<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 December 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 SOFTWARE, 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 December 31, 1998.
Common Stock, par value $0.0001 per share 23,680,670 shares
<PAGE> 2
STAC SOFTWARE, INC.
INDEX
Part I. Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
----
<S> <C>
Condensed Consolidated Balance Sheets
as of December 31, 1998 and
September 30, 1998 3
Condensed Consolidated Statements of
Operations for the three months
ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows for the three months ended
December 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Item 3. Market Risk 14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
STAC SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,798 $ 11,573
Marketable securities 13,826 12,859
Accounts receivable 1,469 777
Inventories 213 197
Income taxes receivable 1,331 1,314
Other current assets 196 317
-------- --------
Total current assets 29,833 27,037
Property and equipment, net 2,463 3,329
Notes receivable 5,079 79
Net assets of discontinued operations -- 12,995
Other assets 406 426
-------- --------
$ 37,781 $ 43,866
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,682 $ 1,458
Accrued expenses and other
current liabilities 3,944 3,022
-------- --------
Total current liabilities 5,626 4,480
Other liabilities 157 173
-------- --------
5,783 4,653
-------- --------
Stockholders' equity
Common stock at par value 31 31
Additional paid in capital 76,340 75,143
Treasury stock (41,347) (41,347)
Cumulative translation adjustment (29) (29)
Retained earnings (2,997) 5,415
-------- --------
Total stockholders' equity 31,998 39,213
-------- --------
$ 37,781 $ 43,866
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
STAC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
Revenues
Software and services $ 3,006 $ 3,705
Royalties -- 4,000
-------- --------
Net revenues 3,006 7,705
Cost of revenues 192 247
-------- --------
Gross margin 2,814 7,458
-------- --------
Operating expenses:
Research and development 1,985 1,864
Sales and marketing 2,411 2,771
General and administrative 1,401 1,438
Restructuring 822 350
-------- --------
Total operating expenses 6,619 6,423
-------- --------
Operating income (loss) (3,805) 1,035
Interest income 440 711
-------- --------
Income (loss) before income taxes (3,365) 1,746
Provision (benefit) for income taxes (1,439) 952
-------- --------
Income (loss) from continuing operations (1,926) 794
Discontinued operations:
Income from discontinued operations, net of taxes of
$550 in 1998 and $622 in 1997 885 934
-------- --------
Net income (loss) $ (1,041) $ 1,728
======== ========
Earnings per common share, basic:
Income (loss) from continuing operations $ (0.08) $ 0.03
======== ========
Income from discontinued operations $ 0.04 $ 0.03
======== ========
Net income (loss) $ (0.04) $ 0.06
======== ========
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C> <C>
Earnings per common share, diluted:
Income (loss) from continuing operations $ (0.08) $ 0.03
======== ========
Income from discontinued operations $ 0.04 $ 0.03
======== ========
Net income (loss) $ (0.04) $ 0.06
======== ========
Weighted average common shares
outstanding, basic 23,466 26,829
======== ========
Weighted average common shares
outstanding, diluted 23,466 27,751
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
STAC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,041) $ 1,728
Adjustments required to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 515 543
Loss on disposals of property and equipment 588 --
Provision for deferred income taxes -- (3)
Changes in assets and liabilities:
Accounts receivable (692) 129
Inventories (16) (53)
Other assets 131 --
Accounts payable 224 (472)
Income taxes receivable (17) --
Income taxes payable -- 606
Accrued expenses and other current liabilities 922 250
-------- --------
Net cash provided by operating activities 614 2,728
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (9,967) (20,219)
Sales of marketable securities 9,000 32,556
Acquisitions of treasury stock -- (5,583)
Purchases of property and equipment (227) (433)
-------- --------
Net cash provided (used) by investing activities (1,194) 6,321
-------- --------
Cash flows from financing activities:
Issuance of common stock 1,045 601
Tax benefit from exercise of stock options 136 97
-------- --------
Net cash provided by financing activities 1,181 698
-------- --------
Effect of exchange rates on cash -- 88
-------- --------
Net cash provided by discontinued operations 624 311
-------- --------
Net increase in cash 1,225 10,146
Cash and cash equivalents at beginning of period 11,573 18,609
-------- --------
Cash and cash equivalents at end of period $ 12,798 $ 28,755
======== ========
Supplemental non-cash activities:
Stock dividend $ 7,371 $ --
======== ========
Conversion of deferred compensation to equity
upon exercise of common stock options $ 16 $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 7
STAC SOFTWARE, 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
Software, 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, 1998. 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
December 31, 1998 and its results of operations for the three month periods
ended December 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. Earnings (Loss) 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. A reconciliation of the numerators
and denominators of the basic and diluted EPS calculations for the three months
ended December 31, 1998 and 1997 is presented below.
