<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 March 31, 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 March 31, 1998.
Common Stock, no par value 25,348,013
shares
1
<PAGE> 2
STAC, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements Page
----
<S> <C>
Condensed Consolidated Balance Sheets
as of March 31, 1998 and
September 30, 1997 3
Condensed Consolidated Statements of
Operations for the three and six months
ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows for the six months ended
March 31, 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 4. Submission of Matters to a vote of Securities Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE> 3
STAC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
-------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,221 $ 19,089
Marketable securities 15,920 33,040
Accounts receivable 3,250 4,568
Inventories 911 590
Deferred income taxes 1,241 1,542
Other current assets 972 685
-------- --------
Total current assets 51,515 59,514
Property and equipment, net 4,868 5,288
Deferred income taxes 6,207 6,461
Other assets 773 661
-------- --------
$ 63,363 $ 71,924
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,454 $ 1,751
Income taxes payable 611 1,402
Accrued expenses and other
current liabilities 3,135 4,254
-------- --------
Total current liabilities 6,200 7,407
Other liabilities 235 237
-------- --------
6,435 7,644
-------- --------
Minority Interest 384 157
-------- --------
Stockholders' equity
Common stock 75,004 74,350
Treasury stock (32,033) (21,351)
Cumulative translation adjustment (61) (106)
Retained earnings 13,634 11,230
-------- --------
Total stockholders' equity 56,544 64,123
-------- --------
$ 63,363 $ 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 Six Months Ended
March 31, March 31,
--------- ---------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $10,151 $11,624 $24,120 $22,520
Cost of revenues 1,775 1,555 4,123 2,608
------- ------- ------- -------
Gross margin 8,376 10,069 19,997 19,912
------- ------- ------- -------
Operating expenses:
Research and development 3,132 2,886 6,324 5,219
Sales and marketing 3,184 4,327 6,746 7,903
General and administrative 1,393 1,362 3,324 2,559
Restructuring -- -- 350 --
------- ------- ------- -------
Total operating expenses 7,709 8,575 16,744 15,681
------- ------- ------- -------
Operating income 667 1,494 3,253 4,231
Interest income 643 567 1,356 1,168
------- ------- ------- -------
Income before income taxes and
minority interest 1,310 2,061 4,609 5,399
Minority interest 39 -- 85 --
Provision for income taxes 546 781 2,120 1,915
------- ------- ------- -------
Net income $ 725 $ 1,280 $ 2,404 $ 3,484
======= ======= ======= =======
Net income per common share, basic $ 0.03 $ 0.04 $ 0.09 $ 0.11
Net income per common share, diluted $ 0.03 $ 0.04 $ 0.09 $ 0.11
Weighted average common shares
outstanding, basic 25,699 30,741 26,264 30,724
Weighted average common shares
outstanding, diluted 26,294 31,101 27,023 31,132
</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>
Six Months Ended
March 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,404 $ 3,484
Adjustments required to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,240 1,205
Deferred stock compensation -- (9)
Provision for deferred income taxes 555 387
Minority interest in income of consolidated subsidiary 85 --
Changes in assets and liabilities, net of business combinations:
Accounts receivable 1,318 62
Inventories (321) 267
Other current assets (287) (373)
Other assets (162) (8)
Accounts payable 703 469
Income taxes payable (791) (161)
Accrued expenses and other current liabilities (739) 210
-------- --------
Net cash provided by operating activities 4,005 5,533
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (23,436) (16,818)
Sales of marketable securities 40,556 5,500
Acquisitions of treasury stock (10,682) --
Purchases of property and equipment (1,150) (1,704)
-------- --------
Net cash provided/(used) by investing activities 5,288 (13,022)
-------- --------
Cash flows from financing activities:
Issuance of common stock 637 243
Tax benefit from exercise of stock options 157 44
-------- --------
Net cash provided by financing activities 794 287
-------- --------
Effect of exchange rates on cash 45 27
-------- --------
Net increase/(decrease) in cash 10,132 (7,175)
Cash and cash equivalents at beginning of period 19,089 35,942
-------- --------
Cash and cash equivalents at end of period $ 29,221 $ 28,767
======== ========
</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 March 31, 1998 and its
results of operations for the three and six month periods ended March 31, 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 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. 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 six months ended March 31,
1998 and 1997 is presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 1998, March 31 1998,
-------------- --------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Income $ 725 $ 2,404
Basic EPS 25,699 $0.03 26,264 $0.09
Dilutive Securities 595 759
------- -----
Diluted EPS 26,294 $0.03 27,023 $0.09
======= ======
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 1997, March 31 1997,
-------------- --------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ------ ------ ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Income $1,280 $3,484
Basic EPS 30,741 $0.04 30,724 $0.11
Dilutive Securities 360 408
-------- --------
Diluted EPS 31,101 $0.04 31,132 $0.11
======== ========
</TABLE>
NOTE 3. Inventories (in thousands; March 31, 1998 unaudited):
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------- --------
<S> <C> <C>
Raw materials $ 148 $ 140
Finished goods 763 450
------- --------
$ 911 $ 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 Form 10-Q for
the period ended December 31, 1997.
