<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
----------
Commission File Number 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, San Diego, California 92130-2093
(Address of principal executive office, including zip code)
(619) 794-4300
(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of June 30, 1998.
Common Stock, no par value 24,142,796 shares
<PAGE> 2
STAC, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements Page
----
<S> <C>
Condensed Consolidated Balance Sheets
as of June 30, 1998 and
September 30, 1997 3
Condensed Consolidated Statements of
Operations for the three and nine months
ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended
June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
STAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30,
1998 1997
-------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 36,775 $ 19,089
Marketable securities 2,973 33,040
Accounts receivable 3,470 4,568
Inventories 476 590
Deferred income taxes 1,282 1,542
Other current assets 1,186 685
-------- --------
Total current assets 46,162 59,514
Property and equipment, net 4,633 5,288
Deferred income taxes 6,138 6,461
Other assets 1,074 661
-------- --------
$ 58,007 $ 71,924
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,260 $ 1,751
Income taxes payable -- 1,402
Accrued expenses and other
current liabilities 3,409 4,254
-------- --------
Total current liabilities 5,669 7,407
Other liabilities 235 237
-------- --------
5,904 7,644
-------- --------
Minority interest 421 157
-------- --------
Stockholders' equity
Common stock 75,144 74,350
Treasury stock (36,322) (21,351)
Cumulative translation adjustment (29) (106)
Retained earnings 12,889 11,230
-------- --------
Total stockholders' equity 51,682 64,123
-------- --------
$ 58,007 $ 71,924
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
STAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 8,776 $ 11,584 $ 32,896 $ 34,104
Cost of revenues 1,726 1,571 5,849 4,180
-------- -------- -------- --------
Gross margin 7,050 10,013 27,047 29,924
-------- -------- -------- --------
Operating expenses:
Research and development 3,313 3,002 9,637 8,221
Sales and marketing 3,816 4,714 10,562 12,617
General and administrative 1,564 1,385 4,888 3,944
Restructuring -- -- 350 --
-------- -------- -------- --------
Total operating expenses 8,693 9,101 25,437 24,782
-------- -------- -------- --------
Operating income (loss) (1,643) 912 1,610 5,142
Interest income 598 643 1,953 1,811
-------- -------- -------- --------
Income (loss) before income taxes and
minority interest (1,045) 1,555 3,563 6,953
Minority interest 21 -- 105 --
Provision for (benefit from) income taxes (321) 451 1,799 2,365
-------- -------- -------- --------
Net income (loss) $ (745) $ 1,104 $ 1,659 $ 4,588
======== ======== ======== ========
Net income (loss) per common share, basic $ (0.03) $ 0.04 $ 0.07 $ 0.15
Net income (loss) per common share, diluted $ (0.03) $ 0.04 $ 0.06 $ 0.15
Weighted average common shares
outstanding, basic 25,022 30,780 25,850 30,744
Weighted average common shares
outstanding, diluted 25,022 31,043 26,535 31,103
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
STAC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,659 $ 4,588
Adjustments required to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,111 1,900
Deferred stock compensation -- (9)
Provision for deferred income taxes 583 548
Minority interest in income of consolidated subsidiary 105 --
Changes in assets and liabilities:
Accounts receivable 1,098 21
Inventories 114 135
Other current assets (501) (493)
Other assets (705) (65)
Accounts payable 509 355
Income taxes payable (1,402) (552)
Accrued expenses and other current liabilities (465) (232)
-------- --------
Net cash provided by operating activities 3,106 6,196
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (26,489) (19,253)
Sales of marketable securities 56,556 12,850
Acquisitions of treasury stock (14,971) --
Purchases of property and equipment (1,544) (3,007)
-------- --------
Net cash provided (used) by investing activities 13,552 (9,410)
-------- --------
Cash flows from financing activities:
Issuance of common stock 796 355
Tax benefit from exercise of stock options 155 80
-------- --------
Net cash provided by financing activities 951 435
-------- --------
Effect of exchange rates on cash 77 51
-------- --------
Net increase (decrease) in cash 17,686 (2,728)
Cash and cash equivalents at beginning of period 19,089 35,942
-------- --------
Cash and cash equivalents at end of period $ 36,775 $ 33,214
======== ========
Supplemental non-cash activities:
Conversion of deferred compensation to equity
upon exercise of common stock options $ (2) $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
STAC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Basis of Presentation:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and 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
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The accompanying condensed consolidated unaudited financial statements of Stac,
Inc. ("Stac" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Consolidated
Financial Statements and notes thereto included in the Company's annual report
for the year ended September 30, 1997. In the opinion of management the
accompanying condensed consolidated unaudited financial statements contain all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the Company's financial position as of June 30, 1998 and its
results of operations for the three and nine month periods ended June 30, 1998
and 1997, respectively. These condensed consolidated unaudited financial
statements are not necessarily indicative of the results to be expected for the
entire year.
