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, 1999
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 June 30, 1999.
Common Stock, par value $0.001 per share 5,953,983 shares
<PAGE>
STAC SOFTWARE, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets ----
as of June 30, 1999 and
September 30, 1998 3
Condensed Consolidated Statements of
Operations for the three and nine months
ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended
June 30, 1999 and 1998 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 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
STAC SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,114 $ 11,573
Marketable securities 9,451 12,859
Accounts receivable 1,956 777
Inventories 227 197
Income taxes receivable 1,503 1,314
Other current assets 529 317
------------ ------------
Total current assets 32,780 27,037
Property and equipment, net 1,800 3,329
Net assets of discontinued operations - 12,995
Other assets 462 505
------------ ------------
$ 35,042 $ 43,866
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,137 $ 1,458
Accrued expenses and other
current liabilities 2,326 3,022
------------ ------------
Total current liabilities 3,463 4,480
Other liabilities 154 173
------------ ------------
3,617 4,653
------------ ------------
Stockholders' equity
Common stock at par value 8 8
Additional paid in capital 76,537 75,166
Treasury stock (41,347) (41,347)
Cumulative translation adjustment (25) (29)
Retained earnings (3,748) 5,415
------------ ------------
Total stockholders' equity 31,425 39,213
------------ ------------
$ 35,042 $ 43,866
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
STAC SOFTWARE, 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,
-------- --------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software and service $ 3,615 $ 3,764 $ 9,991 $ 11,272
Royalties - - - 5,111
------------ ------------ ------------ ------------
Net revenues 3,615 3,764 9,991 16,383
Cost of revenues 259 248 656 708
------------ ------------ ------------ ------------
Gross margin 3,356 3,516 9,335 15,675
------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,470 1,893 4,843 5,571
Sales and marketing 1,942 2,883 6,278 8,124
General and administrative 645 913 2,800 3,151
Restructuring - - 822 350
------------ ------------ ------------ ------------
Total operating expenses 4,057 5,689 14,743 17,196
------------ ------------ ------------ ------------
Operating loss (701) (2,173) (5,408) (1,521)
Interest income 334 586 1,194 1,940
------------ ------------ ------------ ------------
Income (loss) before income taxes (367) (1,587) (4,214) 419
Provision (benefit) for income taxes 196 (566) (1,537) 507
------------ ------------ ------------ ------------
Loss from continuing operations (563) (1,021) (2,677) (88)
Discontinued operations:
Income from discontinued operations,
net of taxes of $550 in 1999 and
$245 and $1,292 in the three and
nine months ended 6/30/98 respectively - 297 885 1,852
------------ ------------ ------------ ------------
Net income (loss) $ (563) $ (724) $ (1,792) $ 1,764
============ ============ ============ ============
Earnings per common share, basic
Loss from continuing operations $ (0.09) $ (0.16) $ (0.45) $ (0.01)
Income from discontinued operations 0.00 0.05 0.15 0.28
Net income (loss) (0.09) (0.11) (0.30) 0.27
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Earnings per common share, diluted
Loss from continuing operations $ (0.09) $ (0.16) $ (0.45) $ (0.01)
Income from discontinued operations 0.00 0.05 0.15 0.28
Net income (loss) (0.09) (0.11) (0.30) 0.27
Weighted average common shares
outstanding, basic 5,937 6,255 5,910 6,463
Weighted average common shares
outstanding, diluted 5,937 6,255 5,910 6,463
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
STAC SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,792) $ 1,764
Adjustments required to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,345 1,549
Loss on disposals of property and equipment 554 -
Provision for deferred income taxes - 756
Changes in assets and liabilities:
Accounts receivable (1,179) 1,221
Inventories (30) (40)
Other assets (199) (369)
Accounts payable (321) 222
Income taxes receivable/payable (189) (1,402)
Accrued expenses and other current liabilities (696) (993)
------------ ------------
Net cash provided (used) by operating activities (2,507) 2,708
------------ ------------
Cash flows from investing activities:
Purchases of marketable securities (27,092) (26,489)
Sales of marketable securities 30,500 56,556
Acquisitions of treasury stock - (14,971)
Purchases of property and equipment (340) (1,060)
