ITEM 1. BUSINESS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES. PREVIO, INC.'S ("PREVIO" OR "THE COMPANY") FUTURE RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO DIFFERENCES IN FUTURE RESULTS INCLUDE BUT ARE NOT LIMITED TO: FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS, NEW PRODUCT INTRODUCTIONS BY THE COMPANY, MARKET ACCEPTANCE OF THE COMPANY'S NEW PRODUCT INTRODUCTIONS, NEW PRODUCT INTRODUCTIONS BY COMPETITORS, 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 IN "OPERATING SYSTEMS" AND "COMPETITION AND RISKS ASSOCIATED WITH NEW PRODUCT INTRODUCTIONS," AND UNDER "REVENUES," "QUARTERLY TRENDS," "SEASONALITY," AND "STOCK PRICE VOLATILITY" IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS).
Previo's business is focused on developing and marketing software products that provide automated resolution to problems and the protection/recovery of data for desktop and notebook computers used by corporate enterprises. These products are used by helpdesks and desktop support organizations (generally part of an enterprise's information technology ("IT") group) to provide better service to the enterprise's employees. Previo's products resolve many kinds of problems more quickly than a technician would be able to using ordinary diagnosis and repair techniques. The types of problems addressed include corrupted software or data, user errors, configuration problems, application conflicts, virus attacks, accidentally deleted files, hard disk failures, and lost or stolen personal computers ("PCs"). Simultaneously these products lower the cost of fixing the problems by reducing the overall amount of technician time involved, by lowering the skill level required by the technician, and by resolving more trouble calls during the first contact.
On April 25, 2000, the Company changed its name from Stac Software, Inc., ("Stac") to Previo concurrent with a change in the Company's focus away from storage and remote access systems, to enter into the emerging eSupport market space. Stac's business was focused on storage systems recovery software with its Replica Tape and Replica Network Data Manager ("NDM") product lines. Replica Tape and Replica NDM were distributed business systems recovery software products, which enabled PC server, desktop and notebook replication and disaster recovery. Stac also developed and marketed ReachOut Enterprise ("ReachOut") remote communications software, a remote access software suite which allowed administrators and end users to access a PC using another PC through a network, the Internet, ISDN lines or modems.
Because of this change of business focus, the Company has largely discontinued the sale of its ReachOut and Replica Tape products, and has consummated agreements with third parties for the sale or license of technology and other attributes associated with these products. The Company has and intends to continue to retain the rights to such technology as is needed for incorporation into its current ESUPPORT ESSENTIALS (TM) product line.
Previo began shipping software under the ESUPPORT ESSENTIALS brand in May 2000. ESUPPORT ESSENTIALS implements patented technology that permits the return of inoperable PCs (both desktops and notebooks) to working condition with relative ease of use, while providing for the automated recovery of an entire computer system including the operating system, applications, individual user preferences and all end user data. The results are increased end-user uptime and service levels, faster problem resolution, and significant reductions in support costs and efforts. ESUPPORT ESSENTIALS is based on the technology used in the Company's former product, Replica NDM, which was introduced to selected customer sites in April 1998 and became commercially available in January 1999. ESUPPORT ESSENTIALS builds on the technology introduced in Replica NDM and expands on it by adding features such as system roll-back, which allows users to restore their applications, data and user preferences to an earlier point-in-time as well as adding remote access capabilities (using the technology formerly used in ReachOut), which provides additional functionality targeted at the enterprise helpdesk market.
On May 1, 2000, the Company announced that it had signed an exclusive OEM agreement with Hewlett-Packard Company ("HP"). Under this agreement, Previo's ESUPPORT ESSENTIALS will serve as the software application core for the HP SureStore AutoBackup family of products. These products represent off the shelf, turnkey solutions that provide core features of the ESUPPORT ESSENTIALS software pre-installed on an HP server appliance. Built on thin-server technology, the appliance captures changes to hard-drive content whenever a PC connects to the network. This automated process is transparent to end-users and does not interfere with other applications. This new class of solutions is designed to safeguard the high volume of business-critical data residing on mobile computers and networked desktop systems in workgroup environments.
As mentioned above, on April 25, 2000, the Company changed its name to Previo, Inc., from Stac Software, Inc., by way of a merger of its wholly-owned subsidiary Previo, Inc., with and into the Company, pursuant to the Delaware General Corporation Law. References in this Report on Form 10-K to Stac Software, Inc. or Stac, Inc. mean the Company. The Company's symbol on the NASDAQ's Stock Market National Market System, "STAC", was changed to "PRVO" in connection with the name change.
On December 16, 1998, the Company changed its name to Stac Software, Inc., from Stac, Inc., by way of a merger of its wholly owned subsidiary Stac Software, Inc., with and into the Company, pursuant to the Delaware General Corporation Law.
In addition, 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 Consolidated Statement of Operations and Balance Sheet. 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.
Previo received royalties from Microsoft and IBM Corporation ("IBM") for licenses of its data compression technology from June 1994 through January 1998 after which the royalties became paid in full. The Company does not expect further revenues from these agreements. The royalties, net of taxes paid, were reinvested in the ReachOut and Replica products, and, more recently, the ESUPPORT ESSENTIALS products that have replaced the Company's former Stacker disk-compression products.
BACKGROUND
ESUPPORT
eSupport is a growing market segment that centers on keeping PC users operational, while at the same time reducing the escalating costs of the helpdesk organizations responsible for this effort by the use of automation. eSupport solutions are designed to provide helpdesk personnel as well as end-users with tools to solve the majority of computer support issues. Problems that once took extended periods to address and fix, or required expensive second-level escalation, can be handled by less-skilled staff or end-users themselves. The benefits to companies include increased end-user satisfaction, higher helpdesk morale, and more effective deployment of scarce technical personnel. While eSupport technologies can be directed at supporting either internal enterprise PC users (employees) or external enterprise PC users (customers), Previo's products are focused on the internal enterprise PC users only.
The market research firm International Data Corp. (IDC) estimates that the eSupport market will grow from $3.1 billion in 1999 to $14.2 billion in 2003. It predicts that this will expand to represent 43% of the total IT support market in the near future. Helpdesk 2000, the leading industry organization, reports that 75% of all organizations have plans to implement an eSupport strategy by 2001.
The increasing need for eSupport technology for supporting enterprise employees has been driven by a variety of factors. Today large enterprises have on average more PCs per employee than just a few years ago. Further, an increasing number of these computers are notebook models which are more prone to loss or damage, or are more dependent upon support simply because they are often physically removed from the helpdesk organization. What were once adjunct devices for assisting and simplifying the tasks of employees, desktop and notebook computers are now essential workplace tools. At the same time that PCs are proliferating, so is their diversity. Users commonly download or otherwise install applications, software components and data without the knowledge or control of central IT organizations. As hard disk storage sizes increase (at over 50% per year), the opportunity for increased complexity and diversity increases even more. The inevitable result is that there are more and more PCs used by corporate employees that have unique characteristics, for which their uptime and operability are critical to the employees' ability to perform their jobs. The failure of these PCs can result in lost revenues, missed opportunities and a variety of other business setbacks.
Industry analysts are predicting that over time eSupport will mature into a hierarchy of technologies. In the first layer, the computer proactively diagnoses and preemptively fixes itself. In the next layer, a PC user can determine and resolve problems him or herself through self-repair technology and automatic diagnosis. The last layer automates the process of helpdesk technicians remotely accessing and servicing a PC much more quickly and certainly than was previously possible.
To date however, a gap has remained between the promise of these eSupport high-level concepts and the reality of the technology and effort required by the enterprise to support its PCs. The crux of the eSupport challenge is in the human resource cost necessary to implement an effective eSupport technology - one that can keep enterprise PC users working with a minimum of downtime and IT effort. We believe that Previo's products fill this gap today.
PREVIO'S ESUPPORT ESSENTIALS
Previo focuses on returning the user's system to working condition as quickly as possible rather than diagnosing or surgically fixing a specific technology problem. Its ESUPPORT ESSENTIALS product line uses patented technology to swiftly and certainly return an inoperable desktop or notebook computer to pre-problem working condition with minimal effort. The ESUPPORT ESSENTIALS software accomplishes this by taking snapshots of the system hard disk and storing the compressed information in a network repository. The computer can then be automatically and transparently "rolled-back" to a pre-problem state at any time while preserving all of the data, as well as the user's own unique preference settings. If permitted, non-technical users can safely and quickly solve their own problems without involving the helpdesk, reducing costly "first calls" or support escalations. Alternatively, support desk personnel can remotely access the PC to handle installations, configuration tasks, or training without requiring expensive "desk-side" visits.
