivity products, storage systems
and printers. Currently, the majority of Hi/fn's sales are to a single storage
system OEM. Hi/fn has also implemented data encryption standards in software and
semiconductors for use with data compression to provide high-performance,
efficient and secure data transmission capabilities for its customers' products.
Hi/fn's products are sold worldwide to OEMs both directly and through
manufacturers' representatives.
Hi/fn has licensed its data compression software to companies such as
Microsoft, Cisco Systems Inc., Netscape Communications Corporation, Ascend
Communications Inc., 3Com Corporation, and Bay Networks Inc., all of which play
significant roles in the development and marketing of Internet and virtual
private network products. Virtual private networks enable businesses to reduce
their data communications costs by using the public networks, such as the
Internet, as an alternative to private leased data communication links. In
addition, Hi/fn, Digital Equipment Corporation, and Cisco have co-authored a
proposal to the Internet Engineering Task Force (the "IETF") for the
implementation of lossless data compression in the IP Security
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<PAGE> 21
("IPSec") protocol. The IPSec is intended for implementation in a wide variety
of networking equipment and will facilitate the deployment of virtual private
networks. However, there can be no assurance that these proposals will
ultimately be adopted by the IETF, or that alternatives using other data
compression technology will not be proposed and adopted.
Stac has received royalties from Microsoft and IBM Corporation for licenses
of its data compression technology since fiscal 1994. The Company expects to
receive $4.0 million in royalties in the December 1997 quarter and $1.1 million
in the March 1998 quarter, after which the license agreements will be fully
paid-up. On an after tax basis, the license fees from Microsoft and IBM have
contributed approximately $2.4 million per quarter to net income.
The following discussion should be read in conjunction with the
consolidated financial statements included elsewhere within this annual report.
Fluctuations in annual and quarterly results may occur as a result of factors
affecting demand for the Company's products such as the timing of the Company's
and competitors' new product introductions and upgrades. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
RESULTS OF OPERATIONS
The following table sets forth for the Company's results of operations and
the percentage relationship of certain items to revenues during the periods
shown. Unless otherwise indicated, references to years are to fiscal years which
ended September 30.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues 100% 100% 100%
Cost of revenues 13 14 12
---- ---- ----
Gross margin 87 86 88
---- ---- ----
Research and development 24 18 16
Purchased research and development -- 26 29
Sales and marketing 36 28 29
General and administrative 12 9 11
Restructuring 2 -- 5
---- ---- ----
74 81 90
---- ---- ----
Operating income (loss) 13 5 (2)
Interest income 5 5 4
---- ---- ----
Income before income taxes 18 10 2
Provision for (benefit from) income taxes 6 13 (1)
---- ---- ----
Net income (loss) 12% (3)% 3%
==== ==== ====
</TABLE>
REVENUES
Revenues increased by 1% to $47.4 million in 1997 compared to 1996
revenues, and increased by 2% in 1996 to $46.8 million compared to 1995 revenues
of $45.8 million. The increase in
21
<PAGE> 22
1997 and 1996 revenues was due to increased Hi/fn sales offset in part by a
decline in software sales as discussed below.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Revenue ($millions):
Software $17.2 36% $17.9 38% $21.7 47%
Hi/fn 14.2 30 12.9 28 7.3 16
Licenses 16.0 34 16.0 34 16.8 37
----- --- ----- --- ----- ---
Total $47.4 100% $46.8 100% $45.8 100%
----- --- ----- --- ----- ---
</TABLE>
Software sales, which are comprised of domestic and international sales and
licenses through distribution, retailers, solution providers, OEM and direct
channels, accounted for $17.2 million of revenues in 1997, $17.9 million of
revenues in 1996 and $21.7 million of revenues in 1995. Software sales decreased
by 4% in 1997 from 1996 due primarily to declining sales of ReachOut which has
reached a mature phase of the product life cycle and due to declining sales of
Stacker. Stacker sales continued to decline from comparable previous periods due
primarily to the inclusion of disk compression in Windows and DOS and the
availability of large capacity, low cost per megabyte hard disk drives. The
Company has discontinued the sale of Stacker products as of the end of fiscal
1997. These declines were partially offset by increased sales in the Replica
product line due to the new releases of that product discussed above. Software
sales decreased by 18% in 1996 from 1995 due primarily to declining sales of
Stacker as discussed above, offset by revenues from ReachOut and, to a lesser
extent, from Replica.
Revenues from Hi/fn, Stac's semiconductor subsidiary which develops,
markets and sells semiconductors and software libraries derived from the
Company's data compression technology and from data encryption standards, were
$14.2 million in 1997, $12.9 million in 1996 and $7.3 million in 1995. The
increase in revenues in both 1997 and 1996 are due primarily to sales of the
Company's data compression coprocessors to providers of high speed networks and
tape drives. The majority of semiconductor sales in fiscal 1997 were from
shipments of data compression coprocessors to Quantum Corporation, an OEM
producer of high speed/high capacity tape storage devices.
Royalties from licenses of Stac's data compression technology to operating
system vendors were $16.0 million in 1997 and 1996 and $16.8 million in 1995. In
1997, 1996 and 1995, royalty revenues were primarily from license agreements
with Microsoft and IBM, who are obligated to continue paying royalties under
those licenses at the rate of $4.0 million per quarter through December 1997,
and $1.1 million in the March 1998 quarter.
International revenues, which are included above, are primarily from sales
of software products. International revenues were $5.1 million, or 11% of
revenues in 1997, and $4.8 million, or 10% of revenues in 1996 and 1995. The
increase in international revenues in 1997 over 1996 is primarily due to sales
of Replica in the European marketplace. International revenues were unchanged in
1996 from 1995 levels. Stac markets and sells to its European accounts from its
office in the United Kingdom and markets and sells to the other principal
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<PAGE> 23
international markets through sales personnel in its San Diego office and
through relationships with distributors and resellers abroad.
GROSS MARGIN
Cost of revenues consists primarily of Stac's proprietary design
semiconductors, which are manufactured by third party foundries for resale by
Stac, and of the user manuals, packaging, media and assembly associated with the
Company's software products. Gross margins were 87% in 1997, 86% in 1996 and 88%
in 1995. The increase in 1997's gross margin from that of 1996 was primarily due
to the higher percentage of high margin semiconductor sales. The decrease in
1996's gross margin from that of 1995 was due to the increase of Hi/fn
semiconductor revenues as a percent of total revenue. Semiconductor revenues
have a lower gross margin than software revenues.
RESEARCH AND DEVELOPMENT
The cost of product development consists primarily of salaries, employee
benefits, overhead, outside contractors and non-recurring engineering fees. Such
expenses were $11.6 million for 1997, $8.4 million for 1996 and $7.2 million for
1995. The increases in product development in 1997 from that of 1996 and in 1996
from that of 1995 were due to the addition of personnel for development of new
versions of ReachOut, development of the Company's Replica product line, and
development of CD-QuickShare in 1995. The Company expects to continue to invest
in the development of products for which it believes there is a need in the
market. However, there can be no assurance that product development programs
invested in by the Company will be successful or that products resulting from
such programs will achieve market acceptance.
Purchased research and development for 1996 includes $12.2 million
recognized in connection with the October 1995 acquisition of California
Software, Inc. and the related investment in DynaNet, Inc. Purchased research
and development for 1995 includes $12.7 million related to the October 1994
acquisition of ReachOut from Ocean Isle Software and $0.7 million related to the
March 1995 technology acquisition from Crossware Development Corporation and
Rememory Corporation.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses consist primarily of salaries, commissions
and benefits of sales, marketing and customer support personnel, and consulting,
advertising, promotional and overhead expenses. Such expenses were $16.8 million
for 1997, $12.9 million for 1996 and $13.3 million for 1995. The increase in
marketing and sales expense in 1997 over that in 1996 was the result of the
addition of personnel and program costs intended to create end user demand for
the Company's products. There was no significant change in marketing and sales
expense in 1996 from that of 1995.