------------ ------------
Net cash provided by investing activities 3,068 14,036
------------ ------------
Cash flows from financing activities:
Issuance of common stock 1,191 920
Tax benefit from exercise of stock options 161 155
------------ ------------
Net cash provided by financing activities 1,352 1,075
------------ ------------
Effect of exchange rates on cash and cash equivalents 4 77
------------ ------------
Cash received from repayment of note 5,000 -
------------ ------------
Net cash provided by discontinued operations 624 201
----------- -----------
Net increase in cash and cash equivalents 7,541 18,097
Cash and cash equivalents at beginning of period 11,573 18,609
------------ ------------
Cash and cash equivalents at end of period $ 19,114 $ 36,706
============ ============
Supplemental non-cash activities:
Stock dividend $ 7,371 $ -
============ ============
Conversion of deferred compensation to equity
upon exercise of common stock options $ 19 $ 2
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE>
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 June
30, 1999 and its results of operations for the three and nine month periods
ended June 30, 1999 and 1998, 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: (IN THOUSANDS, EXCEPT PER SHARE
-------------------------- AMOUNTS; UNAUDITED)
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 and
nine months ended June 30, 1999 and 1998 is presented below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1999 June 30, 1999
------------- -------------
Per-Share Per-Share
Net Loss Shares Amount Net Loss Shares Amount
-------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Loss $ (563) $ (1,792)
Basic EPS 5,937 $ (0.09) 5,910 $ (0.30)
Dilutive Securities - -
---------- ----------
Diluted EPS 5,937 $ (0.09) 5,910 $ (0.30)
========== ==========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, 1998 June 30, 1998
------------- -------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $ (724) $ 1,764
Basic EPS 6,255 $ (0.11) 6,463 $ 0.27
Dilutive Securities - -
---------- ----------
Diluted EPS 6,255 $ (0.11) 6,463 $ 0.27
========== ==========
</TABLE>
NOTE 3. Inventories (IN THOUSANDS, JUNE 30, 1999 UNAUDITED):
-----------
June 30, September 30,
1999 1998
------------ ------------
Raw materials $ 110 $ 132
Finished goods 117 65
------------ ------------
$ 227 $ 197
============ ============
NOTE 4. Stock Option Plan Summary (UNAUDITED)
-------------------------
On March 11, 1999 the Company's stockholders voted to increase the number of
shares subject to outstanding options under the Company's 1992 Stock Option Plan
by 1,733,925 shares in order to adjust for the diminution in the value of
options outstanding as a result of the spin-off of the Company's Hi/fn
subsidiary. The following is a summary of stock options outstanding at June 30,
1999:
OPTIONS OUTSTANDING
--------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
CONTRACTUAL EXERCISE
NUMBER LIFE (YEARS) PRICE
------------ ------------ ------------
Price Range
$0.24 - $3.32.............. 464,851 5.49 $ 2.59
$3.33 - $3.36.............. 838,302 7.11 $ 3.36
$3.37 - $5.40.............. 542,710 8.31 $ 4.18
$5.41 - $9.60.............. 354,883 7.44 $ 6.84
------------
$0.24 - $9.60.............. 2,200,746 7.12 $ 3.96
============
The following is a summary of stock options exercisable at June 30, 1999:
OPTIONS EXERCISABLE
----------------------------
WEIGHTED-
AVERAGE
EXERCISE
NUMBER PRICE
------------ ------------
Price Range
$0.24 - $3.32........................... 356,308 $ 2.50
$3.33 - $3.36........................... 530,406 $ 3.36
$3.37 - $5.40........................... 156,645 $ 4.28
$5.41 - $9.60........................... 301,338 $ 7.00
------------
$0.24 - $9.60........................... 1,344,697 $ 4.05
============
8
<PAGE>
NOTE 5. Reverse Stock Split
-------------------
On May 3, 1999, the Company announced that the Board of Directors had approved a
one-for-four reverse stock split which became effective as of the close of
business May 7, 1999. The Company's stockholders of record as of the close of
business May 7, 1999 received one new share in exchange for every four shares
outstanding. The reverse stock split had previously been authorized by the
Company's stockholders at the Company's Annual Meeting of Stockholders held on
March 11, 1999. As a result of the reverse stock split, the number of shares
outstanding and the number of unissued shares subject to options outstanding and
exerciseable were reduced by a factor of four. Option exercise prices and
historical earnings per share amounts were increased by a factor of four.