The ESUPPORT ESSENTIALS snapshot automatically captures all of the information on the system hard disk: operating system, system preferences, applications and end-user data. Rather than expending scarce and expensive technician time to diagnose, pinpoint and resolve the specific problem, ESUPPORT ESSENTIALS simply puts the PC back into a condition that is known to be functional - simple, direct, fast and sure.
A common usage scenario involves a user whose PC worked without any interruption three months ago, last month, last week and yesterday -- but not today -- due to some software problem. The traditional approach is to try to solve the problem by trial and error, installing application fixes, changing preferences and settings, and further investigation. Previo's approach is to simply return the system to yesterday's working condition - while preserving today's data. Where applicable, further investigation to identify or resolve recurring problems can be done off-line while the end-user is back in business. The Previo approach keeps the enterprise's end-user productivity flowing, protecting the availability of the PCs that reside across the expanses of the extended enterprise.
STRATEGY
Previo's strategy is to provide automated software solutions for helpdesk and information systems managers of large enterprises to help them better manage and resolve issues impacting the operability of the PCs within the organization, exploiting where applicable, the use of the Internet to enable communications for non-networked personnel. The Company is partnering with other OEM software developers, systems integrators and resellers to provide complete IT and helpdesk management solutions for enterprises. The Company currently has strategic alliances with Peregrine Systems, Inc., Remedy Corporation, Miramar Systems ("Miramar") and HP.
The Company intends to implement this strategy as may be required through a combination of strategic technology acquisitions, technology licensing agreements and internal product development. In November 2000, the Company announced an agreement whereby Previo would incorporate Miramar's Desktop DNA into Previo's eSupport Essentials to provide enterprise-class migration support for helpdesk automation.
In addition to the perpetual enterprise licenses sold by Previo, the Company intends to deploy its eSupport Essentials software through a subscription based, managed service. The first pilot deployments for this business model are expected to begin in the second quarter of fiscal 2001.
From time to time the Company considers potential strategic alternatives. However, there is no assurance that any such transaction will ever occur or even if such a transaction were to occur, that it would be successful.
PRODUCTS
The Company currently sells its ESUPPORT ESSENTIALS software to enterprises through perpetual license agreements.
The following table shows the Company's principal product and its pricing as of December 2000.
RESEARCH AND DEVELOPMENT
The market for the Company's product is characterized by rapid technological change, requiring continuous investment to develop and bring to market new features and functionality and logical extensions to this product line. The Company has invested the majority of its software development resources in its ESUPPORT ESSENTIALS product line over the past fiscal year. The Company believes that significant factors in its future success will be its ability to identify and respond to customer needs, to enhance its existing products, to introduce new products on a timely and cost-effective basis, to provide integration and interoperability with major brands of helpdesk call center software, to extend its core technology into new platforms and applications and to anticipate and respond to emerging standards and other technological changes.
The Company intends to continue to develop its software as market conditions warrant and to invest in the development or acquisition of new products. Foreign language versions of products will be developed as market conditions warrant. The Company's research and development is conducted primarily by its internal product development staff and through contractors. Research and development expenses were $5.0 million in fiscal 2000, $6.2 million in 1999 and $7.6 million in 1998, which represented 64%, 44% and 39% of revenues in those periods, respectively.
SALES AND MARKETING
The Company markets and sells its product domestically and internationally (through Previo Europe, Limited ("Previo Europe"), a wholly-owned subsidiary of the Company). The Company sells its products principally through its internal sales and marketing staffs which, primarily with partners, corporate resellers, value added resellers and systems integrators, sell to corporations, government entities and other enterprises.
International sales accounted for revenues of $1.7 million, $5.8 million and $4.8 million in fiscal 2000, 1999 and 1998, respectively. Technical support for Previo products is provided by Previo, Previo Europe or through contracts with third parties. Previo provides customer support to customers who purchase support and maintenance agreements. The Company's international operations are subject to certain risks common to international activities, such as changes in foreign governmental regulations, currency exchange rates, tariffs and taxes, export license requirements, the imposition of trade barriers, difficulties in staffing and managing foreign operations, and political and economic instability.
In addition to the above channels used for marketing and selling the Company's software, the Company licenses its technology and/or software to software and hardware OEMs such as Legato Systems, Inc. ("Legato") and HP for incorporation into their own products.
COMPETITION AND RISKS ASSOCIATED WITH NEW PRODUCT INTRODUCTIONS
The market for ESUPPORT ESSENTIALS is intensely competitive, rapidly changing and significantly affected by new product introductions and other market activities of industry participants. Companies such as Support.com, Connected Corporation and Motive Communications, Inc. have also made public their entrance into the eSupport arena. Competition for ESUPPORT ESSENTIALS and any new products the Company may offer could result in a failure to establish significant sales volume, and/or price concessions that could prevent the Company from ever becoming profitable.
Also, the Company's ESUPPORT ESSENTIALS product may be perceived to compete with well established back-up products from Computer Associates, Inc., Veritas Software Corporation and Legato, all of which have established channels of distribution and installed customer bases. The Company has entered into an OEM license with HP that authorizes HP to resell core ESUPPORT ESSENTIALS technology under certain conditions (see discussion in "Business" section above). While the Company's intent was to expand its sales and marketing reach through this agreement, 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 its relationship with HP than it might have otherwise obtained by only directly selling ESUPPORT ESSENTIALS. Also, ESUPPORT ESSENTIALS is being introduced into sophisticated server environments and, while the Company has invested significant resources in testing ESUPPORT ESSENTIALS under a variety of conditions, configurations and circumstances, there are likely to be environments which have not been anticipated for which additional development of ESUPPORT ESSENTIALS will be necessary.
MANUFACTURING AND BACKLOG
ESUPPORT ESSENTIALS is manufactured by third parties that specialize in the duplication and assembly of software products, in accordance with the Company's specifications. The principal materials and components used include CDs which are used for distribution of the software code and the related user manuals. The software manufacturing process involves the duplication of media, the printing of user manuals, assembly of components and final packaging. The Company believes there is an adequate supply of and source for the raw materials used in ESUPPORT ESSENTIALS and that multiple sources are available for media duplication, manual printing and final packaging.
Generally, the Company has relatively little, if any, backlog of orders for its software products at any given time and does not consider backlog to be a measure of sales for any future period.
PATENTS, TRADEMARKS AND PRODUCT PROTECTION
The Company attempts to protect its products with a combination of trade secret, patent, copyright and trademark laws and with license agreements. The Company owns two issued United States patents relating to its storage management products, which expire in 2015 and 2016, respectively. One of the patents is employed in the Company's ESUPPORT ESSENTIALS product. The Company also has a perpetual, non-royalty bearing license from Hi/fn to implement in the Company's products the patents assigned by the Company to Hi/fn and to license and sublicense the resulting products to the Company's customers.
The status of patents covering technology is highly uncertain, involving complex legal and factual questions. There is no assurance that patent applications that may be filed by the Company will result in patents being issued or that its patents, and any patents that may be issued to it in the future, will afford protection against competitors with similar technology; nor is there any assurance that patents issued to the Company will not be infringed upon or designed around by others or that others will not obtain patents that the Company would need to license or design around or that the Company's competitors will not independently develop non-infringing technologies or products that are equivalent or superior in function or performance. If patents held by competitors or others are upheld by the courts and found to be infringed by Previo's products, the holders of such patents might be in a position to require the Company to stop manufacturing, using or selling the infringing products and to pay up to three times damages to the holders of the infringed patents. There is no assurance that any licenses that might be required for the Company's products would be available on reasonable terms, if at all.
The Company has applied for registration of the ESUPPORT ESSENTIALS trademark in the United States. The Company's rights to register and use trademarks do not ensure that the Company will have superior rights to others that may have registered or used identical or related trademarks on related goods or services, nor that such registrations or uses will not be used to attempt to foreclose use of a particular trademark by the Company.
Because the computer industry is characterized by rapid technological change, the policing of the unauthorized use of computer software is a difficult task and software piracy is expected to continue to be a persistent problem for the packaged software industry. Despite steps taken by Previo to protect its software products, third parties may still make unauthorized copies of Previo's products for their own use or for sale to others. The Company believes that the knowledge, abilities and experience of its employees, its timely product enhancements and upgrades and the availability and quality of the support services it provides to users are more significant factors in influencing end users to buy its products than are patent, trade secret and copyright protection laws.
OPERATING SYSTEMS
ESUPPORT ESSENTIALS server component runs on Windows NT 4.0 Server with client support for Windows 2000 Professional, Windows 98, Windows 95 and Windows NT Workstations. The Company expects to support Windows 2000 Server during calendar 2001. Future versions of Microsoft's Windows operating systems may require significant changes to the Company's products in order to maintain compatibility.