In July 1997, the Company reduced its sales and marketing personnel and, as
a result, expects its sales and marketing expenses to decrease. This reduction
is consistent with the Company's refocusing its sales and marketing efforts
towards developing corporate enterprise customers, rather than individual end
users, however, consolidated sales and marketing expenses are expected to remain
the Company's most significant ongoing operating expense.
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<PAGE> 24
GENERAL AND ADMINISTRATIVE
General and administrative expenses are comprised primarily of salaries for
administrative and corporate services personnel, legal, and other professional
fees. Such expenses were $5.9 million for 1997, $4.4 million for 1996 and $5.2
million for 1995. The increase in 1997 expenses over those in 1996 are primarily
due to the addition of management personnel and the costs of outside consulting
services. The decrease in 1996 expenses from those of 1995 was due to the
inclusion in 1995 of a non-recurring expense of $1 million related to terminated
acquisition activities.
RESTRUCTURING CHARGES
As mentioned above, in July 1997, the Company reorganized its sales and
marketing departments and recorded a restructuring charge of $0.9 million. The
principal components of the charge include $0.5 million for losses on property
and equipment disposals, $0.3 million for severance and employee related
liabilities and $0.1 million for lease termination and closure costs.
In May 1995, the Company closed its Florida direct sales facility and
consolidated U.S. sales activities in its San Diego, California headquarters. In
conjunction with the closure, the Company recorded a restructuring charge to
operations of $2.4 million. The principal components of the charge include $0.6
million for lease termination and closure costs, $1.0 million for intangibles
written down, $0.5 million for losses on property and equipment disposals, and
$0.3 million for severance and employee related liabilities.
INTEREST INCOME
Interest income was $2.4 million in 1997, $2.1 million in 1996 and $2.0
million in 1995. The increase in interest income in 1997 over that of 1995 and
in 1996 over that of 1995 was primarily due to interest earned on higher
investment balances as a result of net positive cash flow from operations. The
Company invests the majority of its funds in tax exempt securities.
INCOME TAXES
For 1997, the Company reported a provision for income taxes of $2.7 million
on income before income taxes of $8.4 million, an effective tax rate of 32%. For
1996, the Company reported a provision for income for taxes of $6.1 million on
income before income taxes of $4.5 million. In 1996, the Company deducted
purchased research and development of $12.2 million for which, consistent with
statutory guidelines, no tax benefit was recognized. Prior to the purchased
research and development, the effective tax rate for 1996 was 37%. For 1995, the
Company recorded a tax benefit on pre-tax net income principally as the result
of tax exempt interest earned on cash equivalents and marketable securities. The
effective tax rates for both 1997 and 1996 are lower than the statutory federal
and state rates due primarily to tax exempt interest earned on cash equivalents
and marketable securities. Differences in effective tax rates among years is
also affected by the proportion of earnings from interest income and foreign
operations to total earnings and the different statutory tax rates associated
with them.
QUARTERLY TRENDS AND CHANNEL INVENTORIES
The Company historically has experienced significant fluctuations in its
revenues and operating results, including net income, and anticipates that these
fluctuations will continue. The Company operates with relatively little backlog
of its software sales, and the majority of its software revenues each quarter
result from orders received in that quarter. Consequently, if near-term
24
<PAGE> 25
demand for the Company's products weakens in a given quarter or if inventory of
the Company's products in the retail and distribution channels satisfies
near-term demand, the Company's operating results for that quarter would be
adversely affected. In addition, when the Company announces enhanced versions of
its software products, the announcement may have the effect of slowing sales of
the current version of the product as buyers delay their purchase. Quarterly
results have been or may in the future be influenced by the timing of
announcements or introductions of new products and product upgrades by the
Company or its competitors, distributor ordering patterns, product returns,
delays in product development and licensing of the Company's products and core
technology. In addition, new products typically have a lengthy evaluation period
before any purchase is made.
Hi/fn's customers order semiconductor products to meet production schedules
based on forecasts of demand for their products. Additionally, OEMs contract
with third party manufacturers to build their products in large lot sizes to
achieve manufacturing efficiencies. As a result of these practices, OEM
semiconductor and finished product inventories can vary significantly depending
on actual sales, the continuation of sales trends, and the timing of contractor
manufacturing cycles with the result that demand for the Company's semiconductor
products may have cyclical increases and decreases.
SEASONALITY
The software industry has typically experienced some seasonal variations in
demand, with sales declining somewhat in the summer months. The Company believes
that its software sales are subject to similar seasonal variations which, when
combined with the other factors described above, are likely to result in
fluctuations in the Company's quarterly results. As a result, historical
quarter-to-quarter comparisons should not be relied upon as indicative of future
performance.
OPERATING SYSTEMS
Stac's ReachOut and Replica products currently operate on a limited number
of personal computer and network operating systems. ReachOut supports Microsoft
Windows NT, Windows 95, Windows 3.x and DOS, while Replica supports Windows NT
and Novell NetWare servers. Replica customers may require support of the Unix
operating system, which the Company does not currently provide. In addition,
future versions of Microsoft's Windows operating systems may require significant
changes to the Company's products in order to maintain compatibility.
COMPETITION AND RISKS ASSOCIATED WITH NEW PRODUCT INTRODUCTIONS
The market for the Company's products is intensely competitive. Increased
competition could result not only in a decline in sales volume, but also in
price reductions that could have a material adverse effect on the Company's
business, operating results and financial condition.
The Company began shipping Replica back-up and disaster recovery software
for Novell NetWare during the second quarter of fiscal 1996 and Replica for
Windows NT in April 1997. Replica competes with well established back-up
products from Cheyenne Software, Inc., recently
25
<PAGE> 26
purchased by Computer Associates, Inc., and Seagate Software, Inc. (owned by
Seagate Technologies, Inc.), Legato Systems, Inc. and Veritas Software
Corporation, all of which have established channels of distribution and
installed customer bases. Resellers could choose not to sell Replica over
competitors' products with the result that significant sales of Replica could
fail to materialize, or products similar to Replica could be successfully
introduced to resellers by the Company's competitors. In addition, Microsoft's
current operating systems incorporate back-up functionality and future operating
systems are expected to include some disaster recovery functionality. Also,
Replica is being introduced into sophisticated server environments and, while
the Company has invested significant resources in testing Replica under a
variety of conditions, configurations and circumstances, there are likely to be
environments which have not been anticipated for which additional development of
Replica will be necessary.
The Company's ReachOut product competes in the remote control software
market against more established products such as Symantec Corporation's
pcAnywhere and Traveling Software, Inc.'s Laplink. ReachOut also competes
against remote access products from companies such as Citrix, Inc. and Shiva
Corporation. Further, Microsoft could elect to incorporate remote control or
additional remote access capabilities into its operating systems which are
pre-installed on most personal computers. The Company believes that the growth
of the remote control market has decreased from the prior years' growth rate and
will have a negative effect on the Company's ability to increase its remote
control revenues.
The Company's license agreement with IBM Corporation grants IBM the right
to implement, but not sublicense, the Company's patented data compression
technology in IBM hardware and software products. Also, microprocessor and chip
set suppliers, customers and others could seek to expand their product offerings
by designing and selling products using competitive data compression, or could
rely on software implementations of data compression and data encryption, or use
other technologies, any of which could render obsolete or adversely affect sales
of Hi/fn's semiconductor and software products.