These changes are reflected in the information presented by this 10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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"), in the Company's Form 10-K for
the year ended September 30, 1998 and in the Company's Forms 10-Q for the
quarters ended December 31, 1998 and March 31, 1999.
OVERVIEW
Stac's storage systems recovery software business is comprised of its
Replica Tape and Replica Network Data Manager ("NDM") product lines. Replica
Tape 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 Tape for NetWare was
introduced in February 1996 and Replica Tape for NT was made available in April
1997. Replica NDM was introduced to selected customer sites in April 1998 and
became commercially available in January 1999. 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 currently 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, Inc. ("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 December 8, 1998 General Form for Registration
of Securities on Form 10 filed by Hi/fn with the SEC for a complete discussion
of Hi/fn and the spin-off transaction.
9
<PAGE>
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. In
addition, the Company believes that certain individuals and entities that
traditionally buy software from both the Company and others may defer purchases
of software in the third and fourth quarters of the 1999 calendar year due to
concern over the Year 2000 issue, which could impact the Company's financial
results.
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,
-------- --------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 7 7 7 4
------------ ------------ ------------ ------------
Gross margin 93 93 93 96
------------ ------------ ------------ ------------
Research and development 41 50 48 34
Sales and marketing 54 77 63 50
General and administrative 18 24 28 19
Restructuring - - 8 2
------------ ------------ ------------ ------------
Total operating expenses 113 151 147 105
------------ ------------ ------------ ------------
Operating loss (20) (58) (54) (9)
Interest income 9 16 12 12
------------ ------------ ------------ ------------
Income (loss) before income taxes (11) (42) (42) 3
Provision for (benefit from) income taxes 5 (15) (15) 3
------------ ------------ ------------ ------------
Net loss from continuing operations (16) (27) (27) -
Net income from discontinued operations - 8 9 11
------------ ------------ ------------ ------------
Net income (loss) (16)% (19)% (18)% 11 %
============ ============ ============ ============
</TABLE>
10
<PAGE>
REVENUES. Revenues decreased 4% to $3.6 million for the quarter ended
June 30, 1999 from $3.8 million in the quarter ended June 30, 1998, and 39% to
$10.0 million for the nine months ended June 30, 1999 from $16.4 million for the
nine months ended June 30, 1998. The decrease in revenues from the June 1998
quarter to the June 1999 quarter was due to declining sales or REACHOUT,
partially offset by increasing sales of REPLICA products. The decrease in
revenues during the nine months ended June 30, 1999 as compared to the same
period of the prior fiscal year was primarily due to the completion of royalty
payments from IBM and Microsoft in January 1998, and also due to declining sales
of REACHOUT, partially offset by increasing sales of REPLICA products.
Software sales, which are comprised of domestic and international sales
through distributors, retailers, solution providers, OEMs and direct channels,
accounted for $3.6 million in the June 1999 quarter, compared to $3.8 million in
the comparable quarter of the prior fiscal year, a decrease of 4%. Software
sales were $10.0 million in the nine months ended June 30, 1999, an 11% decrease
from $11.3 million in the nine months ended June 30, 1998. The decrease in
revenues for both the quarter and nine month periods, was due to declining sales
of REACHOUT, which has reached a mature phase of the product life cycle, and is
partially offset by increasing sales of the Company's REPLICA product family.