EMPLOYEES
As of December 14, 2000, Previo employed approximately 116 full-time employees, of whom approximately 69 were employed in research and development, 32 in sales, marketing and customer support and 15 in operations and administration. None of the Company's employees are represented by a labor union or subject to a collective bargaining agreement. Previo has never experienced a work stoppage due to labor difficulties and believes that its employee relations are good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal domestic administrative, marketing and sales activities are located in approximately 14,000 square feet of leased facilities in San Diego, California. The space is occupied under a lease agreement that expires in March 2005. The Company has an option to renew the lease for an additional five-year period on terms specified in the current lease agreement. The Company's subsidiary in the United Kingdom leases 409 square feet of office space near London under a one-year lease expiring in September 2001. The Company's product development subsidiary in Estonia leases 1,137 square meters of office space in Tallinn, Estonia, under a five year lease expiring March 1, 2005. See Note 9 of Notes to Consolidated Financial Statements for information regarding the Company's obligations under its facilities leases.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is engaged in legal actions arising in the ordinary course of its business and believes that the resolution of these actions will not have a material adverse effect on the Company's results of operations, liquidity, or financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended September 30, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock of Previo is traded on the NASDAQ Stock Market's National Market System ("NMS") under the symbol "PRVO." The following table sets forth the range of high and low sales prices on the NMS for the Common Stock for the periods indicated and since January 1, 1998. Such quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
COMMON STOCK PRICES ------------------- HIGH LOW ---- --- CALENDAR YEAR 1998: First Quarter..................................... $ 24.00 $17.52 Second Quarter.................................... $ 21.52 $17.00 Third Quarter..................................... $ 19.00 $10.52 Fourth Quarter.................................... $ 23.25 $ 2.08
CALENDAR YEAR 1999: First Quarter..................................... $ 5.00 $ 3.08 Second Quarter.................................... $ 6.31 $ 3.52 Third Quarter..................................... $ 6.19 $ 4.06 Fourth Quarter.................................... $ 7.25 $ 3.50
CALENDAR YEAR 2000: First Quarter..................................... $ 12.88 $ 6.06 Second Quarter.................................... $ 8.50 $ 5.50 Third Quarter..................................... $ 8.00 $ 5.63 Fourth Quarter (through December 14, 2000)........ $ 6.25 $ 3.44
The Company had approximately 326 stockholders of record as of December 14, 2000. The last sales price for the Company's Common Stock, as reported on the NMS on December 14, 2000, was $3.50.
On December 16, 1998, the Company distributed a special dividend of its stock in its Hi/fn subsidiary to its stockholders. On December 17, 1998, the Company's Common Stock traded ex-dividend, and its closing price on the NMS on such date was $5.88.
On April 30, 1999, the Company's Board of Directors declared a one-for-four reverse stock split of its common stock, which had been approved by the Company's stockholders at the 1999 Annual Meeting of Stockholders held on March 11, 1999. The reverse split was effective May 7, 1999. (All references to share and per share amounts have been adjusted retroactively to reflect this stock split.)
On April 25, 2000 the Company changed its name from Stac Software, Inc. to Previo, Inc., and correspondingly changed its NMS symbol from STAC to PRVO.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following data, insofar as it relates to each of the fiscal years 1996 through 2000, have been derived from audited financial statements, including the balance sheet at September 30, 2000 and 1999 and the related statements of operations for each of the three years ended September 30, 2000 and notes thereto included herein. This data should be read in conjunction with the consolidated financial statements of the Company and related notes thereto for the corresponding periods.
The Company's consolidated financial statements have been restated to present Hi/fn as a discontinued operation. Accordingly, Hi/fn's assets and liabilities; revenues, costs and expenses; and cash flows have been excluded from the respective captions in the consolidated financial statements, and have been reported as "Net assets of discontinued operations"; "Income from discontinued operations, net of taxes"; and "Net cash used in discontinued operations," respectively, for all periods presented.
The Company has never declared or paid any cash dividends on its common stock. The company currently intends to retain remaining future earnings to finance the growth and development of its business.
Share and per share amounts have been updated to reflect the one-for-four reverse stock split approved by the Board of Directors April 30, 1999 and made effective May 7, 1999.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Previo's business is focused on developing and marketing software products that provide automated resolutions to problems, and protection/recovery of data for desktop and notebook computers used by corporate enterprises. These solutions are aimed at assisting information technology and computer support organizations within these companies to rapidly resolve their end user systems and recovery problems and to better manage the functionality of these systems over their life cycles. Previo's products are sold through a variety of domestic and international channels.
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 Consolidated Statement of Operations and Balance Sheet. 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.
The following discussion should be read in conjunction with the description of the company's current business and the consolidated financial statements and notes thereto, included elsewhere within this annual report. Fluctuations in annual and quarterly results may occur as a result of factors affecting demand for the Company's products such as the timing of the Company's and competitors' new product introductions and upgrades and the information technology budgets for companies. Due to such fluctuations, historical results and percentage relationships are not necessarily indicative of the operating results for any future period. In addition, due to the Company's re-focus of its business into the eSupport business in April 2000 and the discontinuation of the sale of its historical products, the Company's past performance may not be indicative of future operating results.
RESULTS OF OPERATIONS
The following table sets forth for the Company's results of operations and the percentage relationship of certain items to revenues during the periods shown. Unless otherwise indicated, references to years are to fiscal years, which ended September 30.
REVENUES
Revenues in fiscal 2000 were $7.8 million, 44% less than the $13.9 million reported in fiscal 1999. Revenues decreased by 29% to $13.9 million in fiscal 1999 compared to 1998 revenues of $19.4 million. During fiscal 2000 the Company initiated significant changes to its business strategy, including the third quarter discontinuation of the marketing for its ReachOut and Replica Tape products, in order to focus on positioning the Company in the eSupport market. (Although the Company is no longer actively marketing these products, legacy revenues associated with these products are expected to continue throughout fiscal 2001 due to the recognition of previously deferred revenues related to product maintenance and license fees and the expiration of return rights for box product sold through the distributor/retail channel in addition to residual product royalty revenues.) This change in business direction coupled with a decline in revenues from a major OEM partner for royalties associated with the Replica Tape product contributed to the decrease in revenues in fiscal 2000. The decrease in fiscal 1999 revenues from those of 1998 is due to lower revenues received from royalties related to licenses of Previo's data compression technology to operating system vendors. Royalty revenues were $5.1 million in 1998. These royalty revenues were solely from agreements with Microsoft and IBM, who were obligated to continue making payments under the licenses at the rate of $4.0 million per quarter through December 1997, with a final payment of $1.1 million in the March 1998 quarter. The Company expects no further royalty revenues under these agreements with Microsoft and IBM. The decline in fiscal 1999 revenues compared to fiscal 1998 was further attributable to declining sales of ReachOut, which had reached a mature phase of the product life cycle. This decline was partially offset by increased sales of Replica Tape, primarily due to higher OEM revenues.
The Company expects current and future revenues to be significantly impacted by the discontinuance of the ReachOut and Replica Tape products.
Software sales, which are comprised of domestic and international sales and licenses through distributors, retailers, solution providers, OEMs and direct channels, accounted for 100% of revenues in fiscal 2000 and fiscal 1999 and 74% of revenues in fiscal 1998. Software sales decreased by 44% in fiscal 2000 from fiscal 1999, and by 3% in fiscal 1999 from fiscal 1998.
International revenues, which are included above, were $1.7 million or 22% of revenues in fiscal 2000, $5.8 million, or 42% of revenues in fiscal 1999 and $4.8 million or 25% of revenues in fiscal 1998. The decrease in international revenue as a percentage of total revenue in fiscal 2000 compared to fiscal 1999 and the increase in fiscal 1999 from 1998 is primarily due to particularly high European royalty revenues in fiscal 1999 related to an OEM agreement. The decrease in actual dollars of international revenues in fiscal 2000 over fiscal 1999 is related to the change in market strategy and corresponding discontinuation of the Company's ReachOut and Replica Tape product lines as discussed above. Previo markets and sells to its European accounts from its office in the United Kingdom and markets and sells primarily to Japan and Australia through relationships with distributors and resellers abroad.
GROSS MARGIN
Cost of revenues consists primarily of the license fees, user manuals, packaging, media and assembly associated with the Company's software products, as well as the costs of rendering product support services pursuant to paid service offerings. Gross margins were 86% in fiscal 2000, 94% in fiscal 1999 and 95% in fiscal 1998. The decrease in gross margins in fiscal 2000 over fiscal 1999 was primarily due to an increase in customer support capacity as the Company prepared for customer needs relative to the new product offering, while at the same time experiencing declining revenues related to the discontinuance of the ReachOut and Replica Tape products. Gross margins were also less in fiscal 2000 than in fiscal 1999 due to increased obsolescence reserves taken for box product inventory, related to the Company's discontinuation of sales of the ReachOut and Replica Tape products as discussed above. The decrease in gross margins from fiscal 1998 to 1999 is due to the elimination of royalty revenues, which carry 100% gross margin.
