-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G25mA9TbDE9Y7T2imPC4TetWB6eM3Xw7ZUA0c39zsqYkAo1rjeJmDbYxbESwL0ZT yWBTP2lc4Z4aajp24ZkIWA== 0000879136-98-000014.txt : 19980819 0000879136-98-000014.hdr.sgml : 19980819 ACCESSION NUMBER: 0000879136-98-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980818 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHIVA CORP CENTRAL INDEX KEY: 0000879136 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 042889151 STATE OF INCORPORATION: MA FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24918 FILM NUMBER: 98693324 BUSINESS ADDRESS: STREET 1: 28 CROSBY DR CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 7816871000 MAIL ADDRESS: STREET 1: 28 CROSBY DR CITY: BEDFORD STATE: MA ZIP: 01730 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended July 4, 1998 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to ----- ----- Commission File Number 0-24918 ------- SHIVA CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2889151 -------------------------------- --------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 28 Crosby Drive, Bedford, MA 01730 (Address of principal executive offices, including Zip Code) (781) 687-1000 (Registrant's telephone number, including area code) ------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /x/ NO --- --- The number of shares outstanding of the registrant's Common Stock as of July 4, 1998 was 30,330,020. SHIVA CORPORATION INDEX ----- Part I Financial Information Item 1 Consolidated Financial Statements Consolidated Balance Sheet July 4, 1998 and January 3, 1998 Consolidated Statement of Operations Three and six months ended July 4, 1998 and June 28, 1997 Consolidated Statement of Cash Flows Six months ended July 4, 1998 and June 28, 1997 Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Part II Other Information Item 1 Legal Proceedings Item 4 Submission of Matters to a Vote of Security Holders Item 5 Stockholder Proposals for 1999 Annual Meeting Item 6 Exhibits and Reports on Form 8-K Signature SHIVA CORPORATION Consolidated Balance Sheet (in thousands, except share related data)
July 4, January 3, 1998 1998 ----------- ---------- (unaudited) Assets Current assets: Cash and cash equivalents $ 21,113 $ 58,915 Short-term investments 45,914 36,868 Accounts receivable, net of allowances of $8,148 at July 4, 1998 and $8,037 at January 3, 1998 19,493 23,169 Inventories 10,939 14,058 Deferred income taxes 8,683 8,683 Prepaid expenses and other current assets 2,102 2,369 -------- -------- Total current assets 108,244 144,062 Property, plant and equipment, net 20,185 26,093 Deferred income taxes 22,815 8,840 Other assets 7,172 3,251 -------- -------- Total assets $158,416 $182,246 ======== ======== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 6,542 $ 9,376 Accrued expenses 28,692 22,304 Deferred revenue 5,002 4,068 -------- -------- Total current liabilities 40,236 35,748 Deferred income taxes 561 554 -------- -------- Total liabilities 40,797 36,302 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized none issued - - Common stock. $.01 par value; 100,000,000 shares authorized, 30,436,135 and 29,605,848 shares issued and outstanding at July 4, 1998 and January 3, 1998, respectively 304 296 Additional paid-in capital 154,688 153,036 Treasury stock at cost, 106,115 shares at July 4, 1998 (1,307) - Unrealized gain on investments 32 110 Cumulative translation adjustment (244) (308) Accumulated deficit (35,854) (7,190) -------- -------- Total stockholders' equity 117,619 145,944 -------- -------- Total liabilities and stockholders' equity $158,416 $182,246 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
SHIVA CORPORATION Consolidated Statement of Operations (in thousands, except per share data) (unaudited)
Three months ended Six months ended ------------------- ------------------ July 4, June 28, July 4, June 28, 1998 1997 1998 1997 -------- -------- ------- -------- Revenues: Product $27,678 $33,598 $57,494 $58,966 Service 8,460 1,628 16,634 3,169 Licenses and Royalties 2,156 4,512 2,197 8,762 ------- ------- ------- ------- Total revenues 38,294 39,738 76,325 70,897 ------- ------- ------- ------- Cost of revenues: Product 12,524 14,256 25,879 34,343 Service 5,038 1,693 10,232 3,245 ------- ------- ------- ------- Total cost of revenues 17,562 15,949 36,111 37,588 ------- ------- ------- ------- Gross profit 20,732 23,789 40,214 33,309 ------- ------- ------- ------- Operating expenses: Research and development 4,640 5,778 9,221 11,739 Selling, general and administrative 15,202 20,409 30,010 38,307 In-process research and development - - 34,500 - Restructuring expenses 9,435 - 11,065 - ------- ------- ------- ------- Total operating expenses 29,277 26,187 84,796 50,046 ------- ------- ------- ------- Loss from operations (8,545) (2,398) (44,582) (16,737) Interest income 891 938 2,014 1,900 Interest and other income (expense), net 614 (146) 415 (268) -------- ------- -------- -------- Loss before income taxes (7,040) (1,606) (42,153) (15,105) Income tax benefit (2,253) (610) (13,489) (5,739) -------- ------- --------- -------- Net loss $(4,787) $ (996) $(28,664) $(9,366) ======== ======== ========= ======== Net loss per share - basic and diluted $ (0.16) $ (0.03) $ (0.95) $ (0.32) ======== ======== ========= ======== Shares used in computing net loss per share - basic and diluted 30,277 29,128 30,065 29,050 ======== ======== ========= ======== The accompanying notes are an integral part of the consolidated financial statements.