International sales, which are included in the above software sales,
are comprised primarily of software products and were $1.3 million, or 37% of
revenues for the quarter ended June 30, 1999 compared to $1.2 million, or 32% of
revenues in the quarter ended June 30, 1998. International sales were $4.2
million or 42% of revenues in the nine months ended June 30, 1999 and $3.8
million, or 23% of revenues for the comparable period of the prior fiscal year.
The increase in international revenues as a percentage of revenues in the nine
month period ended June 30, 1999, over the comparable period in the prior fiscal
year was primarily due to the decrease in domestic license revenues as a result
of the completion of the Company's royalty agreements with Microsoft and IBM,
and stronger penetration in the European marketplace with its current product
offerings. 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 royalties related to licenses of Stac's
data compression technology to operating systems vendors in the quarter or nine
months ended June 30, 1999. There were no royalty revenues from these licenses
in the quarter ended June 30, 1999 and $5.1 million, or 31% of revenues for the
nine months ended June 30, 1998, due to the January 1998 completion of the
underlying royalty 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, and the costs of rendering product support services pursuant
to paid service offerings. Gross margins remained at 93% for the quarter ended
June 30, 1999 from the comparable quarter in the prior year, and decreased to
93% for the nine months ended June 30, 1999 from 96% for the nine months ended
June 30, 1998, primarily due to the decrease in IBM and Microsoft royalty
revenues which carried 100% gross margins.
RESEARCH AND DEVELOPMENT. Research and development costs consist
primarily of salaries, employee benefits, overhead, outside contractors and
non-recurring engineering fees. Such expenses were $1.5 million and $1.9 million
for the quarters ended June 30, 1999 and June 30, 1998, respectively, and $4.8
million and $5.6 million for the nine months ended June 30, 1999 and June 30,
1998, respectively. The decrease in research and development costs from the
prior year's quarter and nine month period was primarily due to lower product
localization costs and lower employee and consulting costs in the current
periods, related to the reallocation of resources amongst development facilities
in conjunction with the restructuring discussed below. 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 research and
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. Sales and marketing expenses consist
primarily of the salaries, commissions and benefits of sales, marketing and
customer support personnel, and consulting, advertising, promotion and overhead
11
<PAGE>
expenses. Such expenses were $1.9 million for the quarter ended June 30, 1999
and $2.9 million for the quarter ended June 30, 1998, and $6.3 million for the
nine months ended June 30, 1999 and $8.1 million for the nine months ended June
30, 1998. The reduced spending in the quarter and nine months ended June 30,
1999 from the prior year's comparable quarter and nine month period is primarily
due to reductions in staffing and marketing program costs attributable to the
corporate restructurings completed in the December 1998 and 1997 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 $0.6 million
and $0.9 million for the quarters ended June 30, 1999 and June 30, 1998,
respectively, and $2.8 million and $3.2 million for the nine months ended June
30, 1999 and June 30, 1998, respectively. The reduction in expenses in the
current quarter and nine month periods reflects lower management costs and
non-recurring costs, both related to Stac's spin-off of its former Hi/fn, Inc.
subsidiary.
RESTRUCTURING. The restructuring charge of $0.8 million in the nine
months ended September 30, 1999 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 costs and resources
with the needs of a stand-alone, partner-focused software company. The
restructuring charge of $0.4 million in the nine months ended June 30, 1998 is
primarily for the costs of severance benefits and is 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 began in the September 1997 quarter and was
completed in the December 1997 quarter, and was initiated to better align costs
and resources with the Company's focus on the storage systems recovery needs of
enterprise customers.
INTEREST INCOME. Interest income was $0.3 million for the quarter ended
June 30, 1999 and $0.6 million for the quarter ended June 30, 1998, and $1.2
million and $1.9 million for the nine month periods ended June 30, 1999 and June
30, 1998, respectively. The decrease in interest income for the three and nine
months ended June 30, 1999 compared to the three and nine months ended June 30,
1998 was due primarily to lower invested cash balances in marketable securities
during the June 1999 periods as a result of the Company's share repurchase
programs executed beginning in July 1997.