RESEARCH AND DEVELOPMENT
The cost of product development consists primarily of salaries, employee benefits, overhead and outside contractors. Such expenses were $5.0 million in fiscal 2000, $6.2 million in fiscal 1999 and $7.6 million for fiscal 1998. The decrease in product development costs in fiscal 2000 over fiscal 1999 is primarily due to lower employee and consulting costs related to the reallocation of resources among development facilities in conjunction with the restructuring discussed below. The decrease in product development costs in fiscal 1999 over fiscal 1998 is primarily due to lower product localization costs as well as lower employee and consulting costs as discussed above. The increase in product development expense as a percentage of revenues was primarily due to the Company's lower revenues in fiscal 2000 as compared to fiscal 1999 and in fiscal 1999 as compared to fiscal 1998. 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 is 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
Sales and marketing expenses consist primarily of salaries, commissions and benefits of sales, marketing and customer support personnel, and consulting, advertising, promotional and overhead expenses. These expenses were $9.2 million in fiscal 2000, $8.2 million fiscal 1999 and $10.5 million for fiscal 1998. The increase in costs in fiscal 2000 over those of the prior fiscal year is primarily due to the staffing of the Company's enterprise sales organization and increased marketing and market research costs incurred in the development and implementation of the Company's new market-entry strategy. The decrease in marketing and sales expense in fiscal 1999 from 1998 was due to corporate restructurings of these functional areas. The restructurings refocused sales and marketing efforts towards developing corporate enterprise customers, rather than individual end-users. The increase in selling and marketing expense as a percentage of revenues was primarily due to the Company's lower revenues in fiscal 2000 as compared to 1999 and in fiscal 1999 as compared to 1998. Sales and marketing expenses are expected to remain the Company's most significant ongoing operating expense.
GENERAL AND ADMINISTRATIVE
General and administrative expenses are comprised primarily of salaries for administrative and corporate services personnel and legal and other professional fees. Such expenses were $2.8 million for fiscal 2000, $3.4 million for fiscal 1999 and $4.4 million for fiscal 1998. The reduction in spending in fiscal 2000 over fiscal 1999 and in fiscal 1999 over fiscal 1998 reflects lower management costs and non-recurring costs associated with Previo's spin-off of its former Hi/fn subsidiary. The increase in general and administrative expenses as a percentage of revenues was primarily due to the Company's lower revenues in fiscal 2000 as compared to 1999 and in fiscal 1999 as compared to 1998.
RESTRUCTURING CHARGES
In fiscal 1999, the Company charged $1.2 million to operations, related to two restructurings which occurred during the year. The first restructuring charge was $0.8 million and was completed in anticipation of the reorganization related to the December 16, 1998 spin-off of the Hi/fn subsidiary. Primary components of the charge were losses on property and equipment abandonments ($0.6 million) and severance and employee related liabilities paid for terminated employees ($0.2 million). The second restructuring was $0.4 million and was designed to contain development costs by utilizing offshore facilities for these functions. The amount charged to restructuring included severance and employee related liabilities paid for terminated employees ($0.3 million) and lease termination costs ($0.1 million).
As discussed above, in fiscal 1997, the Company reorganized its sales and marketing departments and recorded a restructuring charge of $0.9 million. The principal components of the charge were losses on property and equipment abandonments ($0.4 million), severance and employee related liabilities ($0.3 million), lease termination costs ($0.1 million) and consulting and outplacement related to the terminated employees ($0.1 million). In fiscal 1998, the Company incurred an additional $0.3 million related to this restructuring. This additional amount represented severance and employee related liabilities that the Company was not permitted to expense until the affected employees were notified of the termination and the Company had committed to provide for such costs.
INTEREST AND OTHER INCOME
Interest and other income was $3.4 million in fiscal 2000, $1.6 million in fiscal 1999 and $2.4 million in fiscal 1998. The fiscal 2000 amount includes $1.6 million related to the redemption of preferred shares of Dynanet, Inc. held by the Company which were received in connection with its acquisition of California Software, Inc. in 1995. As the shares of Dynanet were acquired as an adjunct to the California Software acquisition, and at that time the fair value of these shares was not significant, the Dynanet shares were recorded at no costs basis; therefore, the entire redemption value is currently treated as other income. Additionally, interest income in fiscal 2000 increased from that in fiscal 1999 due to higher interest rates and higher average invested cash balances. The reduction in interest income from fiscal 1998 to 1999 was primarily due to lower invested balances during the 1999 fiscal year, as a result of the completion of the Company's stock repurchase program in fiscal 1998.
INCOME TAXES
Although the Company incurred a tax loss for fiscal 2000 it did not recognize any significant resultant benefit as its opportunity for net operating loss carrybacks have been depleted. The nominal net income tax charge recognized for the year is primarily associated with income taxes from foreign source revenues and the related statutory withholdings required by the foreign jurisdiction. The Company continues to record a 100% valuation allowance against its deferred tax assets. For fiscal 1999, the Company reported a benefit from income taxes of $1.7 million. This amount reflects net operating loss carrybacks to be applied to prior periods' tax liabilities. The effective tax rate of 37% for fiscal 1999 was lower than the statutory federal and state rates due to applicable alternative minimum tax limitations on the Company's net operating loss carryback. For fiscal 1998, the Company reported a provision for income taxes of $5.9 million, which is inclusive of a charge to establish a valuation allowance of $6.4 million against deferred tax assets. Before the valuation allowance, the benefit for income taxes was $0.5 million for an effective tax rate of 25% in fiscal 1998. The valuation allowance was recorded as a result of an assessment made of future taxable income as required by accounting standards, made in conjunction with the anticipated spin-off of the Company's Hi/fn subsidiary. The effective tax rate was lower than the statutory federal and state rates primarily due to non-deductible expenses related to the spin-off and due to differences in tax rules impacting foreign operations.
QUARTERLY TRENDS
Fluctuations in quarterly results are expected to be significantly impacted by the cessation of revenues from discontinued product lines, ReachOut and Replica Tape. Management does not expect the revenue streams from new product offerings to offset the decrease from the discontinued product lines until the end of fiscal 2001. In addition, the Company historically has experienced significant fluctuations in its revenues and operating results, including net income (loss), 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, 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 usually has 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 ESUPPORT ESSENTIALS product offering may 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 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.
STOCK PRICE VOLATILITY
Due to the factors noted above, the Company's stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in earnings from levels expected by securities analysts or the investment community in general 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, cash equivalents and marketable securities decreased by $0.1 million to $29.7 million at September 30, 2000 from $29.8 million at September 30, 1999. Accounts receivable decreased by $0.9 million to $1.5 million at September 30, 2000 from that at September 30, 1999, primarily attributable to Previo's discontinuation of its distribution business and the corresponding elimination of distributor receivable balances. Working capital decreased by $3.6 million to $25.9 million at September 30, 2000 from that at September 30, 1999, primarily as a result of increases in liabilities largely related to accruals for potential tax liabilities and increases in deferred revenues.
The Company believes that existing cash balances and funds provided by operations will be sufficient to finance its working capital requirements for a minimum of the next twelve months.
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 converted to United States currency and transferred to Previo's offices in the United States for investment.
The fair value of the Company's investments in marketable securities at September 30, 2000, was $11.9 million. 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 September 30, 2000, 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.
As of December 14, 2000, there were 326 holders of record of the Company's common stock.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements at September 30, 2000 and 1999, and for each of the three fiscal years in the period ended September 30, 2000 and the Report of PricewaterhouseCoopers LLP, Independent Accountants, are included in this report on pages through.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to Registrant's Definitive Proxy Statement to be filed with the Commission pursuant to Regulation 14A in connection with the 2001 Annual Meeting (the "Proxy Statement") under the headings "Nominees" and "Background of Executive Officers not Described Above."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Proxy Statement under the heading "Executive Compensation."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the Proxy Statement under the heading "Certain Transactions."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
(b) The Registrant filed no reports on Form 8-K during the fourth quarter of the fiscal year ended September 30, 2000.
(c) Exhibits
EXHIBIT EXHIBIT FOOTNOTE NUMBER DESCRIPTION - ---------- -------- ----------- (7) 2.1 Agreement and Plan of Merger, dated April 5, 1996, between the Registrant and Stac, Inc., a California corporation.
(7) 3.1 Certificate of Incorporation of the Registrant.
(7) 3.2 Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1, 3.2, 10.8, 10.9, 10.10 and 10.12.