NOTE 2. Net Income (Loss) Per Share:
The Company has adopted Statement of Financial Accounting Standard (FAS) No.
128, "Earnings Per Share." Basic EPS is calculated by dividing net income by the
weighted average number of common shares outstanding for the period, without
consideration for the dilutive impact of potential common shares ("dilutive
securities") that were outstanding during the period. Diluted EPS is computed by
dividing net income by the weighted average number of common shares outstanding
for the period, increased by dilutive securities that were outstanding during
the period unless the effect of these securities is anti-dilutive. Net income
remains the same for the calculations of basic EPS and diluted EPS. The Company
has restated EPS for prior periods concurrent with the adoption of FAS 128. A
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations for the three and nine months ended June 30, 1998 and 1997 is
presented below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1998 June 30, 1998
--------------------------------------------- ----------------------------------------
Per-Share Per-Share
Net Loss Shares Amount Net Income Shares Amount
-------- ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Income (loss) $ (745) $1,659
Basic EPS 25,022 ($0.03) 25,850 $0.07
Dilutive Securities - 685
------ ------
Diluted EPS 25,022 ($0.03) 26,535 $0.06
====== ======
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1997 June 30, 1997
--------------------------------------------- ----------------------------------------
Per-Share Per-Share
Net Loss Shares Amount Net Income Shares Amount
-------- ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 1,104 $ 4,588
Basic EPS 30,780 $0.04 30,744 $0.15
Dilutive Securities 263 359
------ ------
Diluted EPS 31,043 $0.04 31,103 $0.15
====== ======
</TABLE>
NOTE 3. Inventories (in thousands; June 30, 1998 unaudited):
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
---- ----
<S> <C> <C>
Raw materials $ 122 $ 140
Finished goods 354 450
------- ------
$ 476 $ 590
======= ======
</TABLE>
7
<PAGE> 8
ITEM 2. 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. Stac, Inc.'s ("Stac" or "the Company") 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, Channel Inventories, New Product
Introductions," "Seasonality," "Operating Systems," "Competition and Risks
Associated with New Product Introductions" and "Stock Price Volatility") and in
the Company's Form 10-K for the year ended September 30, 1997 and Forms 10-Q for
the periods ended December 31, 1997 and March 31, 1998.
Stac 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 focuses
its development and marketing resources on the business segments it believes
have the highest growth potential and continually evaluates its strategic
objectives with respect to its businesses. 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. In the June quarter the company installed a
production version of Replica Network Data Manager (NDM), enterprise-wide
network data protection for centrally-managed, Windows-based desktop PCs and
notebooks, at certain beta sites for evaluation and testing. Replica NDM will be
available to qualified accounts during the September 1998 quarter. The Company
intends to continue to focus on the development of relationships with key
software OEMs and system integration partners and is investing significant
amounts of its product development, marketing and sales resources in the Replica
family of products.
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. ReachOut Enterprise, released in February 1998, has been
architected as a 32-bit end-to-end solution targeted for helpdesk professionals
and network administrators who support a large number of users.
Hi/fn designs, develops and markets high-performance multi-protocol
packet processors -- advanced semiconductor devices that enable secure,
high-bandwidth network connectivity and efficient storage of business
information. The Company's packet processor products perform the computationally
intensive tasks of compression and/or encryption, providing its customers with
high-performance, interoperable implementations of a wide variety of
industry-standard networking and storage protocols. The Company's products are
used in a variety of networking and storage equipment such as routers, remote
access concentrators, firewalls and back-up storage devices.