Three Months Ended
December 31, 1998
(unaudited)
-----------
<TABLE>
<CAPTION>
Per-Share
Net Loss Shares Amount
-------- ------ ---------
<S> <C> <C> <C>
Net Income (loss) $(1,041)
Basic EPS 23,466 ($0.04)
Dilutive Securities --
------
Diluted EPS 23,466 ($0.04)
======
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1997
(unaudited)
-----------
Per-Share
Net Income Shares Amount
---------- ------ ---------
<S> <C> <C> <C>
Net Income $1,728
Basic EPS 26,829 $0.06
Dilutive Securities 922
------
Diluted EPS 27,751 $0.06
======
</TABLE>
NOTE 3. Inventories (in thousands; December 31, 1998 unaudited):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
<S> <C> <C>
Raw materials $138 $132
Finished goods 75 65
---- ----
$213 $197
==== ====
</TABLE>
8
<PAGE> 9
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 Software, 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,
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 Form 10-K for
the year ended September 30, 1998.
Stac's storage systems recovery software business is comprised of its
Replica 3 and Replica Network Data Manager ("NDM") product lines. Replica 3 and
Replica NDM are high-performance, easy-to-deploy, distributed business systems
recovery software products, which enable fast PC server, desktop and notebook
replication and disaster recovery. Replica for NetWare was introduced in
February 1996, Replica for NT was made available in April 1997 and Replica NDM
was introduced to selected customer sites in April 1998. The Company intends to
focus on the development of relationships with key OEMs in the storage
management software sector and with system integration partners, and is
investing the majority of its product development, marketing and sales resources
in the Replica product line and extensions to Replica.
The Company also develops and markets ReachOut Enterprise ("ReachOut")
remote communications software, a remote access software suite which allows
administrators and end users to access a PC using another PC through a network,
the Internet, ISDN lines or modems. ReachOut works with Microsoft Corporation's
("Microsoft") Windows NT, Windows 98/95, Windows 3.x and DOS operating systems.
On December 16, 1998, the Company distributed a special dividend
of its stock in its Hi/fn subsidiary to its stockholders. Hi/fn was a majority
owned subsidiary of the Company and is engaged in silicon and software
implementations of data compression and data encryption standards for the
network communications and storage equipment markets. As a result of the
spin-off, Hi/fn has been accounted for as a discontinued operation in the
Company's financial statements. Hi/fn is currently traded on Nasdaq under the
symbol HIFN. Please refer to the Registration Statement on Form 10 filed by
Hi/fn with the SEC for a complete discussion of Hi/fn and the spin-off
transaction.
Stac received royalties from Microsoft and IBM Corporation ("IBM") for
licenses of its data compression technology from June 1994 through January 1998
after which the royalty agreements became paid in full. The Company does not
expect further revenues from these agreements.
The following discussion should be read in conjunction with the
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. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
9
<PAGE> 10
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
December 31,
------------------
1998 1997
------ ------
<S> <C> <C>
Revenues 100% 100%
Cost of revenues 6 3
---- ----
Gross margin 94 97
---- ----
Research and development 66 24
Sales and marketing 80 36
General and administrative 47 19
Restructuring 28 5
---- ----
Total operating expenses 221 84
---- ----
Operating income (loss) (127) 13
Interest income 15 9
---- ----
Income (loss) before income taxes (112) 22
Provision for (benefit from) income taxes (48) 12
---- ----
Income (loss) from continuing operations (64) 10
Income from discontinued operations 29 12
---- ----
Net income (loss) (35)% 22%
==== ====
</TABLE>
Revenues. Revenues decreased 61% to $3.0 million for the quarter ended
December 31, 1998 from $7.7 million in the quarter ended December 31, 1997. The
decrease in revenues from the comparable period of the prior fiscal year was
primarily due to the completion of royalty payments from IBM and Microsoft in
January 1998, and due to declining sales of ReachOut.