(1) 10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and officers with related schedule.
(1)(8) 10.2 Registrant's 1992 Stock Option Plan ("the 1992 Plan").
(5)(8) 10.3 Registrant's 1992 Non-Employee Directors' Plan, as Amended ("the Directors' Plan").
(1)(8) 10.4 Registrant's Employee Stock Purchase Plan and related Offering document.
(1) 10.5 Securities Purchase Agreement, dated as of March 27, 1990, among the Registrant and the other persons Named therein.
(1)(8) 10.6 Distributor Agreement, between the Registrant and Merisel, Inc., dated as of March 1, 1991.
(1)(8) 10.7 Distributor Agreement, between the Registrant and Ingram Micro, Inc. dated as of March 13, 1991.
(3)(8) 10.8 License Agreement, between the Registrant and Microsoft Corporation, dated as of June 20, 1994.
(5)(8) 10.9 Forms of Non-statutory Stock Option Agreements under the Directors' Plan.
(6) 10.10 Stock Purchase Agreement dated October 6, 1995 between the Registrant and William T. Baker.
(6) 10.11 Option Purchase Agreement dated October 6, 1995 among the Registrant and Certain Holders of Options to Purchase Common Stock of California Software, Inc.
(6) 10.12 Indemnity Agreement dated October 6, 1995 between the Registrant and William T. Baker.
(6) 10.13 Series A Preferred Stock Purchase Agreement dated October 6, 1995 by and between DynaNet, Inc. and the Registrant.
(7) 10.14 Office Lease date March 22, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(7) 10.15 Office Lease date March 22, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(7) 10.16 Office Lease dated July 12, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(7) 10.17 Amendment No. 1 to the Office Lease dated July 12, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(7) 10.18 Amendment No. 2 to the Office Lease dated July 12, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(9) 10.19 Cross License Agreement dated as of November 21, 1996 between the Registrant and Hi/fn, Inc.
(9) 10.20 Form of Distribution Agreement.
(9) 10.21 Form of Employee Benefits and Other Matters Allocation Agreement.
(9) 10.22 Form of Tax Allocation and Indemnity Agreement.
10.23 Distributor Agreement, between the Registrant and Ingram Micro, Inc. dated as of June 8, 1999.
(10) 10.24 Severance Agreement with Gary Clow.
(10) 10.25 Severance Agreement with John Witzel.
(10) 10.26 1992 Non-Employee Directors' Stock Option Plan, as Amended.
(8)(12) 10.27 Form of Change of Control Agreement
(11) 10.28 2000 Equity Incentive Plan
(8) 10.29 Employment Agreement with Tom Dilatush
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney. Reference is made to page 20.
- ----------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-46389) or amendments thereto and incorporated herein by reference.
(2) Certain confidential portions deleted pursuant to Order Granting Application Under the Securities Act of 1933, as amended, and Rule 406 thereunder respecting Confidential Treatment dated May 6, 1992.
(3) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1994, as amended.
(4) Certain confidential portions deleted pursuant to order Granting Application for Confidential Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 dated October 21, 1994.
(5) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995.
(6) Filed as an exhibit to the Company's Report on Form 8-K filed on October 16, 1995, relating to the Company's (i) acquisition of all of the outstanding capital stock and options to purchase the capital stock of California Software, Inc. and (ii) acquisition of Series A Preferred Stock of DynaNet, Inc.
(7) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
(8) Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 14(a)(4).
(9) Filed as an exhibit to the Registration Statement on Form 10, as amended filed by Hi/fn, Inc. (File No. O-24765) and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(11) Filed as an exhibit to the Company's Form S-8 filed on April 24, 2000.
(12) Incorporated by reference to the form 10-K/A filed on January 28, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
PREVIO, INC.
By: /s/ Tom Dilatush ------------------------ Tom Dilatush Chief Executive Officer
Date: December 20, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Tom Dilatush and Clifford L. Flowers, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their or his substitute or substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ----
/s/ Antonio Perez Chairman of the Board December 20, 2000 - ------------------------------ (Antonio Perez)
/s/ Tom Dilatush Chief Executive Officer December 20, 2000 - ------------------------------ (Tom Dilatush)
/s/ Clifford L. Flowers Vice President of Finance, December 20, 2000 - ------------------------------ Chief Financial Officer and (Clifford L. Flowers) Secretary (Principal Financial and Accounting Officer)
/s/ Corey M. Smith Director December 20, 2000 - ------------------------------ (Corey M. Smith)
/s/ Peter D. Schleider Director December 20, 2000 - ------------------------------ (Peter D. Schleider)
/s/ Robert W. Johnson Director December 20, 2000 - ------------------------------ (Robert W. Johnson)
/s/ Gary W. Clow Director December 20, 2000 - ------------------------------ (Gary W. Clow)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Previo, Inc.
In our opinion, the accompanying consolidated balance sheet and the related statements of operations, of cash flows and of changes in stockholders' equity and comprehensive income (loss) present fairly, in all material respects, the financial position of Previo, Inc. and its subsidiaries at September 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule at September 30, 2000 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/S/ PricewaterhouseCoopers LLP
San Diego, California October 25, 2000
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
PREVIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
Previo, Inc. (the "Company") develops and markets software products that provide automated resolutions to problems and protection/recovery of data for desktop and notebook computers (personal computers or "PCs") used by corporate enterprises. The Company was incorporated as Stac Electronics, Inc. in February of 1983. In April 2000, the Company initiated significant changes to its business strategy, including the third quarter discontinuation of the marketing of its ReachOut and Replica Tape products, and changed its name to Previo, Inc. to allow customers to focus on its entry into the emerging eSupport market. The Company's major product, ESUPPORT Essentials, implements patented technology that permits the return of inoperable PCs to working condition.
CONSOLIDATION
The financial statements at and for the years ended September 30, 2000 and 1999 consolidate the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
FINANCIAL STATEMENT PREPARATION
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from perpetual licenses of the Company's software for which there are no significant continuing obligations and collection of the related receivable is probable is recognized on delivery of the software and acceptance by the customer. Revenue from maintenance agreements is generally recognized ratably over the respective maintenance periods. Revenue from contract services is generally recognized as the services are performed using the percentage of completion method based on costs incurred to date compared to total estimated costs at completion. Amounts received under contracts in advance of performance are recorded as deferred revenue and are generally recognized within one year of receipt.
Historically the Company has offered rights of return on its ReachOut and Replica Tape products. When the right of return exists, revenues are reduced at the time of sale to reflect expected returns which are based on historical experience. If no historical experience exists at the date of the sale, revenues are deferred until such right of return lapses.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
MARKETABLE SECURITIES
The Company's marketable securities are comprised of funds on deposit with a liquid asset manager that have been invested principally in commercial paper. The carrying amount of these investments approximates fair value due to the short maturities or demand nature of the instruments. At September 30, 2000, all marketable securities are classified as available-for-sale and carried at fair value. Unrealized gains or losses at September 30, 2000 and 1999 are not significant. The cost of securities sold is based on the specific identification method.
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. As the Company has discontinued sales of its ReachOut and Replica Tape products, inventory is $0 at September 30, 2000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Additions to property and equipment, including significant betterments and renewals, are capitalized. Maintenance and repair costs are charged to expense as incurred. Depreciation is computed using the straight-line method over estimated useful lives of three to five years and totaled $1,225,000, $1,704,000 and $1,966,000 for fiscal 2000, 1999 and 1998, respectively. Leasehold improvements are amortized over the shorter of the asset life or lease term.
LONG-LIVED ASSETS
The Company investigates potential impairments of long-lived assets, certain identifiable intangibles and associated goodwill, on an exception basis, when events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss is recognized when the sum of the expected future net cash flows is less than the carrying amount of the asset. The amount of the impairment loss, if any, will generally be measured as the difference between the net book value of the assets and their estimated values. No such impairments of long-lived assets existed through September 30, 2000.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to expense as incurred. Development costs for software to be licensed or sold that are incurred from the time technological feasibility is established until the product is available for general release to customers are capitalized and reported at the lower of cost or net realizable value. Through September 30, 2000, no significant development costs were incurred after technological feasibility was reached.
ADVERTISING
Expenditures for advertising costs are charged to expense as incurred and totaled $474,000, $151,000 and $97,000 for fiscal 2000, 1999 and 1998, respectively.
STOCK-BASED COMPENSATION
The Company measures compensation expense for its employee stock-based compensation plans using the intrinsic value method and provides pro forma disclosures of net income (loss) and loss per share as if the fair value method had been applied in measuring compensation expense. Accordingly, compensation cost for stock awards is measured as the excess, if any, of the fair value Company's common stock at the date of grant over the amount an employee must pay to acquire the stock.