INCOME TAXES. The effective tax rate for the June 1999 quarter and nine
months ended June 30, 1999 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, with the provision recorded during the quarter reflecting an
adjustment to that forecast resulting in limitations imposed on the Company's
ability to recognize tax benefit because of Alternative Minimum Tax regulations.
The effective income tax rate for the quarter and nine months ended June 30,
1998 was 36% and 121%, respectively. The effective tax rate for the nine months
ended June 30, 1998 reflects the non-deductible 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 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 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.
12
<PAGE>
SEASONALITY. The software industry has typically experienced some
seasonal variations in demand, with sales declining somewhat in the summer
months. The Company believes that its software sales are subject to similar
seasonal variations which, when combined with the other factors described above,
are likely to result in fluctuations in the Company's quarterly results. As a
result, historical quarter-to-quarter comparisons should not be relied upon as
indicative of future performance.
OPERATING SYSTEMS. Stac's ReachOut, Replica Tape 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 Tape supports Windows NT. Previous
versions of Replica Tape are still available to support Novell NetWare servers.
Replica Tape 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, including Windows 2000, 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., Veritas Software Corporation ("Veritas)
and Legato Systems, Inc. ("Legato"), all of which have established channels of
distribution and installed customer bases. The Company has entered into OEM
licenses with Legato, Veritas, Hewlett-Packard Company and Tivoli Systems, Inc.
(a wholly owned subsidiary of IBM) 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 it
might have otherwise obtained by only directly selling Replica. Also, there is
no assurance that revenues recognized in the current and previous quarters
pursuant to these agreements will continue into future quarters. 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.
The Company's ReachOut product competes in the remote control software
market against more established products such as Symantec Corporation's
pcAnywhere, Compaq Corporation's Carbon Copy, Computer Associate Inc.'s Control
IT, Netopia's Timbuktu 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
13
<PAGE>
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 $4.1 million
to $28.6 million at June 30, 1999 from those at September 30, 1998. The increase
was primarily due to the repayment of the $5.0 million note receivable, by the
Company's recently spun-off Hi/fn subsidiary, partially offset by cash used in
general operations. Working capital increased by $6.8 million to $29.3 million
at June 30, 1999 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.
From time to time the Company considers strategic transactions and
alternatives with the goal of maximizing stockholder value. For example, in
December 1998 the company completed the spin-off of Hi/fn, Inc. The Company will
continue to evaluate additional potential strategic transactions and
alternatives that it believes will enhance stockholder value. These additional
potential strategies may include a variety of different structures, including
spin-offs, strategic partnerships, joint ventures, restructurings, divestitures
and business combinations.
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.
However, the Company believes that certain individuals and entities
that traditionally buy software from both the Company and others may defer
purchases of software in the third and fourth quarters of calendar 1999 due to
concerns over the Year 2000 issue, which could impact the Company's financial
results.
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 all of its significant current product offerings 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 85% of all internal systems are verified as Year 2000 compliant. All
critical business systems have been upgraded to versions that are certified Year
2000 compliant, with the exception of backordered telephone equipment which is
expected to be installed during the September 1999 quarter, and sales order
processing and accounting software for its United Kingdom office which are
expected to be compliant by the middle of the December 1999 quarter.
In addition, the Company has completed an evaluation of certain third
parties with which it does significant business confirming that each is 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. 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
14
<PAGE>
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
June 30, 1999 was $9,451,000. 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 June 30, 1999 the Company's portfolio was
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.
15
<PAGE>
PART II-OTHER INFORMATION
Items 1 through 5 are not applicable and have been omitted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE>
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: August 13, 1999 /s/ Clifford L. Flowers
------------------------------------------
Clifford L. Flowers
Vice President of Finance and
Chief Financial Officer
Principal Financial and Accounting
Officer and Duly Authorized Officer
17
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