STOCK PRICE VOLATILITY
Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock in any given period. Shortfalls could be caused by
shortfalls in revenues, timing of the receipt of technology license fees, and/or
increased levels of expenditures. Additionally, the Company participates in a
highly dynamic industry, which often results in significant volatility of the
Company's stock price.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and marketable securities decreased by $13.3 million to
$52.1 million at September 30, 1997 from that at September 30, 1996. The
decrease was primarily attributable to cash used to purchase treasury stock of
$21.4 million, partially offset by cash generated from operations. Accounts
receivable decreased by $1.0 million to $4.6 million at September 30, 1997 from
that at September 30, 1996. Working capital decreased by $16.4 million to $52.1
million at September 30, 1997 from that at September 30, 1996.
26
<PAGE> 27
During 1996, the Company paid $0.2 million in dividends on its Series A
Preferred Stock. The obligation to pay the preferred dividend terminated when
the preferred stock was converted to common stock in November 1995.
The Company believes that existing cash balances and funds provided by
operations will be sufficient to finance the working capital requirements of the
consolidated companies for the foreseeable future.
Selected Quarterly Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Sept. 30, June 30, Mar. 31, Dec. 31,
Fiscal 1997 1997 1997 1997 1996
- ---------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 13,313 $ 11,584 $ 11,624 $ 10,896
Gross margin 11,148 10,013 10,069 9,843
Income from operations 843 912 1,494 2,737
Net income 1,072 1,104 1,280 2,204
Net income per common share $ .03 $ .04 $ .04 $ .07
Common stock price:
High $ 5.31 $ 5.13 $ 7.13 $ 8.63
Low $ 3.19 $ 3.38 $ 4.75 $ 6.38
Sept. 30, June 30, Mar. 31, Dec. 31,
Fiscal 1996 1996 1996 1996 1995
- ---------------------------------- -------- -------- -------- --------
Revenues $ 12,234 $ 10,988 $ 12,236 $ 11,307
Gross margin 10,522 9,168 10,712 9,832
Income (loss) from operations 3,214 2,618 4,358 (7,838)
Net income (loss) 2,527 1,916 3,062 (9,180)
Net income (loss) per common share $ .08 $ .06 $ .10 $ (.33)
Common stock price:
High $ 11.25 $ 13.88 $ 14.50 $ 15.13
Low $ 6.88 $ 9.88 $ 8.75 $ 6.75
</TABLE>
As of December 19, 1997, there were 452 holders of record of the Company's
common stock.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements at September 30, 1997 and
1996, and for each of the three fiscal years in the period ended September 30,
1997 and the Report of Price Waterhouse LLP, Independent Accountants, are
included in this report on pages F-1 through F-20.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
Registrant's Definitive Proxy Statement to be filed with the Commission pursuant
to Regulation 14A in connection with the 1998 Annual Meeting (the "Proxy
Statement") under the headings "Nominees" and "Background of Executive Officers
not Described Above."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Proxy Statement under the heading "Certain Transactions."
28
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
(1) Report of Independent Accountants F-1
Consolidated Balance Sheet at
September 30, 1997 and 1996 F-2
Consolidated Statement of Operations for
Fiscal 1997, 1996 and 1995 F-3
Consolidated Statement of Cash Flows for
Fiscal 1997, 1996 and 1995 F-4
Consolidated Statement of Shareholders' Equity
for Fiscal 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
(2) Schedule I -- Marketable Securities S-1
All other schedules have been omitted because they are not
applicable or required, or the information required to be set
forth therein is included in the Financial Statements or notes
thereto.
</TABLE>
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of
the fiscal year ended September 30, 1997.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit Exhibit
Footnote Number Description
- -------- ------- -----------
<S> <C> <C>
(7) 2.1 Agreement and Plan of Merger, dated April 5, 1996,
between the Registrant and Stac, Inc., a California
corporation.
(7) 3.1 Certificate of Incorporation of the Registrant.
(7) 3.2 Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1, 3.2, 10.8, 10.9,
10.10 and 10.12.
(1) 10.1 Form of Indemnity Agreement entered into between
the Registrant and its directors and officers with
related schedule.
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
<S> <C> <C>
(1)(8) 10.2 Registrant's 1992 Stock Option Plan (the "1992
Plan").
(5)(8) 10.3 Registrant's 1992 Non-Employee Directors' Plan, as
amended (the "Directors' Plan").
(1)(8) 10.4 Registrant's Employee Stock Purchase Plan and related
offering document.
(1) 10.5 Securities Purchase Agreement, dated as of March 27,
1990, among the Registrant and the other persons
named therein.
(1)(8) 10.6 Distributor Agreement, between the Registrant and
Merisel, Inc., dated as of March 1, 1991.
(1)(8) 10.7 Distributor Agreement, between the Registrant and
Ingram Micro, Inc., dated as of March 13, 1991.
(3)(8) 10.8 License Agreement, between the Registrant and
Microsoft Corporation, dated as of June 20, 1994.
(5)(8) 10.9 Forms of Non-statutory Stock Option Agreements under
the Directors' Plan.
(6) 10.10 Stock Purchase Agreement dated October 6, 1995
between the Registrant and William T. Baker.
(6) 10.11 Option Purchase Agreement dated October 6, 1995 among
the Registrant and Certain Holders of Options to
Purchase Common Stock of California Software, Inc.
(6) 10.12 Indemnity Agreement dated October 6, 1995 between the
Registrant and William T. Baker.
(6) 10.13 Series A Preferred Stock Purchase Agreement dated
October 6, 1995 by and between DynaNet, Inc. and the
Registrant.
(7) 10.14 Office Lease date March 22, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.
(7) 10.15 Office Lease date March 22, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.
(7) 10.16 Office Lease dated July 12, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
<S> <C> <C>
(7) 10.17 Amendment No. 1 to the Office Lease dated July 12,
1994 between the Registrant and Weyerhaeuser Mortgage
Company and Fort Wyman, Inc.
(7) 10.18 Amendment No. 2 to the Office Lease dated July 12,
1994 between the Registrant and Weyerhaeuser Mortgage
Company and Fort Wyman, Inc.
11.1 Calculation of net income (loss) per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney. Reference is made to page 32.
</TABLE>
- --------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-46389) or amendments thereto and incorporated herein by reference.
(2) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Act of 1933, as amended, and Rule 406
thereunder respecting Confidential Treatment dated May 6, 1992.
(3) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1994, as amended.
(4) Certain confidential portions deleted pursuant to order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated October 21, 1994.
(5) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995.
(6) Filed as an exhibit to the Company's Report on Form 8-K filed on October
16, 1995, relating to the Company's (i) acquisition of all of the
outstanding capital stock and options to purchase the capital stock of
California Software, Inc. and (ii) acquisition of Series A Preferred Stock
of DynaNet, Inc.
(7) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996.
(8) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)(4).
31
<PAGE> 32
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.
STAC, INC.
By: /s/ Gary W. Clow
--------------------------------
Gary W. Clow
Chairman of the Board, President and
Chief Executive Officer
Date: December 23, 1997
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gary W. Clow and John R. Witzel, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
32
<PAGE> 33
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>
/s/ Gary W. Clow Chairman of the Board, December 23, 1997
- ---------------------------------------- and Chief Executive
(Gary W. Clow) Officer (Principal
executive officer)
/s/ John R. Witzel Vice President of Finance, December 23, 1997
- ---------------------------------------- Chief Financial Officer and
(John R. Witzel) Secretary (principal
financial and accounting
officer)
/s/ Douglas L. Whiting, Ph.D. Vice President of December 23, 1997
- ---------------------------------------- Technology and Director
(Douglas L. Whiting, Ph.D.)