Stock-based awards issued to non-employees are accounted for using a fair value method and are re-measured to fair value at each period end until the earlier of the date that performance is complete or a performance commitment has been obtained.
INCOME TAXES
The Company records a provision (benefit) for income taxes using the liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax liability or asset, net of valuation allowance, is established for the expected future consequences resulting from the differences between the financial reporting and income tax bases of assets and liabilities and from net operating loss and credit carryforwards. Deferred income tax expense or benefit represents the net change during the year in the deferred income tax liability or asset. A valuation allowance is established when necessary to reduce deferred tax assets to amounts more likely than not to be realized.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share has been computed by dividing net income (loss) by the weighted average number of common shares outstanding. Basic EPS is calculated by dividing the income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is calculated by dividing the income (loss) available to common stockholders by the weighed average number of common shares outstanding for the period, increased by dilutive securities that were outstanding during the period. Net income (loss) remains the same for the calculations of basic EPS and diluted EPS. There were 699,155; 493,164 and 567,517 dilutive securities outstanding for the years ended September 30, 2000, 1999 and 1998, respectively, which have been excluded from EPS as their effect is anti-dilutive. For the years ended September 30, 2000, 1999 and 1998 the calculation for basic and diluted EPS are as follows:
YEAR ENDED SEPTEMBER 30, 2000
(in thousands PER SHARE except per share data) NET LOSS SHARES AMOUNT Net loss from continuing operations $ (6,794) Basic EPS 6,386 $ (1.06) Dilutive securities - -------- -------- Diluted EPS 6,386 $ (1.06) ======== ========
YEAR ENDED SEPTEMBER 30, 1999
(in thousands PER SHARE except per share data) NET LOSS SHARES AMOUNT Net loss from continuing operations $ (2,898) Basic EPS 5,925 $ (0.49) Dilutive securities - -------- -------- Diluted EPS 5,925 $ (0.49) ======== ========
YEAR ENDED SEPTEMBER 30, 1998
(in thousands PER SHARE except per share data) NET LOSS SHARES AMOUNT Net loss from continuing operations $ (7,882) Basic EPS 6,337 $ (1.24) Dilutive securities - -------- -------- Diluted EPS 6,337 $ (1.24) ======== ========
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted average exchange rates during the period for revenues and expenses. Gains and losses from translation are excluded from results of operations and accumulated as a separate component of stockholders' equity.
DIVERSIFICATION OF CREDIT RISK
The Company's policy is to place its cash, cash equivalents and marketable securities in high credit quality financial instruments and to limit the amount of credit exposure.
SEGMENT REPORTING
Management has determined that the Company operates in one business segment.
NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities." In May 1999, the FASB delayed the effective date of FAS 133 by one year. The Company will be required to adopt FAS 133 for fiscal year 2001. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, certain derivatives must be recognized as assets and liabilities and measured at fair value. The Company is not currently engaged in hedging activities and does not anticipate the adoption of FAS 133 to have any effect on its consolidated financial position or results of operation.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants with additional time to implement SAB 101. The Company will be required to adopt SAB 101 by the fourth quarter of fiscal 2001. The Company does not expect the adoption of SAB 101 to have a material effect on its consolidated financial position or results of operation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year presentation.
NOTE 2 -- DISCONTINUED OPERATIONS:
On August 7, 1998, the Company filed a Form 10 information statement with the Securities and Exchange Commission, announcing its intention to spin-off its majority owned subsidiary Hi/fn, Inc. ("Hi/fn"). The plan allowed for the 6,000,000 shares of preferred Hi/fn stock, owned by the Company, to be distributed to the Company's stockholders in a ratio of approximately one Hi/fn share for every 4 shares of Company stock owned. The distribution was completed on December 16, 1998.
The Company's consolidated financial statements have been restated to reflect this distribution as discontinued operations. Accordingly, the revenues, costs and expenses; assets and liabilities; and cash flows of these discontinued operations have been excluded from the respective captions in the Consolidated Statement of Operations, Consolidated Balance Sheet and Consolidated Statement of Cash Flows, and have been reported through the fiscal year end as "Income from discontinued operations, net of taxes"; as "Net assets of discontinued operations," and as "Net cash used in discontinued operations" for all periods presented.
Summarized financial information for the discontinued operation is as follows: (Note: 1999 numbers include activity through December 16, 1998 only. Balance sheet information is not included for 1999 as balances were no longer consolidated.)
SEPTEMBER 30, ------------- (in thousands) 1999 1998 -------------- ---- ---- Revenues $5,886 $21,533 Income before income taxes 1,435 3,845 Net income 885 2,218 Current assets 14,382 Total assets 16,611 Current liabilities 9,659 Total liabilities 9,659
NOTE 3 -- COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS: (table amounts in thousands)
SEPTEMBER 30, ------------------------ 2000 1999 ------- ------- Accounts receivable: Trade receivables......................... $1,708 $2,644 Less allowance for doubtful accounts...... (253) (263) ------- ------- $1,455 $2,381 ======= =======
Many of the Company's customers are large corporate enterprises, resellers and OEMs, which can result in concentrated credit risk with respect to the Company's trade receivables. Management believes that its credit policies substantially mitigate such concentrated credit risk.
SEPTEMBER 30, ----------------------- 2000 1999 -------- -------- Inventories: Raw materials.............................. $ - $ 203 Finished goods............................. - 37 -------- -------- $ - $ 240 ======== ========
Property and equipment: Computer equipment......................... $ 5,148 $ 4,368 Leasehold improvements..................... 942 678 Office equipment........................... 710 703
Furniture and fixtures..................... 646 619 -------- -------- 7,446 6,368 Less accumulated depreciation.............. (5,723) (4,812) -------- -------- $ 1,723 $ 1,556 ======== ========
Accrued expenses and other current liabilities: Customer support and upgrades.............. $ 1,812 $ 1,106 Compensation and employee benefits......... 653 484 Restructuring.............................. 43 204 Other...................................... 987 518 -------- -------- $ 3,495 $ 2,312 ======== ========
SEPTEMBER 30, ---------------------------------- 2000 1999 1998 -------- -------- -------- Revenues: Software........................... $ 7,804 $13,856 $14,292 Royalties and licenses............. - - 5,111 -------- -------- -------- $ 7,804 $13,856 $19,403 ======== ======== ========
NOTE 4 -- RESTRUCTURING CHARGES:
During the first quarter of fiscal 1999, the Company recorded a restructuring charge to operations of $822,000, representing costs incurred in anticipation of reorganization related to the December 1998 spin-off of its Hi/fn, Inc. subsidiary. The components of this charge were losses on property and equipment abandonments ($555,000), severance and benefits paid to terminated employees ($246,000) and lease termination costs ($21,000). These costs were incurred and paid prior to the end of the fiscal year.
During the fourth quarter of fiscal 1999, the Company recorded a restructuring charge to operations of $400,000, representing costs incurred as the company reorganized its product development department and relocated much of its development activity to offshore locations. The components of this charge were severance and benefits paid to terminated employees ($274,000), lease termination costs ($86,000), losses on property and equipment abandonments ($35,000) and outplacement related to terminated employees ($5,000). By the end of fiscal 1999, the Company had incurred and paid costs of $161,000 in severance and benefits to terminated employees, and $35,000 in losses on property and equipment abandonments. During fiscal 2000 the Company incurred an additional $123,000 in severance and benefits paid to terminated employees and $38,000 in lease termination costs.
During the fourth quarter of fiscal 1997, the Company recorded a restructuring charge to operations of $850,000, representing costs incurred in conjunction with the Company's reorganization of its software business. During the first quarter of fiscal 1998, the Company charged another $350,000 to operations, as additional costs related to the earlier charge, that under generally accepted accounting principles, the Company was not permitted to
accrue for until the affected employees were notified of the termination and the Company had committed to provide for such costs. These costs were incurred and paid throughout fiscal 1998, with the final payments being made during the fourth quarter. The costs were comprised of severance and benefits paid to terminated employees ($648,000), losses on abandonments of property and equipment ($380,000), costs for consulting and outplacement related to the terminated employees ($100,000) and lease termination costs ($72,000).
NOTE 5 -- STOCK REPURCHASES:
During fiscal 1998, the Company acquired 992,400 shares of its own stock, or Treasury stock, totaling $19,996,000 through open market share repurchases. The Company did not purchase any Treasury stock during fiscal 1999 or 2000.
NOTE 6 - REVERSE STOCK SPLIT:
On May 7, 1999 the Company executed a one-for-four reverse stock split whereby one share of common stock was issued in exchange for every four shares issued and outstanding. Share amounts and prices have been adjusted retroactively throughout this report to reflect the effect of the split.