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 May 1998 Stac announced Replica NDM
technology, enterprise-wide network data protection for centrally-managed,
Windows-based desktop PCs and notebooks. Replica Sequoia is currently deployed
in large enterprise beta sites in the United States and Europe. The Company
expects the final product to be available on a limited basis in June 1998 and to
be generally available 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 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. 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 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
8
<PAGE> 9
and printers. Currently, the majority of Hi/fn's sales are to the contract
manufacturers of Quantum Corporation's DLT tape storage products. Hi/fn has also
implemented data encryption standards on semiconductors for use with data
compression to provide high-performance, efficient and secure data transmission
capabilities for its customers' products. In March 1998, Hi/fn shipped the first
production quantities of its 7711 encryption/compression coprocessor, which is
the industry's first chip to incorporate both data encryption and data
compression and to implement the IP Security ("IPSec") protocol. 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 Corporation, 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 Systems, Inc. have
co-authored a proposal to the Internet Engineering Task Force (the "IETF") for
the implementation of lossless data compression in the IPSec protocol. 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 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.
On an after tax basis, in prior quarters, the license fees from Microsoft and
IBM have contributed approximately $2.4 million per quarter to net income. In
the current quarter the after tax contribution is $0.7 million.
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 Six Months Ended
March 31, March 31,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 17 13 17 12
--------- -------- --------- --------
Gross margin 83 87 83 88
--------- -------- --------- --------
Research and development 31 25 26 23
Sales and marketing 31 37 28 35
General and administrative 14 12 14 11
Restructuring - - 2 -
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C> <C> <C>
--------- -------- --------- --------
Total operating expenses 76 74 70 69
--------- -------- --------- --------
Operating income 7 13 13 19
Interest income 6 5 6 5
--------- -------- --------- --------
Income before income taxes and minority
interest 13 18 19 24
Minority interest 1 - 1 -
Provision for income taxes 5 7 8 9
--------- -------- --------- --------
Net income 7% 11% 10% 15%
========= ======== ========= ========
</TABLE>
Revenues. Revenues decreased 13% to $10.1 million for the quarter ended
March 31, 1998 from $11.6 million in the quarter ended March 31, 1997. Revenues
increased 7% to $24.1 million in the six month period ended March 31, 1998 from
$22.5 million in the comparable period of the prior fiscal year. The decrease in
revenue for the March 1998 quarter from the comparable quarter of the prior
fiscal year is due to lower license fee payments from IBM and Microsoft and
lower software revenues, partially offset by higher revenues in the Hi/fn
semiconductor business. The increase in revenue for the six months ended March
31, 1998 over the comparable period of the prior fiscal year is due to higher
Hi/fn revenues, partially offset by lower license fee payments from IBM and
Microsoft and lower software revenues.
Software sales, which are comprised of domestic and international sales
and licenses through distributors, solution providers and OEMs, accounted for
$3.8 million, or 37% of revenues for the quarter ended March 31, 1998 compared
to $4.6 million, or 40% of revenues in the quarter ended March 31, 1997, and
$7.5 million, or 31% of revenues for the six months ended March 31, 1998,
compared to $9.4 million, or 42% of revenues in the six months ended March 31,
1997. The decrease in revenues for the quarter and six month periods is
primarily due to an 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 March 1998 three and six 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
significant 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 from the Company's data
compression technology, were $5.2 million, or 52% of revenues for the quarter
ended March 31, 1998 compared to $3.0 million, or 26% of revenues in the quarter
ended March 31, 1997. Revenues for the six month period ended March 31, 1998
were $11.5 million or 48% of total revenue, compared to $5.1 million, or 23% of
revenues in the six months ended March 31, 1997. The increase in Hi/fn's
revenues for the quarter was the result of increased sales of compression chips
to contract manufacturers of Quantum for their DLT tape drives, and increased
shipments of semiconductors to network equipment OEMs, including the first
shipment of Hi/fn's 7711 encryption/compression coprocessor. The increase in
revenues for the six month period ended March 31, 1998 over the comparable
period of the prior fiscal year is due to the increased shipments as discussed
above, and due 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 Company expects
Hi/fn's revenues in the June 1998 quarter to be approximately the same as those
of the March 1998 quarter, due to the fluctuating demand for Hi/fn products from
Quantum's contractors.
Royalties from licenses of Stac's data compression technology to
operating systems vendors were $1.1 million, or 11% of revenues in the quarter
ended March 31, 1998, and $4.0 million, or 34% or revenues in the comparable
period of the prior fiscal year. Royalties for the six month period ended
10
<PAGE> 11
March 31, 1998 were $5.1 million, or 21% of revenues, while royalties for the
six month period ended March 31, 1997 were $8.0 million, or 35% of revenues. The
$1.1 million in the current quarter represents the completion of royalty
payments related to the underlying license agreements from Microsoft and IBM.