/s/ Charles H. Gaylord, Jr. Director December 23, 1997
- ----------------------------------------
(Charles H. Gaylord, Jr.)
/s/ Robert W. Johnson Director December 23, 1997
- ----------------------------------------
(Robert W. Johnson)
/s/ Antonio Perez Director December 23, 1997
- ----------------------------------------
(Antonio Perez)
</TABLE>
33
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Stac, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
shareholders' equity present fairly, in all material respects, the
financial position of Stac, Inc. and its subsidiaries at September 30, 1997
and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended September 30, 1997, in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is
to express an opinion on these financial statements 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.
Price Waterhouse LLP
San Diego, California
October 27, 1997
F-1
<PAGE> 35
STAC, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,089 $ 35,942
Marketable securities 33,040 29,463
Accounts receivable 4,568 5,577
Inventories 590 754
Deferred income taxes 1,542 979
Prepaid expenses and other current assets 685 232
-------- --------
Total current assets 59,514 72,947
Property and equipment, net 5,288 3,673
Deferred income taxes 6,461 6,322
Other assets 661 748
-------- --------
$ 71,924 $ 83,690
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,751 $ 1,389
Income taxes payable 1,402 390
Accrued expenses and other current liabilities 4,254 2,670
-------- --------
Total current liabilities 7,407 4,449
Other liabilities 237 242
-------- --------
7,644 4,691
-------- --------
Commitments and contingencies (Notes 8 and 10)
Minority Interest 157 --
-------- --------
Common stock and other shareholders' equity:
Common stock, no par value; 100,000,000 shares
authorized; 30,880,000 and 30,687,000 shares issued
in 1997 and 1996, respectively 74,350 73,547
Treasury stock, at cost; 3,828,000 shares (21,351) --
Cumulative translation adjustment (106) (118)
Retained earnings 11,230 5,570
-------- --------
Total common stock and other
shareholders' equity 64,123 78,999
-------- --------
$ 71,924 $ 83,690
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 36
STAC, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 47,417 $ 46,765 $ 45,804
Cost of revenues 6,344 6,531 5,376
-------- -------- --------
Gross margin 41,073 40,234 40,428
Operating expenses:
Research and development 11,558 8,356 7,212
Purchased research and development -- 12,217 13,354
Sales and marketing 16,788 12,923 13,268
General and administrative 5,892 4,386 5,201
Restructuring 850 -- 2,428
-------- -------- --------
Total operating expenses 35,088 37,882 41,463
Operating income (loss) 5,985 2,352 (1,035)
Interest income 2,420 2,115 1,983
-------- -------- --------
Income before income taxes and 8,405 4,467 948
minority interest
Provision for (benefit from) income taxes 2,710 6,142 (548)
Minority interest in net income of
consolidated subsidiary 35 -- --
-------- -------- --------
Net income (loss) 5,660 (1,675) 1,496
Less preferred dividends -- 168 1,598
-------- -------- --------
Net income (loss) available for
common shareholders $ 5,660 $ (1,843) $ (102)
======== ======== ========
Net income (loss) per common share,
primary $ .18 $ (.06) $ .00
Net income (loss) per common share,
fully diluted $ .18 $ ( .05) $ .00
Weighted average common shares
outstanding, primary 30,926 30,068 25,391
Weighted average common shares
outstanding, fully diluted 30,935 30,585 25,391
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 37
STAC, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,660 $ (1,675) $ 1,496
Adjustments required to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 2,686 1,945 2,289
Purchased research and development -- 12,217 13,354
Non-cash restructuring charges 636 -- 1,489
Deferred stock compensation (5) 91 154
Loss (gain) on disposals of property, plant and equipment -- (14) 79
Minority interest in income of consolidated subsidiary 35 -- --
Provision (benefit) for deferred income taxes (702) 851 (6,274)
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable 1,009 649 (864)
Income taxes receivable -- 251 327
Inventories 164 (270) 245
Prepaid expenses and other current assets (453) (113) 409
Other assets (122) 11 96
Accounts payable 362 382 (971)
Income taxes payable 1,012 390 --
Accrued expenses and other current liabilities 948 (264) 730
-------- -------- --------
Net cash provided by operating activities 11,230 14,451 12,559
-------- -------- --------
Cash flows from investing activities:
Purchases of marketable securities (25,253) (35,333) (24,612)
Sales of marketable securities 21,676 31,737 59,404
Acquisitions, net of cash acquired (400) (11,252) (18,860)
Acquisitions of treasury stock (21,351) -- --
Purchases of property and equipment (3,692) (1,547) (2,225)
-------- -------- --------
Net cash provided (used) by investing activities (29,020) (16,395) 13,707
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock, net 814 1,336 951
Tax benefits from exercise of stock options 111 1,853 730
Preferred stock dividends -- -- (1,598)
-------- -------- --------
Net cash provided by financing activities 925 3,189 83
-------- -------- --------
Effect of exchange rate changes on cash 12 1 6
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (16,853) 1,246 26,355
Cash and cash equivalents at beginning of year 35,942 34,696 8,341
-------- -------- --------
Cash and cash equivalents at end of year $ 19,089 $ 35,942 $ 34,696
======== ======== ========
</TABLE>
F-4
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Net cash paid (refunds received) for income taxes $ 2,288 $ 2,797 $ (4,674)
Supplemental non-cash activities:
Conversion of preferred stock to common stock -- 39,960 --
Issuance of common stock for business acquisitions -- 965 --
Issuance of preferred stock dividends in common
stock -- 168 --
Conversion of deferred compensation to equity
upon exercise of common stock options 21 164 137
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 39
STAC, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
COMMON STOCK TRANSLATION RETAINED TREASURY
SHARES AMOUNT ADJUSTMENT EARNINGS STOCK TOTAL
------ -------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 25,096 $ 27,283 $ (125) $ 7,515 $ -- $ 34,673
Dividends paid on preferred stock -- -- -- (1,598) -- (1,598)
Issuance of common stock upon
exercise of options 518 817 -- -- -- 817
Issuance of common stock under
Employee Stock Purchase Plan 57 271 -- -- -- 271
Tax benefits from exercise of
stock options -- 730 -- -- -- 730
Equity adjustment from foreign
currency translation -- -- 6 -- -- 6
Net income -- -- -- 1,496 -- 1,496
------ -------- ----------- ------------ -------- --------
Balance at September 30, 1995 25,671 29,101 (119) 7,413 -- 36,395
Conversion of mandatorily
redeemable preferred stock 4,440 39,960 -- -- -- 39,960
Dividends paid on preferred stock 19 168 -- (168) -- --
Issuance of common stock for
business acquisitions 105 965 -- -- -- 965
Issuance of common stock upon
exercise of options 412 1,204 -- -- -- 1,204
Issuance of common stock under
Employee Stock Purchase Plan 40 296 -- -- -- 296
Tax benefits from exercise of
stock options -- 1,853 -- -- -- 1,853
Equity adjustment from foreign
currency translation -- -- 1 -- -- 1
Net loss -- -- -- (1,675) -- (1,675)
------ -------- ----------- ------------ -------- --------
Balance at September 30, 1996 30,687 73,547 (118) 5,570 -- 78,999
Acquisitions of treasury stock (3,828) -- -- -- (21,351) (21,351)
Issuance of common stock upon
exercise of options 137 468 -- -- -- 468
Issuance of common stock under
Employee Stock Purchase Plan 56 224 -- -- -- 224
Tax benefits from exercise of
stock options -- 111 -- -- -- 111
Equity adjustment from foreign
currency translation -- -- 12 -- -- 12
Net income -- -- -- 5,660 -- 5,660
------ -------- ----------- ------------ -------- --------
Balance at September 30, 1997 27,052 $ 74,350 $ (106) $ 11,230 $(21,351) $ 64,123
====== ======== =========== ============ ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 40
STAC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
Stac, Inc. (the "Company") designs, develops, markets and supports
networking technologies, systems management software and applications for the
storage and communication of data for personal computers and computer networks.