NOTE 7 -- INCOME TAXES: (table amounts in thousands)
At September 30, 2000, the Company has federal and California net operating loss carryforwards of approximately $16,613,000 and $10,390,000. The federal and California net operating loss carryforwards expire beginning in 2019 and 2006 respectively. The company also has federal and California research and development tax credit carryforwards of approximately $156,000 and $123,000 respectively. The federal research and development credit will begin expiring in 2013. The California research and development credit does not expire. The company also has alternative minimum tax credits of $381,000 which have no expiration date.
Deferred income taxes are comprised of the following:
SEPTEMBER 30, ----------------------------- 2000 1999 ----------- ----------- Deferred tax assets......... $ 12,444 $ 5,957 Deferred tax liabilities.... - - Valuation allowance......... (12,444) (5,957) ----------- ----------- $ - $ - =========== ===========
Based on a number of factors, including the lack of current profits and the fact that the Company competes in a market that is characterized by rapidly changing technology, management believes that there is sufficient uncertainty regarding the realization of deferred tax assets that a full valuation allowance has been provided.
The principal components of deferred income taxes are as follows:
SEPTEMBER 30, -------------------------- 2000 1999 ---------- ---------- Revenue recognition for tax purposes.......... $ 390 $ 161 Net operating and capital loss carryforwards.. 6,340 - Tax credits................................... 799 - Allowances and accrued expenses............... 251 247 Depreciation and amortization................. 489 548 Purchased research and development............ 4,017 4,680 Other......................................... 158 321 Valuation allowance........................... (12,444) (5,957) ---------- ---------- $ - $ - ========== ==========
Components of pre-tax income (loss) are as follows:
YEAR ENDED SEPTEMBER 30, ----------------------------------------- 2000 1999 1998 -------- -------- -------- Domestic .................... $(5,690) $(5,266) $(2,329) Foreign ..................... (1,089) 705 326 -------- -------- -------- $(6,779) $(4,561) $(2,003) ======== ======== ========
The provision (benefit) for income taxes is comprised of the following:
YEAR ENDED SEPTEMBER 30, ----------------------------------------- 2000 1999 1998 -------- -------- -------- Current tax expense (benefit): Federal ....................... $ (62) $(1,665) $(1,405) Foreign ....................... 75 - - State ......................... 2 2 (239) -------- -------- -------- 15 (1,663) (1,644) -------- -------- -------- Deferred tax expense (benefit): Federal ....................... - - 5,921 State ......................... - - 1,602 -------- -------- -------- - - 7,523 -------- -------- -------- $ 15 $(1,663) $ 5,879 ======== ======== ========
A reconciliation of the amount computed by applying the statutory federal income tax rate to income before income taxes, to the provision for income taxes follows:
YEAR ENDED SEPTEMBER 30, ------------------------------ 2000 1999 1998 -------- -------- -------- Amount computed at statutory Federal rate of 34% ......................... $(2,310) $(1,551) $ (681) State income taxes, net of Federal benefit ..................................... (450) (32) 31 Expenses not deductible for tax purposes ...... 15 68 230 Foreign taxes ................................. 412 (22) (42) Net operating and capital loss carryforwards .. (2,953) - - Tax exempt interest ........................... - - (38) Revision of prior year's tax estimates ........ (24) - (127) Valuation of deferred tax asset ............... 5,349 (91) 6,372 Other ......................................... (24) (35) 134 -------- -------- -------- $ 15 $(1,663) $ 5,879 ======== ======== ========
NOTE 8 -- STOCK OPTIONS, WARRANTS AND EMPLOYEE BENEFIT PLANS:
1992 STOCK OPTION PLAN
In March 1992, the Company adopted the 1992 Stock Option Plan (the "1992 Plan"), as amended in March 1999, which provides for the granting of incentive stock options and non-qualified stock options to purchase up to 3,093,341 shares of the Company's common stock. The 1992 Plan is administered by the Compensation Committee of the Board of Directors and provides for options for the purchase of the Company's common stock to be granted to employees, officers and consultants of the Company at prices that are not less than 100% and 50% of the estimated fair market value of the related shares at the date of grant for incentive stock options and non-qualified stock options, respectively. Options vest as determined by the Compensation Committee, generally over a period of four or five years. The maximum term of options granted under the 1992 Plan is ten years.
1992 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In March 1992, the Company adopted the 1992 Non-Employee Directors' Stock Option Plan (the "Directors' Plan"), as amended in February 1995 and March 1999, which provides for the automatic granting of non-qualified stock options to purchase up to 223,446 shares, as amended, of the Company's common stock. The 1992 Plan is administered by the Board of Directors and provides for options for the purchase of the Company's common stock to each director of the Company (or an affiliate of the Company) who is not otherwise employed by the Company (or an affiliate of the Company). Such directors will automatically be granted an option to purchase common stock upon election to the Board and on each anniversary of that date thereafter so long as the director continues to serve on the Board. Vesting periods are five years for initial options granted, and four years for options granted in re-election years. The maximum term of options granted under the Directors' Plan is ten years.
2000 EQUITY INCENTIVE PLAN
In April 2000, the Company adopted the 2000 Equity Incentive Plan (the "2000 Plan"), which provides for the granting of non-qualified stock options, stock awards and the rights to acquire restricted stock for up to 250,000 shares of the Company's common stock. The 2000 Plan is administered by the Compensation Committee of the Board of Directors and provides for options for the purchase of the Company's common stock to be granted to employees, officers and consultants of the Company at prices that are not less than 50% of the estimated fair market value of the related shares at the date of grant. Options vest as determined by the Compensation Committee, generally over a period of four years. The maximum term of options granted under the 2000 Plan is ten years.
Combined information for all stock option activities for fiscal 2000, 1999 and 1998 is summarized below:
OPTIONS OUTSTANDING ---------------------------- WEIGHTED- AVERAGE EXERCISE SHARES PRICE ------ ----- Balance at September 30, 1997......... 3,239,910 $ 3.42 Options granted...................... 444,792 4.38 Options exercised.................... (262,636) 1.69 Options canceled..................... (667,449) 4.95 ------------ Balance at September 30, 1998......... 2,754,617 3.95 Options granted...................... 286,117 3.75 Options exercised.................... (307,365) 3.36 Options canceled..................... (693,418) 4.88 ------------ Balance at September 30, 1999......... 2,039,951 4.06 Options granted...................... 1,347,849 6.63 Options exercised.................... (729,341) 4.37 Options canceled..................... (830,996) 6.55 ------------ Balance at September 30, 2000......... 1,827,463 5.47 ============
The following is a summary of stock options outstanding at September 30, 2000:
OPTIONS OUTSTANDING ------------------------------------ WEIGHTED- AVERAGE WEIGHTED- REMAINING AVERAGE CONTRACTUAL EXERCISE NUMBER LIFE (YEARS) PRICE ------ ------------ ----- Price Range $1.64 - $3.36.......... 525,124 4.56 $ 3.03 $3.50 - $5.81.......... 524,323 8.36 4.81 $5.82 - $7.00.......... 327,143 9.59 6.03 $7.12 - $12.87......... 450,873 8.17 8.67 ----------- $1.64 - $12.87......... 1,827,463 7.44 5.47 ===========
The following is a summary of stock options exercisable at September 30, 2000:
OPTIONS EXERCISABLE ------------------------- WEIGHTED- AVERAGE EXERCISE NUMBER PRICE ------ ----- Price Range $1.64 - $3.36...................... 485,569 $ 3.02 $3.50 - $5.81...................... 176,569 4.46 $5.82 - $7.00...................... 7,664 6.25 $7.12 - $12.87..................... 186,541 7.71 -------- $1.64 - $12.87..................... 856,343 4.37 ========
EMPLOYEE STOCK PURCHASE PLAN
In March 1992, the Company adopted the Employee Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 250,000 shares of the Company's common stock. The most recent offering under the Purchase Plan terminated on October 31, 2000. The Purchase Plan is administered by the Board of Directors and allows participating employees to have up to 15% of their earnings withheld and used to purchase shares of common stock on specified dates. The price of the common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock at the commencement date or the relevant purchase date. During fiscal 2000, 10,013 shares were issued under the Plan at a price of $3.24 per share, and 9,133 shares were issued at a price of $3.08 per share. At September 30, 2000, 121,599 shares were reserved for future issuance.