Software and service sales, which are comprised of domestic and
international sales and licenses through distributors, retailers, solution
providers, OEMs and direct channels, accounted for $3.0 million in the December
1998 quarter, compared to $3.7 million in the comparable quarter of the prior
fiscal year, a decrease of 19%. The decrease in revenues is primarily due to
declining sales of ReachOut, which has reached a mature phase of the product
life cycle. Revenues in the December 1998 quarter from the Company's Replica
product family remained relatively unchanged from the comparable quarter in the
prior fiscal year.
International sales, which are included in the above software and
service sales, were $1.1 million, or 37% of revenues for the quarter ended
December 31, 1998 compared to $1.3 million, or 17% of revenues in the quarter
ended December 31, 1997. The increase in international revenues as a percentage
of revenues in the December 1998 quarter over the comparable period in the prior
fiscal year was primarily due to the decrease in license revenues as a result of
the
10
<PAGE> 11
completion of the Company's royalty agreements with Microsoft and IBM. 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.
There were no revenues from licenses of Stac's data compression
technology to operating systems vendors in the quarter ended December 31, 1998,
compared to $4.0 million, or 52% of revenues in the comparable period of the
prior fiscal year, due to the completion of the underlying license agreements
with IBM and Microsoft. The Company expects no further revenues from these
agreements.
Cost of Revenues and Gross Margin. Cost of revenues consists primarily
of the user manuals, packaging, media and assembly associated with the Company's
software products. Gross margins decreased to 94% for the quarter ended December
31, 1998 from 97% in the quarter ended December 31, 1997 primarily due to the
decrease in IBM and Microsoft royalty 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 $2.0 million and $1.9 million
for the quarters ended December 31, 1998 and December 31, 1997 respectively. The
increase in product development costs over the prior quarter's costs is due to
increased development activity related to the Company's Replica NDM product. 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 $2.4 million for the quarter ended December 31,
1998 and $2.8 million for the quarter ended December 31, 1997. The reduced
spending in the quarter ended December 31, 1998 from the prior year's first
quarter is primarily due to reductions in staffing and marketing program costs
attributed to the corporate restructurings completed in the December 1997 and
1998 quarters. 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
for each of the quarters ended December 31, 1998 and 1997.
Restructuring. The restructuring charge of $0.8 million in the quarter
ended December 31, 1998 reflects $0.5 million of fixed assets abandoned and
written off as a result of the restructuring, $0.2 million in severance costs
and benefits, and $0.1 million in lease termination costs. The restructuring was
initiated to better align the Company's resources with the needs of a
stand-alone, partner-focused software company. The restructuring charge of $0.4
million in the December 31, 1997 quarter is primarily for the costs of severance
benefits and was part of a total restructuring charge of $1.2 million, $0.8
million of which was charged to operations in fiscal 1997. The severance
benefits had not been communicated to the affected employees at September 30,
1997, and therefore could not be expensed until the subsequent quarter, when the
notification and restructuring were completed. The restructuring that began in
the September 1997 quarter and was completed in the December 1997 quarter was
initiated to better align costs and resources with the Company's focus on the
storage systems recovery needs of enterprice customers.
Interest Income. Interest income was $0.4 million for the quarter ended
December 31, 1998 and $0.7 million for the quarter ended December 31, 1997. The
decrease in interest income for the three months ended December 31, 1998
compared to the three months ended December 31, 1997 was due primarily to lower
invested cash balances during the December 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
December 31, 1998 and 1997 was 43% and 55%, respectively. The effective tax rate
for the December 1998 quarter was based on the Company's forecasted taxable
results for the year and the anticipated carry-back benefit for income taxes
paid in previous years. The effective tax rate for the December 1997 quarter
reflects the non-deductible
11
<PAGE> 12
nature of certain costs associated with the Hi/fn spin-off transaction, for
which, consistent with statutory guidelines, no tax benefit was recognized.