The Company was incorporated in February of 1983.
Consolidation
The financial statements as of and for the years ended September 30, 1997
and 1996 consolidate the accounts of the Company and its majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Financial Statement Preparation
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make assumptions that
affect the reported amounts 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 those estimates.
Revenue Recognition
Revenue from the sale of software is generally recognized upon shipment,
net of an allowance for estimated returns. Recognition of software revenue is
deferred when, in management's opinion, quantities of such products in the
distribution channel are above levels considered appropriate. Revenue from the
sale of semiconductors and board products is recognized upon shipment, net of an
allowance for estimated returns. Royalty revenue and revenue from the licensing
of software and technology developed by the Company is recognized pursuant to
the terms of the underlying agreements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
F-7
<PAGE> 41
Marketable Securities
The Company's marketable securities are comprised of funds on deposit with
a liquid asset manager that have been invested principally in municipal bonds.
The carrying amount of these investments approximates fair value due to the
short maturities or demand nature of the instruments. At September 30, 1997, all
marketable securities are classified as available-for-sale and carried at fair
value. Unrealized gains or losses at September 30, 1997 and 1996 are not
material.
Inventories
Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market.
Property and Equipment
Property and equipment are stated at cost. Additions to property and
equipment, including significant betterments and renewals, are capitalized.
Maintenance and repair costs are charged to expense as incurred. Depreciation is
computed using the straight-line method over estimated useful lives of three to
five years and totaled $2,077,000, $1,343,000 and $1,501,000 in fiscal 1997,
1996 and 1995, respectively. Leasehold improvements are amortized over the
shorter of the asset life or lease term.
Long-Lived Assets
The Company investigates potential impairments of long-lived assets,
certain identifiable intangibles and associated goodwill, on an exception basis,
when events or changes in circumstances have made recovery of an asset's
carrying value unlikely. An impairment loss is recognized when the sum of the
expected future net cash flows is less than the carrying amount of the asset. No
such impairments of long-lived assets existed through September 30, 1997.
Research and Development
Expenditures for research and development are charged to expense as
incurred. Financial accounting rules requiring the capitalization of certain
software development costs have not materially affected the Company.
F-8
<PAGE> 42
Advertising
Expenditures for advertising costs are charged to expense as incurred and
totaled $791,000, $1,758,000 and $2,169,000 in fiscal 1997, 1996 and 1995,
respectively.
Stock- Based Compensation
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense.
Income Taxes
The Company records a provision (benefit) for income taxes using the
liability method. Current income tax expense or benefit represents the amount of
income taxes expected to be payable or refundable for the current year. A
deferred income tax liability or asset, net of valuation allowance, is
established for the expected future consequences resulting from the differences
between the financial reporting and income tax bases of assets and liabilities
and from net operating loss and credit carryforwards. Deferred income tax
expense or benefit represents the net change during the year in the deferred
income tax liability or asset.
Net Income (Loss) Per Common Share
Net income per share has been computed by dividing net income, after
reduction for preferred dividends, by the weighted average number of common
shares outstanding. In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard (FAS) No. 128, "Earnings Per
Share," which the Company will adopt for all periods ending after December 15,
1997. Pursuant to this Statement, the Company will replace the reporting of
"primary" earnings per share (EPS) with "basic" EPS. Basic EPS is calculated by
dividing the income available to common shareholders by the weighted average
number of common shares outstanding for the period, without consideration for
common stock equivalents. "Fully diluted" EPS will be replaced by "diluted" EPS.
Diluted EPS is computed similarly to fully diluted EPS under the provisions of
APB Opinion No. 15. The Company will restate EPS for prior periods upon the
adoption of FAS 128. The Company believes that the impact of implementing FAS
128 will not be material to its consolidated financial statements.
F-9
<PAGE> 43
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars using period-end exchange rates for assets and
liabilities and weighted average exchange rates during the period for revenues
and expenses. Gains and losses from translation are excluded from results of
operations and accumulated as a separate component of shareholders' equity.
Diversification of Credit Risk
The Company's policy is to place its cash, cash equivalents and marketable
securities in high credit quality financial instruments and to limit the amount
of credit exposure.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentations.
New Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (FAS) No. 130, "Reporting Comprehensive Income."
The Company will adopt FAS 130 as required for all periods beginning after
December 15, 1997. This statement establishes standards for reporting and
presentation of comprehensive income and its components in the financial
statements. Comprehensive income is defined as "the change in equity (net asset)
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners." The adoption of FAS 130 is not expected to have a significant impact on
the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (FAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company will adopt FAS 131 as required
for all periods beginning after December 15, 1997. This statement requires the
disclosure of certain information about operating segments in the financial
statements. It also requires that public companies report certain information
about their products and services, the geographic areas in which they operate,
and their major customers. The adoption of FAS 131 is not expected to have a
significant impact on the Company's financial position or results of operations.
F-10
<PAGE> 44
NOTE 2 -- BUSINESS ACQUIRED AND NON-RECURRING CHARGES:
In August 1997 the Company acquired the outstanding stock of Datlin
Software, Ltd. ("Datlin") for $400,000 in cash in a transaction accounted for
under the purchase method. The Company has capitalized the purchase price of
this acquisition for the in place organization and other intangible costs, and
will amortize it on a straight line basis over a ten year period.
During the fourth quarter of fiscal 1997, the Company recorded a
restructuring charge to operations of $850,000, representing costs incurred in
conjunction with the Company's reorganization of its software business. The
principal components of the charge include $470,000 for losses on property,
plant and equipment, $259,000 for severance and employee related liabilities,
and $121,000 for lease termination costs. The Company expects to charge $350,000
to operations in the first fiscal quarter of 1998 as additional amounts for
severance and employee related liabilities that under generally accepted
accounting principles, the Company was not permitted to accrue for until the
affected employees were notified of the termination and the Company had
committed to provide for such costs.
In October 1995 the Company acquired the outstanding stock of California
Software, Inc. (CSI) for $9,252,000 in cash net of liabilities assumed, and
$965,000 in Stac common stock in a transaction accounted for under the purchase
method. In conjunction with the acquisition, the Company made an additional
$2,000,000 investment in the Series A Preferred Stock of Dynanet, Inc.
(Dynanet), a start up entity founded by the principal of CSI. The Company has
accounted for its investment in Dynanet as an addition to the purchase price of
CSI due to the lack of in place technology or operating activity at Dynanet,
consistent with its start up status. As a result of these transactions the
Company recorded a one time charge to earnings of $12,217,000 for purchased
research and development. Because of the underlying tax attributes of these
transactions, the Company did not recognize an accompanying tax benefit
associated with this one time charge to earnings.
NOTE 3 -- COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
(TABLE AMOUNTS IN THOUSANDS):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
------- -------
<S> <C> <C>
Accounts receivable:
Trade receivables $ 4,846 $ 5,904
Less allowance for doubtful accounts (278) (327)
------- -------
$ 4,568 $ 5,577
======= =======
</TABLE>
F-11
<PAGE> 45
Substantially all of the Company's customers are microcomputer hardware and
software distributors and resellers and OEM's, which results in concentrated
credit risk with respect to the Company's trade receivables. Management believes
that its credit policies substantially mitigate such concentrated credit risk.