PRO FORMA DISCLOSURE
The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its stock-based compensation. No compensation expense has been recognized for stock option grants, which are fixed in nature, as the options have been granted at fair market value. No compensation expense has been recognized for the Purchase Plan. Had compensation cost for the Company's stock-based compensation awards issued during fiscal 2000, 1999 and 1998 been determined based on the fair value at the grant date consistent with the rules of Statement of Financial Accounting Standard No. 123, the Company's net loss and net loss per share would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the years ended September 30, 2000, 1999 and 1998, respectively: dividend yield of 0.0% for all years, risk free interest rates of 6.31%, 5.27%, and 5.48%, expected volatility of 140%, 150% and 84%, and expected lives of 2.02, 2.05 and 2.17. The weighted-average fair value of options granted during the years ended September 30, 2000, 1999 and 1998 was $7.06, $3.75 and $4.38 per share, respectively. The fair value of the employees' purchase rights pursuant to the Purchase Plan is estimated using the Black-Scholes model with the following assumptions: dividend yield of 0.0% for all years, risk-free interest rates of 6.30%, 4.87% and 5.00%, expected volatility of 140%, 150% and 84%, and an expected life of six months for all years. The weighted-average fair value of those purchase rights granted during the years ended September 30, 2000, 1999 and 1998 was $3.97, $2.72 and $1.97 per share, respectively.
401(K) PLAN
In July 1991, the Company adopted an employee savings and retirement plan (the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan permits, but does not require matching contributions by the Company on behalf of all participants. No such contributions were made during fiscal 2000, 1999 or 1998.
WARRANTS
In June 2000, the Company issued a fully vested, immediately exercisable and non-forfeitable warrant to purchase 10,000 shares of its common stock at an exercise price of $5.81 in connection with services received prior to the date of grant. This warrant expires ten years from the date of grant. The fair value of this warrant at the time of grant, which was determined by management to be $57,000, based upon application of the Black-Scholes option pricing model using the following assumptions: dividend yield of 0.0%, risk-free interest rate of 6.00%, volatility of 150% and contractual life of 10 years, was expensed during 2000. At September 30, 2000, all of these warrants remained outstanding.
NOTE 9 -- COMMITMENTS:
The Company occupies its facilities under several cancelable and non-cancelable operating leases that expire at various dates through September 2005, and which contain renewal options. Future minimum lease payments are as follows:
YEAR ENDED SEPTEMBER 30, AMOUNT ------------ 2001.......................................... $ 536,000 2002.......................................... 488,000 2003.......................................... 496,000 2004.......................................... 504,000 2005.......................................... 212,000 ------------ $ 2,236,000 ============
Rent expense under operating leases was $848,000, $615,000 and $784,000, in fiscal 2000, 1999 and 1998, respectively. Certain facilities leases provide for scheduled rent increases. The total lease commitment for such leases is being charged ratably to operations.
NOTE 10 -- SIGNIFICANT CUSTOMERS AND FOREIGN OPERATIONS:
A significant portion of the Company's revenues has been derived from technology licenses and sales to major distributors or resellers as follows:
Three customers accounted for 11%, 8% and 6%, respectively, of fiscal 2000 revenues. Two customers accounted for 17% and 10%, respectively, of fiscal 1999 revenues. Three customers accounted for 21%, 13% and 12%, respectively, of fiscal 1998 revenues.
Software revenues are inclusive of royalties received from Microsoft and IBM Corporation for licenses of the Company's technology. The Company received $5,111,000 in such revenues in fiscal 1998, completing all obligations outstanding related to the underlying license agreements.
In fiscal 2000, 1999 and 1998, international revenues were $1,710,000, $5,835,000 and $4,794,000, respectively, consisting primarily of sales to customers in Canada, Europe and the Pacific Rim.
Condensed financial information related to the Company's wholly owned foreign subsidiaries is as follows:
YEAR ENDED SEPTEMBER 30, ------------------------ (in thousands) 2000 1999 1998 - --------------- ------- ------- ------- Revenues.......................... $ 1,715 $ 3,898 $ 3,580 Operating income (loss)........... $(1,099) $ 622 $ 307 Identifiable assets............... $ 288 $ 886 $ 1,218
NOTE 11 -- CONTINGENCIES:
The Company may be contingently liable with respect to certain asserted and unasserted claims that arise during the normal course of business. In the opinion of management, the outcome of such matters presently known to management will not have a material adverse effect on the Company's business, financial position, or results of operations.
Matters management is currently aware of include ongoing audits by the Internal Revenue Service and the State of California Franchise Tax Board. The Internal Revenue Service audit has been ongoing since 1996 and the State of California Audit was initiated in 1998. Based on the outcomes of these audits there may be a resulting amount of income taxes and associated interest due and payable to either or both of these entities.
S-1
EXHIBIT EXHIBIT FOOTNOTE NUMBER DESCRIPTION - ---------- -------- ----------- (7) 2.1 Agreement and Plan of Merger, dated April 5, 1996, between the Registrant and Stac, Inc., a California corporation.
(7) 3.1 Certificate of Incorporation of the Registrant.
(7) 3.2 Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1, 3.2, 10.8, 10.9, 10.10 and 10.12.
(1) 10.1 Form of Indemnity Agreement entered into between the Registrant and its directors and officers with related schedule.
(1)(8) 10.2 Registrant's 1992 Stock Option Plan ("the 1992 Plan").
(5)(8) 10.3 Registrant's 1992 Non-Employee Directors' Plan, as Amended ("the Directors' Plan").
(1)(8) 10.4 Registrant's Employee Stock Purchase Plan and related Offering document.
(1) 10.5 Securities Purchase Agreement, dated as of March 27, 1990, among the Registrant and the other persons Named therein.
(1)(8) 10.6 Distributor Agreement, between the Registrant and Merisel, Inc., dated as of March 1, 1991.
(1)(8) 10.7 Distributor Agreement, between the Registrant and Ingram Micro, Inc. dated as of March 13, 1991.
(3)(8) 10.8 License Agreement, between the Registrant and Microsoft Corporation, dated as of June 20, 1994.
(5)(8) 10.9 Forms of Non-statutory Stock Option Agreements under the Directors' Plan.
(6) 10.10 Stock Purchase Agreement dated October 6, 1995 between the Registrant and William T. Baker.
(6) 10.11 Option Purchase Agreement dated October 6, 1995 among the Registrant and Certain Holders of Options to Purchase Common Stock of California Software, Inc.
(6) 10.12 Indemnity Agreement dated October 6, 1995 between the Registrant and William T. Baker.
(6) 10.13 Series A Preferred Stock Purchase Agreement dated October 6, 1995 by and between DynaNet, Inc. and the Registrant.
(7) 10.14 Office Lease date March 22, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(7) 10.15 Office Lease date March 22, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(7) 10.16 Office Lease dated July 12, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(7) 10.17 Amendment No. 1 to the Office Lease dated July 12, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(7) 10.18 Amendment No. 2 to the Office Lease dated July 12, 1994 between the Registrant and Weyerhaeuser Mortgage Company and Fort Wyman, Inc.
(9) 10.19 Cross License Agreement dated as of November 21, 1996 between the Registrant and Hi/fn, Inc.
(9) 10.20 Form of Distribution Agreement.
(9) 10.21 Form of Employee Benefits and Other Matters Allocation Agreement.
(9) 10.22 Form of Tax Allocation and Indemnity Agreement.
10.23 Distributor Agreement, between the Registrant and Ingram Micro, Inc. dated as of June 8, 1999.
(10) 10.24 Severance Agreement with Gary Clow.
(10) 10.25 Severance Agreement with John Witzel.
(10) 10.26 1992 Non-Employee Directors' Stock Option Plan, as Amended.
(8)(12) 10.27 Form of Change of Control Agreement
(11) 10.28 2000 Equity Incentive Plan
(8) 10.29 Employment Agreement with Tom Dilatush
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney. Reference is made to page 20.
- ----------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-46389) or amendments thereto and incorporated herein by reference.
(2) Certain confidential portions deleted pursuant to Order Granting Application Under the Securities Act of 1933, as amended, and Rule 406 thereunder respecting Confidential Treatment dated May 6, 1992.
(3) Filed as exhibit to the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1994, as amended.
(4) Certain confidential portions deleted pursuant to order Granting Application for Confidential Treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934 dated October 21, 1994.
(5) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995.
(6) Filed as an exhibit to the Company's Report on Form 8-K filed on October 16, 1995, relating to the Company's (i) acquisition of all of the outstanding capital stock and options to purchase the capital stock of California Software, Inc. and (ii) acquisition of Series A Preferred Stock of DynaNet, Inc.
(7) Filed as exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996.
(8) Indicates management or compensatory plan or arrangement required to be identified pursuant to Item 14(a)(4).
(9) Filed as an exhibit to the Registration Statement on Form 10, as amended filed by Hi/fn, Inc. (File No. O-24765) and incorporated herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(11) Filed as an exhibit to the Company's Form S-8 filed on April 24, 2000.
(12) Incorporated by reference to the form 10-K/A filed on January 28, 1999.