8
<PAGE> 9
The Company's packet processors allow network equipment vendors to
add bandwidth enhancement and security capabilities to their products. The
Company's products provide high-performance implementations of key algorithms
used in the implementation of Virtual Private Networks ("VPNs"). VPNs enable
businesses to reduce wide area networking costs by replacing dedicated leased
lines with lower cost IP-based networks such as the Internet. Using VPNs,
businesses also can provide trading partners and other constituents with secure,
authenticated access to the corporate network, increasing productivity through
improved communications with business partners. Storage equipment vendors use
the Company's products to improve the performance and capacity of mid-to
high-end tape back-up systems.
The Company has previously stated that it intends to "spin-off" its
Hi/fn subsidiary through a tax-free dividend to Stac shareholders, subject to
business and market conditions. The Company is continuing to evaluate the
factors that influence the decision to spin-off of Hi/fn and intends to make a
public announcement in the event such decision is reached. Should Stac commit
itself to a formal plan to execute the spin-off and distribution, an assessment
of the realizability of the deferred income tax assets could require that an
allowance for these assets be established with a resultant charge to earnings in
the amount of their carrying value.
Stac has received royalties from Microsoft Corporation and IBM
Corporation for licenses of its data compression technology since fiscal 1994.
The Company received final payments of $1.1 million in the March 1998 quarter.
In prior quarters, the license fees from Microsoft and IBM have contributed
approximately $2.4 million, net of taxes, per quarter to net income.
The following discussion should be read in conjunction with the
condensed consolidated financial statements included elsewhere within this
quarterly 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 and
other factors described herein. 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 the Company's results of operations
and the percentage relationship of certain items to revenues during the periods
shown:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 20 14 18 12
---- ---- ---- ----
Gross margin 80 86 82 88
---- ---- ---- ----
Research and development 38 26 29 24
Sales and marketing 43 40 32 37
General and administrative 18 12 15 12
Restructuring -- -- 1 --
---- ---- ---- ----
Total operating expenses 99 78 77 73
---- ---- ---- ----
Operating income (loss) (19) 8 5 15
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C>
Interest income 7 6 6 5
---- ---- ---- ----
Income (loss) before income taxes
and minority interest (12) 14 11 20
Minority interest -- -- 1 --
Provision for (benefit from) income taxes (4) 4 5 7
---- ---- ---- ----
Net income (loss) (8)% 10% 5% 13%
==== ==== ==== ====
</TABLE>
Revenues. Revenues decreased 24% to $8.8 million for the quarter
ended June 30, 1998 from $11.6 million in the quarter ended June 30, 1997.
Revenues decreased 4% to $32.9 million in the nine month period ended June 30,
1998 from $34.1 million in the comparable period of the prior fiscal year. The
decrease in revenue for the June 1998 quarter and nine months from the
comparable periods of the prior fiscal year is due to the completion of license
fee payments from IBM and Microsoft in January 1998, partially offset by higher
revenues in the Hi/fn semiconductor business.
Software sales, which are comprised of domestic and international
sales and licenses through distributors, solution providers and OEMs, accounted
for $3.8 million, or 43% of revenues for the quarter ended June 30, 1998
compared to $3.7 million, or 32% of revenues in the quarter ended June 30, 1997,
and $11.3 million, or 34% of revenues for the nine months ended June 30, 1998,
compared to $13.1 million, or 39% of revenues in the nine months ended June 30,
1997. The decrease in revenues for the nine month period ended June 30, 1998 is
primarily due to the expected decline in retail sales of ReachOut, partially
offset by increased sales of Replica. Sales of Stac's Replica 3 product line
more than doubled in the June 1998 three and nine month periods from those of a
year ago as a result of increasing sales of Replica for Windows NT, introduced
in April 1997. ReachOut has reached a mature phase of the product life cycle and
growth in sales of this product is not anticipated.