Bad debt expenses were insignificant in fiscal 1997, and $211,000 and $120,000
in fiscal 1996 and 1995, respectively.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Inventories:
Raw materials $ 140 $ 88
Finished goods 450 666
-------- --------
$ 590 $ 754
======== ========
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
Property and equipment:
Computer equipment $ 7,917 $ 4,919
Leasehold improvements 1,539 1,297
Office equipment 1,266 1,178
Furniture and fixtures 1,235 1,013
Vehicles 51 51
-------- --------
12,008 8,458
Less accumulated depreciation (6,720) (4,785)
-------- --------
$ 5,288 $ 3,673
======== ========
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
Accrued expenses and other current liabilities:
Customer support and upgrade accruals $ 1,408 $ 1,052
Compensation and employee benefits 1,366 971
Promotional accruals 26 204
Restructuring 636 --
Treasury stock acquisition costs 463 --
Other 355 443
-------- --------
$ 4,254 $ 2,670
======== ========
</TABLE>
F-12
<PAGE> 46
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues:
Software, semiconductors and
board products $31,417 $30,765 $28,998
Royalties and licenses 16,000 16,000 16,806
------- ------- -------
$47,417 $46,765 $45,804
======= ======= =======
</TABLE>
NOTE 4 -- MANDATORILY REDEEMABLE PREFERRED STOCK:
On November 7, 1995, Stac's Series A Mandatorily Redeemable Preferred Stock
held by Microsoft Corporation converted into 4,459,000 shares of Stac common
stock pursuant to the provisions of the preferred stock agreement as a result of
Stac's common stock maintaining a price per share in excess of $9.00 for twenty
consecutive trading days.
Preferred dividends of $168,000 and $1,598,000 were paid during fiscal
1996 and 1995, respectively.
NOTE 5 -- STOCK REPURCHASES:
During the fourth quarter of fiscal 1997 the Company acquired 3,828,000
shares of its common stock by tender offer using the Dutch Auction mechanism,
and to a lesser extent, open market share repurchases. Treasury stock totaling
$21,351,000 at September 30, 1997 is inclusive of amounts tendered to acquire
stock and the related costs to execute the Dutch Auction transaction.
NOTE 6 -- INCOME TAXES:
Deferred income taxes are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets $ 8,584 $ 7,850
Deferred tax liabilities (581) (549)
------- -------
$ 8,003 $ 7,301
======= =======
</TABLE>
F-13
<PAGE> 47
The principal components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1996
------ ------
<S> <C> <C>
Revenue recognition for tax purposes $ 615 $ 391
Bad debts allowance 119 142
Inventory valuation accounts 117 246
Depreciation and amortization 560 197
Purchased research and development 5,847 6,050
Accrued restructuring 364 --
Other 381 275
------ ------
$8,003 $7,301
====== ======
</TABLE>
Components of pre-tax income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Domestic $ 8,670 $ 4,591 $ 1,098
Foreign (265) (124) (150)
------- ------- -------
$ 8,405 $ 4,467 $ 948
======= ======= =======
</TABLE>
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current tax expense:
Federal $ 2,488 $ 3,972 $ 4,481
State 924 1,319 1,245
------- ------- -------
3,412 5,291 5,726
------- ------- -------
Deferred tax expense (benefit):
Federal (609) 683 (4,860)
State (93) 168 (1,414)
------- ------- -------
(702) 851 (6,274)
------- ------- -------
$ 2,710 $ 6,142 $ (548)
======= ======= =======
</TABLE>
F-14
<PAGE> 48
A reconciliation of the amount computed by applying the statutory federal
income tax rate to income before income taxes, to the provision for income taxes
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Amount computed at statutory
Federal rate of 34% $ 2,858 $ 1,519 $ 322
State income taxes, net of Federal
benefit 512 268 57
Expenses not deductible for tax purposes 72 4,949 122
Differentials from foreign operations 90 42 51
Tax credits (25) (12) (155)
Foreign sales corporation benefit -- -- (54)
Tax exempt interest (808) (715) (672)
Revision of prior year's tax estimates 41 33 (249)
Other (30) 58 30
------- ------- -------
$ 2,710 $ 6,142 $ (548)
======= ======= =======
</TABLE>
NOTE 7 -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS:
1992 Stock Option Plan
In March 1992, the Company adopted a Stock Option Plan (the "1992 Plan"),
which provides for the granting of incentive stock options and non-qualified
stock options to purchase up to 5,000,000 shares of the Company's common stock.
The 1992 Plan is administered by the Compensation Committee of the Board of
Directors and provides for options for the purchase of the Company's common
stock to be granted to employees, officers and consultants of the Company at
prices that are not less than 100% and 50% of the estimated fair market value of
the related shares at the date of grant for incentive stock options and
non-qualified stock options, respectively. Options vest as determined by the
Compensation Committee. The maximum term of options granted under the 1992 Plan
is ten years.
1992 Non-Employee Directors' Stock Option Plan
In March 1992, the Company adopted the 1992 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), as amended in February 1995, which provides
for the automatic granting of non-qualified stock options to purchase up to
400,000 shares, as amended, of the Company's common stock. The 1992 Plan is
administered by the Board of Directors and provides for options for the purchase
of the Company's common stock to each director of the Company (or an affiliate
of the Company) who is not otherwise employed by the Company (or an affiliate of
the Company). Such directors will automatically be granted an option to purchase
common stock upon election to the Board and on each anniversary of that date
thereafter so long as the director continues to serve on
F-15
<PAGE> 49
the Board. Vesting periods are five years for initial options granted, and four
years for options granted in re-election years. The maximum term of options
granted under the Directors' Plan is ten years.
Combined information for all stock option activities for fiscal 1997 and
1996 is summarized below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at September 30, 1995 2,105,935 $ 3.72
Options granted 785,000 $ 9.85
Options exercised (413,739) $ 2.52
Options canceled (239,277) $ 5.79
---------
Balance at September 30, 1996 2,237,919 $ 5.82
Options granted 3,354,024 $ 5.10
Options exercised (138,712) $ 3.23
Options canceled (1,874,920) $ 7.50
---------
Balance at September 30, 1997 3,578,311 $ 4.49
=========
</TABLE>
The following is a summary of stock options outstanding at September 30,
1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
CONTRACTUAL EXERCISE
NUMBER LIFE (YEARS) PRICE
--------- ------------ ---------
<S> <C> <C> <C>
Price Range
$0.125- $2.625 247,966 3.29 $ 0.77
$2.75 - $3.563 1,633,119 8.17 $ 3.37
$3.75 - $5.375 751,022 9.11 $ 4.70
$5.50 - $8.00 859,257 8.90 $ 6.91
$8.25 - $13.25 86,947 8.45 $ 10.37
---------
$0.125 - $13.25 3,578,311 8.21 $ 4.49
=========
</TABLE>
F-16
<PAGE> 50
The following is a summary of stock options exercisable at September 30,
1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
------------------------
WEIGHTED-
AVERAGE
EXERCISE
NUMBER PRICE
------- ---------
<S> <C> <C>
Price Range
$0.125 - $2.625 241,160 $ 0.72
$2.75 - $3.563 373,916 $ 2.76
$3.75 - $5.375 130,703 $ 4.81
$5.50 - $8.00 202,836 $ 6.87
$8.25 - $13.25 31,979 $ 10.61
-------
$0.125 - $13.25 980,594 $ 3.59
=======
</TABLE>
Employee Stock Purchase Plan
In March 1992, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate of 1,000,000 shares of the Company's
common stock. The current offering under the Purchase Plan terminates on October
31, 1998. The Purchase Plan is administered by the Board of Directors and allows
participating employees to have up to 15% of their earnings withheld and used to
purchase shares of common stock on specified dates. The price of the common
stock purchased under the Purchase Plan will be equal to 85% of the lower of the
fair market value of the common stock at the commencement date or the relevant
purchase date. During fiscal 1997, shares totaling 28,491 and 27,456 were issued
under the Plan at prices of $3.96 and $4.04, per share, respectively. At
September 30, 1997, 702,934 shares were reserved for future issuance.