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, and the majority of its
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 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, the Company's new products typically have a lengthy
evaluation period before any purchase is made.
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 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, Replica 3 and Replica NDM products
currently operate on a limited number of personal computer and network operating
systems. ReachOut supports Microsoft Windows NT, Windows 98, Windows 95, Windows
3.x and DOS, while Replica 3 supports Windows NT and Novell NetWare servers.
Replica 3 customers may require support of the Unix operating system, which the
Company does not currently provide. Replica NDM server component supports only
Windows NT with client support for Windows 98, Windows 95 and Windows NT
workstations. 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's Replica product line competes with well established back-up
products from Computer Associates, Inc., Seagate Software (currently owned by
Seagate Technologies, Inc. but in the process of being acquired by Veritas),
Legato and Veritas Software Corporation, all of which have established channels
of distribution and installed customer bases. The Company has entered into OEM
licenses with Legato and Seagate which authorize those companies to resell
Replica products under certain conditions. While the Company hopes to expand its
sales and marketing reach through these agreements, the Company expects to
realize less revenue per unit than it would if it sold the products itself. As a
result, the Company could realize less revenue from sales of Replica than if it
might have otherwise obtained by only directly selling Replica. In addition,
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.
12
<PAGE> 13
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. 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 rate of growth of the remote control market it serves
has decreased from prior years' growth rates or may actually be declining and
that it will have a difficult time gaining further sales growth against its
competitors.
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 increased by $2.2 million
to $26.6 million at December 31, 1998 from those at September 30, 1998. The use
of cash for operations was offset by a variety of significant factors including
settlements with Hi/fn on intercompany balances, income tax refunds received,
and non-cash portions of the restructuring charge. Working capital increased by
$1.6 million to $24.2 million at December 31, 1998 from that at September 30,
1998.
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 at least the next twelve months.
YEAR 2000
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software have historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.
To date, the Company's primary focus in its analysis of its Year 2000
issue has been on its product offerings. Stac has performed extensive year 2000
compliance testing of its current products and believes, to its best knowledge,
that Replica 3 3.03 for Windows NT, Replica 3 3.05 for NetWare, Replica NDM 1.41
and ReachOut Enterprise (the "Products") are year 2000 compliant; provided that
the underlying operating system and other software are year 2000 compliant.
The Company has also completed its initial evaluation of Year 2000
compliance with respect to all of its internal computer, telephone and security
systems (hardware and software). As a result of this evaluation, the Company has
determined that all business critical systems are year compliant, or will be
made compliant through available product upgrades prior to the end of the June
1999 quarter at an estimated cost to the Company of $100,000.
In addition, the Company has had initial communications with certain
significant third parties with which it does business to discuss and evaluate
their Year 2000 compliance plans and state of readiness and to determine the
extent to which the Company's systems may be affected by the failure of others
to remediate their own Year 2000 issues. To date, the Company has received only
preliminary feedback from such parties indicating that they are in the process
of implementing measures to ensure Year 2000 compliance, and further
representing that they will achieve compliance before the close of calendar
1999.
13
<PAGE> 14
The Company has not independently confirmed any information received
from other parties with respect to the Year 2000 issues. As such, there can be
no assurance that such other parties will complete their Year 2000 conversion in
a timely fashion or will not suffer a Year 2000 business disruption that may
adversely affect the Company's financial condition and results of operations.
To date, the Company has not identified any system which presents a
material risk of not being Year 2000 ready in a timely fashion or for which a
suitable alternative cannot be implemented. However, the Company may ultimately
identify systems which do present a material risk of Year 2000 disruption. Such
disruption may include, among other things, the inability to process
transactions or information, procure inventory, or engage in similar normal
business activities. The failure of the Company to identify systems which
require Year 2000 conversion that are critical to the Company's operations or
the failure of the Company or others with which the Company does business to
become Year 2000 ready in a timely manner could have a material adverse effect
on the Company's financial condition and results of operations.