Revenues from Hi/fn, which are comprised of sales and licenses of
semiconductors and software libraries derived primarily from the Company's data
compression technology, were $5.0 million, or 57% of revenues for the quarter
ended June 30, 1998 compared to $3.9 million, or 34% of revenues in the quarter
ended June 30, 1997. Revenues for the nine month period ended June 30, 1998 were
$16.5 million or 50% of total revenue, compared to $9.0 million, or 26% of
revenues in the nine months ended June 30, 1997. The increase in Hi/fn's
revenues for the quarter ended June 30, 1998 was primarily the result of
increased sales of compression chips to contract manufacturers of Quantum for
their DLT tape drives and increased revenue from software licenses. The increase
in revenues for the nine month period ended June 30, 1998 over the comparable
period of the prior fiscal year is primarily due to the increased shipments of
compression chips as discussed above, which was due, in part, to depressed
revenues during the December 1996 quarter, resulting from high levels of
inventory held by some OEM customers in that quarter, consistent with OEMs'
practice of building product in large lots in order to achieve manufacturing
efficiencies. (See the discussion of "Quarterly Trends, Channel Inventories, New
Product Introductions" below.) The increase is also due to a doubling of
shipments of semiconductors to network equipment OEMs in the current period
compared to the nine months ended June 1997. The current periods' shipments to
networking equipment OEMs include Hi/fn's 7711 encryption/compression
coprocessor. The Company expects Hi/fn's revenues in the September 1998 quarter
to be the same as or slightly lower than those of the June 1998 quarter, due to
the fluctuating demand for Hi/fn's products from Quantum's supplier.
There were no royalties from licenses of Stac's data compression
technology to operating systems vendors in the quarter ended June 30, 1998,
compared to $4.0 million, or 34% of revenues in the comparable period of the
prior fiscal year. Royalties for the nine month period ended June 30, 1998 were
$5.1 million, or 16% of revenues, while royalties for the nine month period
ended June 30, 1997 were $12.0 million, or 35% of revenues. The $5.1 million in
the current nine month period represents the completion of royalty payments
related to the underlying license agreements from Microsoft and IBM.
10
<PAGE> 11
International sales, which are included in the above sales, are
comprised primarily of software products and were $1.2 million, or 14% of
revenues for the quarter ended June 30, 1998 compared to $1.2 million, or 10% of
revenues in the quarter ended June 30, 1997, and $3.8 million, or 12% and $3.7
million and 11% of revenues for the nine month periods ended June 30, 1998 and
1997, respectively. Stac markets and sells to its European accounts from its
office in the United Kingdom and markets and sells to the other principal
international markets through sales personnel in its San Diego office and
through relationships with distributors and resellers abroad.
Cost of Revenues and Gross Margin. Cost of revenues consists
primarily of Hi/fn semiconductors which are manufactured to specification by
third party foundries for resale by Hi/fn, and the user manuals, packaging,
media and assembly associated with the Company's software products. Gross
margins decreased to 80% for the quarter ended June 30, 1998 from 86% in the
quarter ended June 30, 1997, and to 82% for the nine months ended June 30, 1998
from 88% for the nine months ended June 30, 1997 primarily due to the higher
proportion of semiconductor sales, which have a higher percentage cost of sales
than software products, and due to the decrease in IBM and Microsoft licensing
revenues which carried 100% gross margins.
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 $3.3 million and $3.0 million
for the quarters ended June 30, 1998 and June 30, 1997 respectively, and $9.6
million and $8.2 million respectively for the nine month periods ended June 30,
1998 and June 30, 1997. The increase in product development costs for both the
three and nine month periods of the current fiscal year over that of the prior
year was due primarily to increased developmental activity for Hi/fn
semiconductor products. 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.
Sales and Marketing Expense. Selling and marketing expenses consist
primarily of the salaries, commissions and benefits of sales, marketing and
customer support personnel, and consulting, advertising, promotion and overhead
expenses. Such expenses were $3.8 million for the quarter ended June 30, 1998
and $4.7 million for the quarter ended June 30, 1997. These expenses were $10.6
million and $12.6 million for the nine month periods ended June 30, 1998 and
June 30, 1997, respectively. The reduced spending in both the three and nine
month periods of the current fiscal year over that of the prior year is the
result of a corporate restructuring completed in the December 1997 quarter.
Consolidated sales and marketing expenses are expected to remain a significant
ongoing operating expense.