1996 Equity Incentive Plan (Hi/fn)
During fiscal 1997, Hi/fn adopted the 1996 Equity Incentive Plan (the
"Hi/fn Plan") whereby 1,499,900 shares of Hi/fn common stock were reserved for
issuance pursuant to nonqualified and incentive stock options and restricted
stock awards. Shares reserved for under the Hi/fn Plan represent 20% of Hi/fn
equity on a fully diluted basis. The plan is administered by the Board of
Directors of Hi/fn or its designees and provides generally that nonqualified
stock options and restricted stock may be awarded at a price not less than 85%
of the fair market value of the stock at the date of the award. Incentive stock
options must be awarded at a price not less than 100% of the fair market value
of the stock at the date of the award, or 110% of fair market value for awards
to more than 10% stockholders. Options granted under the Hi/fn Plan may have a
term of up to 10 years. The Company has the discretion to provide for
restrictions and the lapse thereof in respect of restricted stock awards, and
options typically vest at a rate of 25% of the total grant per year over a
four-year period. However, the Company may, at its discretion, implement a
different vesting schedule with respect to any new stock option grant. During
fiscal 1997, Hi/fn issued 202,574 shares of common stock under the Hi/fn Plan
at an exercise price of $0.60 per share. As a result of early exercise features
as provided for by the Hi/fn Plan, options granted are immediately exercisable
subject to the Company's repurchase rights which expire in a manner paralleling
the option vesting schedule.
Pro Forma Disclosure
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock based compensation. No compensation
expense has been recognized for stock option grants, which are fixed in nature,
as the options have been granted at fair market value. No compensation expense
has been recognized for the Purchase Plan. Had compensation cost for the
Company's stock based compensation awards issued during fiscal 1997 and 1996
been determined based on the fair value at the grant date consistent with the
rules of Statement of Financial Accounting Standard No. 123, the Company's net
income (loss) and net income (loss) per share would have been reduced to the pro
forma amounts indicated below:
F-17
<PAGE> 51
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1997 1996
------ -------
<S> <C> <C>
Net income (loss):
As reported $5,660 $(1,843)
====== =======
Pro forma $3,185 $(2,574)
====== =======
Net income (loss) per share:
As reported $ 0.18 $ (0.06)
====== =======
Pro forma $ 0.10 $ (0.09)
====== =======
</TABLE>
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 used for grants during the years ended September 30, 1997 and 1996,
respectively: dividend yield of 0.0% for both years, risk free interest rates of
6.46% and 6.41%, expected volatility of 96% and 100%, and expected lives of 2.0
years for both years. The weighted-average fair value of options granted during
the years ended September 30, 1997 and 1996 was $5.10 and $9.83 per share,
respectively. The fair value of the employees' purchase rights pursuant to the
Purchase Plan is estimated using the Black-Scholes model with the following
assumptions: dividend yield of 0.0% for both years, risk-free interest rates of
5.46% and 5.42%, expected volatility of 96% and 100%, and an expected life of
six months for both years. The weighted-average fair value of those purchase
rights granted during the years ended September 30, 1997 and 1996 was $2.71 and
$4.26 per share, respectively.
The fair value of each option granted under the Hi/fn Plan is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants during the year ended
September 30, 1997: dividend yield of 0.0%, risk-free interest rate of 6.46%,
expected volatility of 250%, and an expected life of 1.5 years. Options to
purchase 1,038,000 shares were granted during fiscal 1997 at a weighted
average exercise price of $0.60 per share. The weighted average fair value of
options granted during the year was $0.60 per share. At September 30, 1997,
there were 788,176 options outstanding under the Hi/fn Plan with a weighted
average exercise price of $0.60 per share and a weighted average remaining
contractual life of 9.39 years.
401(k) Plan
In July 1991, the Company adopted an employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan
permits, but does not require matching contributions by the Company on behalf of
all participants. No such contributions were made during fiscal 1997, 1996 or
1995.
F-18
<PAGE> 52
NOTE 8 -- COMMITMENTS:
The Company occupies its facilities under several non-cancelable operating
leases that expire at various dates through March 2000, and which contain
renewal options. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
1998 $ 835,554
1999 670,913
2000 315,696
-----------
$ 1,822,163
===========
</TABLE>
Rent expense under operating leases was approximately $1,008,000, $566,000,
and $1,074,000, in fiscal 1997, 1996, and 1995, respectively. Certain facilities
leases provide for scheduled rent increases. The total lease commitment for such
leases is being charged ratably to operations.
NOTE 9 -- SIGNIFICANT CUSTOMERS, BUSINESS SEGMENTS AND FOREIGN OPERATIONS:
A significant portion of the Company's revenues has been derived from
technology licenses and sales to major distributors or resellers as follows:
Two customers accounted for 25% and 21%, respectively, of fiscal 1997
revenues. One customer accounted for 26% of fiscal 1996 revenues. Two customers
accounted for 26% and 11%, respectively, of fiscal 1995 revenues.
The Company classifies its operating activity into two principal business
segments. Stac Software develops, markets and supports a range of systems
management software which is sold and licensed through distribution, retail,
original equipment manufacturer, and direct channels. Hi/fn (formerly the
Technology Business Unit) develops and markets semiconductor and software
libraries which implement the Company's data compression technology as well as
data encryption. Condensed financial information related to the Company's
business segments is as follows:
<TABLE>
<CAPTION>
Stac Software: 1997 1996 1995
- ------------- -------- -------- --------
<S> <C> <C> <C>
Revenues $ 33,191 $ 33,871 $ 38,462
Operating income (loss) $ 2,933 $ (1,026) $ (3,331)
Identifiable assets $ 4,068 $ 4,863 $ 5,816
Hi/fn: 1997 1996 1995
- ----- -------- -------- --------
Revenues $ 14,226 $ 12,894 $ 7,342
Operating income $ 3,052 $ 3,378 $ 2,296
Identifiable assets $ 2,472 $ 2,120 $ 2,148
</TABLE>
Segment operating results reflect general corporate expense allocations.
Identifiable assets primarily include accounts receivable, inventories,
capitalized software, intangible and other assets. All other assets are either
corporate in nature, are not identifiable with particular segments or are not
material. Acquisitions of property, plant and equipment and depreciation are not
identified as to industry segments for similar reasons.
F-19
<PAGE> 53
Software revenues are inclusive of royalties received from Microsoft and
IBM corporation for licenses of the Company's technology. The Company will
receive $5,100,000 in such revenues in fiscal 1998, after which the license
agreements will be fully paid-up.
In fiscal 1997, 1996 and 1995, international revenues were $5,068,000,
$4,766,000 and $4,799,000, respectively, consisting primarily of sales to
customers in Canada, Europe and the Pacific Rim.
Condensed financial information related to the Company's wholly owned
foreign subsidiaries is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 3,228 $ 2,893 $ 3,183
Operating income (loss) $ 212 $ 677 $ (270)
Identifiable assets $ 1,358 $ 1,010 $ 977
</TABLE>
NOTE 10 -- CONTINGENCIES:
The Company may be contingently liable with respect to certain asserted and
unasserted claims that arise during the normal course of business. In the
opinion of management, the outcome of such matters presently known to management
will not have a material adverse effect on the Company's business, financial
position, or results of operations.
F-20
<PAGE> 54
STAC INC.