SHIVA CORPORATION Consolidated Statement of Cash Flows Increase (Decrease) in Cash and Cash Equivalents (in thousands) (unaudited)
Six Months Ended ----------------------- July 4, June 28, 1998 1997 ------- -------- Cash flows from operating activities Net loss $(28,664) $ (9,366) Adjustments to reconcile net loss to net cash provided by operating activities: In-process research and development 34,500 - Depreciation and amortization 6,305 4,631 Non-cash restructuring charge 3,570 - Deferred income taxes (13,527) (6,443) Changes in assets and liabilities, net of effects of acquisition: Accounts receivable 4,531 13,640 Inventories 3,221 2,162 Prepaid expenses and other current assets 310 19 Accounts payable (3,353) (4,239) Accrued expenses 6,341 (420) Deferred revenue 929 571 Other long term liabilities - (17) -------- -------- Net cash provided by operating activities 14,163 538 -------- -------- Cash flows from investing activities Purchases of property, plant and equipment (2,257) (5,910) Payments for acquisition (39,912) - Capitalized software development costs (88) (399) Purchases of short-term investments (27,119) (10,686) Proceeds from maturity and sales of short-term investments 17,995 16,109 Change in other assets (330) (824) -------- -------- Net cash used by investing activities (51,711) (1,710) --------- --------- Cash flows from financing activities Principal payments on long-term debt and capital lease obligations (117) (229) Purchases of treasury stock (1,307) - Proceeds from exercise of stock options and warrants 1,212 671 --------- --------- Net cash provided (used) by financing activities (212) 442 --------- --------- Effects of exchange rate changes on cash and cash equivalents (42) 583 --------- --------- Net decrease in cash and cash equivalents (37,802) (147) Cash and cash equivalents, beginning of period 58,915 72,067 --------- --------- Cash and cash equivalents, end of period $ 21,113 $ 71,920 ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
SHIVA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and have been prepared by the Company in accordance with generally accepted accounting principles. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. Such adjustments are of a normal recurring nature, except for the restructuring charges incurred during the three-month and six-month periods ended July 4, 1998 and the in-process research and development charges incurred during the six-month period ended July 4, 1998. While the Company believes that the disclosures presented are adequate to make the information not misleading, these consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. The results of operations for the three-month and six-month periods ended July 4, 1998 are not necessarily indicative of the results expected for the full fiscal year. 2. EARNINGS PER SHARE: The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," and has restated earnings per share amounts for all periods presented herein.
Three months Three months ended July 4, ended June 28, 1998 1997 ------------- -------------- Net loss ($4,787,000) ($996,000) ============ ============= Weighted average shares outstanding 30,276,645 29,128,123 Common-equivalent share outstanding - - ----------- ------------- Weighted average and common equivalent shares outstanding 30,276,645 29,128,123 ----------- ------------- Basic and diluted net loss per share ($0.16) ($0.03) ============ ============= Six months Six months ended July 4, ended June 28, 1998 1997 ------------- -------------- Net loss ($28,664,000) ($9,366,000) ============= ============== Weighted average shares outstanding 30,065,206 29,049,872 Common-equivalent share outstanding - - ----------- ------------- Weighted average and common equivalent shares outstanding 30,065,206 29,049,872 ----------- ------------- Basic and diluted net loss per share ($0.95) ($0.32) ============ =============
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: At July 4, 1998, the Company had cash and cash equivalents of $21,113,000 and $45,914,000 of short-term investments, including an unrealized gain of $32,000 recorded as a separate component of stockholders' equity. The Company's short-term investments at July 4, 1998, classified as available-for-sale, consist of municipal securities, corporate debt securities, certificates of deposit, and U.S. Treasury securities, with various maturity dates through June 2000. 4. INVENTORIES:
Inventories consist of the following: July 4, January 3, (in thousands) 1998 1998 ------- ---------- Raw materials $ 5,150 $ 7,199 Work-in-process 126 57 Finished goods 5,663 6,802 ------- -------- $10,939 $14,058 ======= ========