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 $1.6 million
in the quarter ended June 30, 1998 and $1.4 million in the quarter ended June
30, 1997. These costs were $4.9 million in the nine month period ended June 30,
1998, compared to $3.9 million in the nine months ended June 30, 1997. The
increase in the nine month period's general and administrative expenses over
expenses incurred in the comparable period of the prior fiscal year is primarily
due to $425,000 of professional fees incurred in the December 1997 quarter
related to the anticipated spin-off of the Company's Hi/fn subsidiary.
Restructuring. The restructuring charge of $0.4 million is primarily
for the costs of severance benefits and is part of a total restructuring charge
of $1,200,000, $850,000 of which was charged to operations in fiscal 1997.
Interest Income. Interest income was $0.6 million for each of the
quarters ended June 30, 1998 and 1997, and $2.0 million for the nine months
ended June 30, 1998 compared to $1.8 million for the comparable period of the
prior fiscal year. The increase in interest income for the nine months ended
June 30, 1998 over the nine months ended June 30, 1997 was due primarily to the
investment of available cash during the June 1998 time period in taxable
instruments which carry a higher pre-tax yield than the Federal tax-exempt
instruments invested in during previous periods. Higher yields from taxable
11
<PAGE> 12
investments were offset in part by lower invested cash balances during the June
1998 quarter as a result of the Company's share repurchase programs executed
beginning in July 1997.
Income Taxes. The effective income tax rate for the quarters ended
June 30, 1998 and 1997 was 31% and 29%, respectively, and 45% and 34%, for the
nine month periods ended June 30, 1998 and 1997, respectively, before the charge
in the December 1997 quarter for the professional fees associated with the Hi/fn
spin-off, for which no tax benefit has been recognized at this time.
Contributing to the higher effective tax rate for the fiscal 1998 periods was
the Company's investment of available cash during that quarter in taxable
instruments as discussed in "Interest Income" above. Differences in effective
tax rates between periods is therefore affected by the proportion of earnings
from interest income and income from foreign operations to total earnings, and
the different statutory tax rates associated with each of these elements. The
Company continually evaluates its deferred income tax assets as required by
generally accepted accounting principles that evaluate these assets under a more
likely than not criteria for realization. Should Stac commit itself to a formal
plan to spin-off and distribute Hi/fn's stock to Stac shareholders, an
assessment of the realizability of the deferred income tax assets could require
a charge to the provision for income taxes and earnings in the amount of their
carrying value in the period the commitment is made.
Quarterly Trends, Channel Inventories, New Product Introductions. 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 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
retail demand, the Company's operating results for that quarter could 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. 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
frequently 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 experienced some seasonal
variations in demand, with sales activity 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,
may 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 and 98, Windows 3.x and DOS.
Replica 3 supports Windows NT and Novell NetWare servers, and Replica NDM
supports Windows 95 and 98 desktops archived to Windows NT data vaults. 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.
12
<PAGE> 13
The Company began shipping Replica data recovery and back up software
for Novell NetWare during the March 1997 quarter and Replica for Windows NT in
April 1997. In June 1998 the Company made available Replica NDM, a disaster
recovery and back up software product for enterprise desktop PCs and notebooks.
The Replica product line competes with well-established back-up products from
Computer Associates, Inc., 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 and desktop 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 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/or 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 $12.4
million to $39.7 million at June 30, 1998 from that at September 30, 1997. The
decrease was primarily attributable to purchases of treasury stock, partially
offset by cash generated from operations. Working capital decreased by $11.6
million to $40.5 million at June 30, 1998 from that at September 30, 1997.
During the nine months ended June 30, 1998, the Company repurchased
$15.0 million (3,174,600 shares) of its outstanding common stock, pursuant to a
stock repurchase programs announced on October 27, 1997 and on February 24,
1998, which authorized the repurchase of its common stock on the open market or
in privately negotiated transactions.
13
<PAGE> 14
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 next twelve months.
14
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
Items 3, 4 and 5 are not applicable and have been omitted.
15
<PAGE> 16
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
Stac, Inc.
------------------------------------------
(Registrant)
Date: August 4, 1998 /s/ JOHN R. WITZEL
------------------------------------------
John R. Witzel
Vice President of Finance and
Chief Financial Officer
16
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