SCHEDULE I - MARKETABLE SECURITIES
AT SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NAME OF ISSUER PRINCIPAL MARKET CARRYING
TITLE OF ISSUE AMOUNT COST VALUE(A) VALUE(A)
- -------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
InterCap Insd Municipal $ 2,000 $ 2,000 $ 2,006 $ 2,006
Bond Tr
InterCap Insd Municipal 2,000 2,000 2,006 2,006
Bond Tr 3
InterCap Muni Inc 4 2,000 2,000 2,006 2,006
Marietta GA Hsg Auth 3,550 3,550 3,576 3,577
Mfhr Fall
Harrisonburg VA Redev & Hsg 2,000 2,000 2,013 2,012
Auth Mfhr
Miami FLA 1,000 1,087 1,062 1,061
Hlth Facs Cedar
Miami FLA 1,000 1,089 1,063 1,062
Hlth Facs Cedar
Houston TX Wtr & 2,000 2,144 2,109 2,107
Swr Pr
Hawaii State G/O 1,000 1,001 1,009 1,007
RFDG SER CC
Cypress Fairbanks TX 2,000 1,878 1,973 1,973
G/O
Knox Cty Tenn 1,650 1,737 1,730 1,731
Ser B Pre-Re
Penn St GO 1,000 1,057 1,060 1,056
2nd Ser A Pre-Re
Distr Columbia 1,000 1,055 1,056 1,053
GO Ser B
Fairfax Cnty VA G/O 1,000 1,009 1,018 1,018
Illinois State G/O 1,600 1,734 1,715 1,708
</TABLE>
S-1
<PAGE> 55
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Scocorro Tex Indp Sch 776 767
750 770
Dst RFD
Pima Cty AZ 2,000 2,137 2,122 2,113
Sch Tucson AZ
Cuyahoga County 3,000 3,221 3,212 3,202
Ohio
Indiana Trans Fin 1,450 1,583 1,581 1,575
--------- --------- --------- ---------
Ser B Pre-Res
Total $ 32,000 $ 33,058 $ 33,087 $ 33,040
========= ========= ========= =========
</TABLE>
(a) Includes accrued interest
S-2
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Exhibit
Footnote Number Description
- -------- ------- -----------
<S> <C> <C>
(7) 2.1 Agreement and Plan of Merger, dated April 5, 1996,
between the Registrant and Stac, Inc., a California
corporation.
(7) 3.1 Certificate of Incorporation of the Registrant.
(7) 3.2 Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1, 3.2, 10.8, 10.9,
10.10 and 10.12.
(1) 10.1 Form of Indemnity Agreement entered into between the
Registrant and its directors and officers with
related schedule.
(1)(8) 10.2 Registrant's 1992 Stock Option Plan (the "1992
Plan").
(5)(8) 10.3 Registrant's 1992 Non-Employee Directors' Plan, as
amended (the "Directors' Plan").
(1)(8) 10.4 Registrant's Employee Stock Purchase Plan and related
offering document.
(1) 10.5 Securities Purchase Agreement, dated as of March 27,
1990, among the Registrant and the other persons
named therein.
(1)(8) 10.6 Distributor Agreement, between the Registrant and
Merisel, Inc., dated as of March 1, 1991.
(1)(8) 10.7 Distributor Agreement, between the Registrant and
Ingram Micro, Inc., dated as of March 13, 1991.
(3)(8) 10.8 License Agreement, between the Registrant and
Microsoft Corporation, dated as of June 20, 1994.
(5)(8) 10.9 Forms of Non-statutory Stock Option Agreements under
the Directors' Plan.
(6) 10.10 Stock Purchase Agreement dated October 6, 1995
between the Registrant and William T. Baker.
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
<S> <C> <C>
(6) 10.11 Option Purchase Agreement dated October 6, 1995 among
the Registrant and Certain Holders of Options to
Purchase Common Stock of California Software, Inc.
(6) 10.12 Indemnity Agreement dated October 6, 1995 between the
Registrant and William T. Baker.
(6) 10.13 Series A Preferred Stock Purchase Agreement dated
October 6, 1995 by and between DynaNet, Inc. and the
Registrant.
(7) 10.14 Office Lease date March 22, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.
(7) 10.15 Office Lease date March 22, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.
(7) 10.16 Office Lease dated July 12, 1994 between the
Registrant and Weyerhaeuser Mortgage Company and Fort
Wyman, Inc.
(7) 10.17 Amendment No. 1 to the Office Lease dated July 12,
1994 between the Registrant and Weyerhaeuser Mortgage
Company and Fort Wyman, Inc.
(7) 10.18 Amendment No. 2 to the Office Lease dated July 12,
1994 between the Registrant and Weyerhaeuser Mortgage
Company and Fort Wyman, Inc.
11.1 Calculation of net income (loss) per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney. Reference is made to page 32.
</TABLE>
- --------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-46389) or amendments thereto and incorporated herein by reference.
(2) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Act of 1933, as amended, and Rule 406
thereunder respecting Confidential Treatment dated May 6, 1992.
(3) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the
Quarter ended June 30, 1994, as amended.
(4) Certain confidential portions deleted pursuant to order Granting
Application for Confidential Treatment pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934 dated October 21, 1994.
(5) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1995.
(6) Filed as an exhibit to the Company's Report on Form 8-K filed on October
16, 1995, relating to the Company's (i) acquisition of all of the
outstanding capital stock and options to purchase the capital stock of
California Software, Inc. and (ii) acquisition of Series A Preferred Stock
of DynaNet, Inc.
(7) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996.
(8) Indicates management or compensatory plan or arrangement required to be
identified pursuant to Item 14(a)(4).
<PAGE> 1
Exhibit 11.1
STAC, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Primary net income (loss) per share:
Net income (loss) $ 5,660 $ (1,675) $ 1,496
Less preferred dividends -- 168 1,598
-------- -------- --------
Net income (loss) available for common
shareholders $ 5,660 $ (1,843) $ (102)
======== ======== ========
Common and common stock
equivalent shares outstanding 30,926 30,068 25,391
Net income (loss) per share, primary $ .18 $ (.06) $ .00
Fully diluted net income (loss) per share:
Net income (loss) $ 5,660 $ (1,675) $ 1,496
Less preferred dividends -- -- 1,598
-------- -------- --------
Net income (loss) available for common
shareholders $ 5,660 $ (1,675) $ (102)
======== ======== ========
Common and common stock
equivalent shares outstanding 30,935 30,585 25,391
Net income (loss) per share, fully diluted $ .18 $ (.05) $ .00
</TABLE>
<PAGE> 1
Exhibit 21.1
STAC, INC.
SUBSIDIARIES OF REGISTRANT
Hi/fn Inc.
Stac Electronics (U.K.), Limited
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-47733, 33-50038, and 33-55462) of Stac, Inc. of
our report dated October 27, 1997 appearing on page F-1 of this Form 10-K.
Price Waterhouse LLP
San Diego, California
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 19,089
<SECURITIES> 33,040
<RECEIVABLES> 4,846
<ALLOWANCES> 278
<INVENTORY> 590
<CURRENT-ASSETS> 59,514
<PP&E> 12,008
<DEPRECIATION> 6,720
<TOTAL-ASSETS> 71,924
<CURRENT-LIABILITIES> 7,407
<BONDS> 0
0
0
<COMMON> 74,350
<OTHER-SE> (10,227)
<TOTAL-LIABILITY-AND-EQUITY> 71,924
<SALES> 47,417
<TOTAL-REVENUES> 47,417
<CGS> 6,344
<TOTAL-COSTS> 6,344
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,405
<INCOME-TAX> 2,710
<INCOME-CONTINUING> 5,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,660
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