5. COMPREHENSIVE INCOME: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." The Company adopted SFAS 130 on January 4, 1998, which establishes standards for reporting comprehensive income and its components in the consolidated financial statements. Comprehensive loss for the three-month and six-month periods ended July 4, 1998 was $4,897,000 and $28,673,000, respectively, and includes the after-tax effect of foreign currency translation adjustments and unrealized holding losses arising during the period. 6. ACQUISITION: On March 26, 1998, the Company acquired Isolation Systems, Limited, a leading developer of virtual private networking ("VPN") hardware and software solutions based in Toronto, Ontario in exchange for cash paid by the Company from its existing cash and short-term investment balances. The acquisition was accounted for as a purchase. Accordingly, the purchase price of approximately $39,912,000 was allocated to the underlying assets and liabilities based on their respective fair values at the date of closing. The fair value of the net assets acquired was $617,000, and $34,500,000 of the purchase price was allocated to in-process research and development. The amount allocated to in-process research and development was determined through established valuation techniques in the high-technology communications industry and were expensed upon acquisition, as it was determined that technological feasibility had not been established and no alternative uses existed. The excess of the purchase price over the net assets acquired, excluding the in-process research and development charge recorded in the first quarter of 1998, will be amortized on a straight-line basis over three years. This excess approximated $4,795,000, and consisted of developed technology of $2,000,000, an assembled workforce of $300,000 and $2,495,000 in other intangible assets. Pursuant to an indemnification agreement, upon the occurrence of certain events, the Company may also pay an amount not to exceed $6,500,000, which would be recorded as additional goodwill and amortized over the remaining useful life of the asset. The following summary, prepared on an unaudited pro forma basis, combines the results of operations as if Isolation Systems, Limited had been acquired as of December 29, 1996; however the one-time charge of $34,500,000 as a result of the purchase price allocated to in-process research and development has been excluded due to its non-recurring nature. The pro forma results have been adjusted in each of the periods presented below to reflect the loss of interest income as a result of the cash used in the acquisition as well as the amortization of goodwill resulting from the transaction.
Three months ended ----------------------------- (in thousands) July 4, 1998 June 28, 1997 ------------ ------------- Total revenues $ 38,294 $ 39,890 Operating loss (8,545) (3,018) Net loss (4,787) (1,864) ======= ======= Net loss per share - basic and diluted $ ( 0.16) $ ( 0.06) ======= ======= Six months ended ---------------------------- (in thousands) July 4, 1998 June 28, 1997 ------------ ------------- Total revenues $ 77,583 $ 71,276 Operating loss (10,101) (18,241) Net loss (5,701) (11,241) ======= ======== Net loss per share - basic and diluted $ ( 0.19) $ ( 0.39) ======= =======
The unaudited pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations. 7. RESTRUCTURING EXPENSES In the three-month period ended July 4, 1998, the Company approved and implemented a restructuring program to align its financial model with its strategic focus on providing remote access solutions for business. The plan included a reduction of the Company's worldwide workforce by approximately 130 employees, most of which were based in Europe and the remainder in the United States. A majority of these employees indentified were terminated on July 13, 1998 and the remaining terminations are expected to be substantially complete by the end of fiscal 1998. The Company recorded restructur- ing expenses of $9,435,000 in the three-month period ended July 4, 1998, which included $4,585,000 for severance, benefits and other personnel-related expenses, $3,570,000 in non-cash expenses for fixed asset write-downs, and $1,280,000 in professional fees, facilities and other costs. As of July 4, 1998, $1,159,000 of severance, benefits and other personnel-related costs and $340,000 of professional fees, facilties and other costs had been paid. In addition, the Company recorded $1,630,000 of restructuring expenses during the first quarter of fiscal 1998. These expenses, comprised primarily of severance-related costs, were the result of the restructuring of the Company's sales and marketing operations. Substantially all of these costs have been paid. 8. RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in an asset's, liability's, or firm commitment's fair value, changes in the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash-flow hedge transactions, in which the Company is hedging the variability of cash flows related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. The Company has not yet determined the impact that the adoption of FAS 133 will have on its earnings or statement of financial position. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Nortel Agreement. On February 27, 1998, the Company signed a new multi-year agreement (the "1998 Agreement") with Northern Telecom Inc. ("Nortel"). The Company and Nortel have been working together to provide remote access equipment to service providers since 1995. Under the new agreement, Nortel issues purchase orders for a minimum of $5,000,000 per quarter to purchase the Company's products with a minimum aggregate amount of $40,000,000 over the term of the contract, which began in the three-month period ended April 4, 1998. The Company's ability to recognize revenue related to these purchase orders, however, may be impacted by several factors including, but not limited to, the timing of the orders placed, the ability of the Company to ship products in a timely fashion and product availability. These OEM purchases from Nortel replace the minimum royalty arrangement with the Company that was in effect