The Company has not yet completed the development of a comprehensive
Year 2000-specific contingency plan. However, as part of its contingency Year
2000 effort, information received from external sources is examined for date
integrity before being brought into the Company's internal systems. The Company
will incorporate alternatives into its contingency plan, should the software
upgrades described above prove to not fully resolve Year 2000 compliance issues.
If the Company determines that its business is at material risk of disruption
due to currently unforeseen Year 2000 issue or anticipates that its Year 2000
compliance will not be achieved in a timely fashion, the Company will work to
enhance its contingency plan.
The discussion above contains certain forward-looking statements. The
costs of the Year 2000 conversion, and possible risks associated with the Year
2000 issue are based on the Company's current estimates and are subject to
various uncertainties that could cause the actual results to differ materially
from the Company's expectations. Such uncertainties include, among others, the
success of the Company in identifying systems that are not Year 2000 compliant,
the nature and amount of programming required to upgrade or replace each of the
affected systems, the availability of qualified personnel, consultants and other
resources, and the success of the Year 2000 conversion efforts of others.
ITEM 3. MARKET RISK.
The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.
The Company's foreign currency risks are mitigated principally by
maintaining only nominal foreign currency cash balances. Working funds necessary
to facilitate the short term operations of the Company's Subsidiary in the
United Kingdom are kept in the local currencies for the European countries in
which they do business, with excess funds transferred to Stac's offices in the
United States for investment.
The fair value of the Company's investments in marketable securities at
December 31, 1998 was $13,826,000. The Company's investment policy is to manage
its portfolio of marketable securities in order to preserve principal and
liquidity while maximizing the return. At December 31, 1998 the Company's
portfolio is primarily invested in high quality commercial paper, typically with
maturities of less than six months. These investments are distributed among
several issuers to minimize the credit risk associated with any single
institution.
14
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On December 31, 1998 the Company filed a Current Report on Form
8-K dated December 16, 1998 which indicated that the Company completed a
distribution of all its stock in its subsidiary, Hi/fn, Inc., a Delaware
corporation ("Hi/fn") to its stockholders effective December 16, 1998. Hi/fn was
a majority owned subsidiary of the Company and is engaged in silicon and
software implementations of data compression and data encryption standards for
the network communications and storage equipment markets. In the distribution,
Stac distributed one share of common stock of Hi/fn (the "Hi/fn Common Stock")
for every 3.9455 shares of common stock of Stac held by the Company's
stockholders, pursuant to a Distribution Agreement dated as of December 11, 1998
(the "Distribution Agreement") between Stac and Hi/fn. A copy of the
Distribution Agreement was attached to the Form 8-K. Fractional shares of Hi/fn
Common Stock were aggregated and the resulting 184 shares were sold in the
public market. The aggregate net cash proceeds were distributed to those Stac
stockholders entitled to fractional shares. The Hi/fn Common Stock currently is
quoted and traded on The Nasdaq Stock Market's National Market System under the
sumbol "HIFN."
Items 1 through 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 Software, Inc.
------------------------------------------
(Registrant)
Date: February 12, 1999 /s/ Clifford L. Flowers
------------------------------------------
Clifford L. Flowers
Vice President of Finance and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 12,798
<SECURITIES> 13,826
<RECEIVABLES> 1,469
<ALLOWANCES> 305
<INVENTORY> 213
<CURRENT-ASSETS> 29,833
<PP&E> 6,519
<DEPRECIATION> (4,056)
<TOTAL-ASSETS> 37,781
<CURRENT-LIABILITIES> 5,626
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 31,967
<TOTAL-LIABILITY-AND-EQUITY> 37,781
<SALES> 3,006
<TOTAL-REVENUES> 3,006
<CGS> 192
<TOTAL-COSTS> 192
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,365)
<INCOME-TAX> (1,439)
<INCOME-CONTINUING> (1,926)
<DISCONTINUED> 885
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,041)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