International sales, which are included in the above sales, are
comprised primarily of software products and were $1.3 million, or 13% of
revenues for the quarter ended March 31, 1998 compared to $1.2 million, or 10%
of revenues in the quarter ended March 31, 1997, and $2.6 million, or 11% of
revenues for the six month periods ended March 31, 1998 and 1997. 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 83% for the quarter ended March 31, 1998 from 87% in the quarter
ended March 31, 1997, and to 83% for the six months ended March 31, 1998 from
88% for the six months ended March 31, 1997 primarily due to the higher
proportion of semiconductor sales which have a higher percentage cost of sales
than software products and licensing revenues and 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 $3.1 million and $2.9 million
for the quarters ended March 31, 1998 and March 31, 1997 respectively, and $6.3
million and $5.2 million respectively for the six month periods ended March 31,
1998 and March 31, 1997. The increase in product development costs for both the
three and six month periods of the current fiscal year over that of the prior
year was due primarily to increased developmental activity associated with the
Replica product line, and 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 and
expects its development costs in the June 1998 quarter to increase those of the
prior quarter due to OEM integration projects. 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 $3.2 million for the quarter ended March 31, 1998
and $4.3 million for the quarter ended March 31, 1997. These expenses were $6.7
million and $7.9 million for the six month periods ended March 31, 1998 and
March 31, 1997, respectively. The reduced spending in both the three and six
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 $1.4 million
in each of the quarters ended March 31, 1998 and March 31, 1997, respectively.
These costs were $3.3 million in the six month period ended March 31, 1998,
compared to $2.6 million in the six months ended March 31, 1997. The increase in
the six 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 related to the anticipated spin-off of the
Company's Hi/fn subsidiary, incurred in the December 1997 quarter.
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.
11
<PAGE> 12
Interest Income. Interest income was $0.6 million for the quarters ended
March 31, 1998 and 1997, and $1.4 million for the six months ended March 31,
1998 compared to $1.2 million for the comparable period of the prior fiscal
year. The increase in interest income for the six months ended March 31, 1998
over the six months ended March 31, 1997 was due to the investment of available
cash during the March 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 investments were offset in part by
lower invested cash balances during the March 1998 period, net of cash generated
from operations, 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 March
31, 1998 and 1997 was 42% and 38%, respectively, and 42% and 35%, for the six
month periods ended March 31, 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 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.
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, Windows 3.x and DOS. 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.
12
<PAGE> 13
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'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 began shipping Replica business systems 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 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 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 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 $7.0 million
to $45.1 million at March 31, 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 $6.8 million to
$45.3 million at March 31, 1998 from that at September 30, 1997.
During the six months ended March 31, 1998, the Company repurchased
$10.7 million (1,937,000 shares) of its outstanding common stock, pursuant to a
stock repurchase program announced on October 27, 1997, which authorized the
repurchase of its common stock on the open market or in privately negotiated
transactions.
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.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 4. The Company's Annual Meeting of Stockholders (the "Annual Meeting")
was held on March 10, 1998. At the Annual Meeting, the stockholders
of the Company (i) elected each of the persons listed below to serve
as a director of the Company until the 1999 Annual Meeting of
Stockholders or until his successor is elected and (ii) ratified the
selection of Price Waterhouse, LLP as the Company's independent
accountants for the fiscal year ending September 30, 1998.
The Company had 26,068,747 shares of Common Stock outstanding as of
January 16, 1998, the record date for the Annual Meeting. At the
Annual Meeting, holders of a total of 25,880,760 shares of Common
Stock were present in person or represented by proxy. The following
sets forth information regarding the results of the voting at the
Annual Meeting:
Proposal 1: Election of Directors
<TABLE>
<CAPTION>
Voting Shares Voting Shares
In Favor Against
-------- -------
<S> <C> <C>
Director
Gary W. Clow 25,646,776 233,984
Douglas L. Whiting, Ph.D. 25,653,202 227,558
Charles H. Gaylord, Jr. 25,653,202 227,558
Robert W. Johnson 25,653,202 227,558
Antonio Perez 25,650,002 230,758
</TABLE>
Proposal 2: Ratification of Selection of Independent Accountants
<TABLE>
<S> <C>
Votes in favor: 25,741,327
Votes against: 62,121
Abstentions: 77,312
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Items 1, 2, 3 and 5 are not applicable and have been omitted.
14
<PAGE> 15
Signature
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: May 14, 1998 /s/ JOHN R. WITZEL
------------------------------------
John R. Witzel
Vice President of Finance and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 29,221
<SECURITIES> 15,920
<RECEIVABLES> 3,621
<ALLOWANCES> 371
<INVENTORY> 911
<CURRENT-ASSETS> 51,515
<PP&E> 11,997
<DEPRECIATION> 7,129
<TOTAL-ASSETS> 63,363
<CURRENT-LIABILITIES> 6,200
<BONDS> 0
0
0
<COMMON> 75,004
<OTHER-SE> (18,460)
<TOTAL-LIABILITY-AND-EQUITY> 63,363
<SALES> 24,120
<TOTAL-REVENUES> 24,120
<CGS> 4,123
<TOTAL-COSTS> 4,123
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 79
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,524
<INCOME-TAX> 2,120
<INCOME-CONTINUING> 2,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,404
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