during fiscal 1997. In addition, the Company received total professional services revenue of $12,000,000 during the first two quarters of fiscal 1998 from Nortel related to the development of carrier class remote access technology. The OEM purchases and professional services are expected to result in higher revenues from Nortel in fiscal 1998 which will carry lower gross margins than achieved in 1997. Gross margins on sales to Nortel are expected to decline in fiscal 1998 from levels in fiscal 1997 primarily due to the fact that a significant portion of the revenues from Nortel in fiscal 1997 consisted of royalty revenues, with little or no direct cost, related to the Rapport 112, an OEM version of the LanRover Access Switch. On April 23, 1998, Nortel exercised its option under the 1998 Agreement to license certain Shiva technology. Pursuant to the terms of the agreement, Shiva will record a total of $26,000,000 ratably over ten quarters, or $2,600,000 per quarter, which began in the second quarter of fiscal 1998, for the license and other items related to intellectual property. Proceeds from this license agreement will be accounted for as $2,000,000 in LanRover Access Switch revenue and $600,000 in other income per quarter over the license term. Revenues. Revenues in the three-month and six-month periods ended July 4, 1998 were $38,294,000 and $76,325,000, respectively, compared to $39,738,000 and $70,897,000 in the comparable periods in fiscal 1997, respectively. The 4% decrease in revenues in the three-month period ended July 4, 1998 was primarily due to lower volume shipments of the Company's LanRover and LanRover Access Switch products. Revenues increased 8% in the six-month period ended July 4, 1998 compared to the corresponding period in fiscal 1997 principally due to higher service revenues, which increased to $16,634,000 in the six- month period ended July 4, 1998 from $3,169,000 during the comparable period in fiscal 1997. This increase was primarily due to $12,000,000 in professional services revenue from Nortel related to the development of carrier class remote access technology pursuant to the 1998 Agreement. This increase in service revenues is partially offset by lower product and license and royalty revenues. Revenues in the six-month period ended June 28, 1997 were negatively impacted by price protection provisions of $6,700,000, of which $3,900,000 related to the LanRover and $2,800,000 related to the LanRover Access Switch due to increased price competition and price reductions on the V.34 modem card due to the availability of 56K modem technology in the access concentrator market. Price protection rights require the Company to grant retroactive price adjustments for inventories of the Company's products held by distribution partners if the Company lowers its prices for such products. Revenues from the LanRover Access Switch in the three-month and six- month periods ended July 4, 1998 decreased to $14,978,000 and $29,517,000, respectively, from $19,882,000 and $31,248,000 in the comparable periods in fiscal 1997, primarily due to lower volume shipments. Revenues from the LanRover Access Switch in fiscal 1997 included minimum royalty revenues from Nortel that were based on sales of the Nortel Rapport 112, an OEM version of the LanRover Access Switch. These royalty revenues, which will not recur in fiscal 1998 as outlined above, were partially offset by price protection provisions of $2,800,000 recorded in the first quarter of fiscal 1997 as outlined above. Revenues from the LanRover product line in the three-month and six- month periods ended July 4, 1998 decreased to $8,392,000 and $18,138,000, respectively, from $13,433,000 and $25,763,000 in the comparable periods in fiscal 1997, primarily due to lower volume shipments. LanRover revenues in the six-month period ended June 28, 1997 were negatively impacted by price protection provisions of $3,900,000 as previously mentioned. Revenues from the Company's other remote access products increased to $5,228,000 and $9,179,000, respectively, in the three-month and six- month periods ended July 4, 1998 from $3,035,000 and $7,032,000 in the comparable periods in fiscal 1997. The increase in the three-month and six-month periods ended July 4, 1998 was primarily related to sales of the Shiva AccessPort product for the small office and home office market and the introduction of the LanRover VPN Gateway product as a result of the acquisition of Isolation Systems, Limited on March 26, 1998, partially offset by decreased revenues from certain other products. The Company provides its distributors and resellers with product return rights for stock balancing and product evaluation. Revenues were reduced by provisions for product returns of $1,993,000, or 5% of gross revenues, and $5,316,000, or 7% of gross revenues, in the three- month and six-month periods ended July 4, 1998, respectively. Provisions for product returns in the corresponding periods in fiscal 1997 were $726,000, or 2% of gross revenues, and $11,345,000, or 14% of gross revenues. The decrease in the provision for product returns in the six-month period ended July 4, 1998 compared to the same period in fiscal 1997 was primarily a result of provisions recorded in the first quarter of fiscal 1997 to account for slow-moving and discontinued products in the Company's North American distribution channels. Revenues from OEM customers represented 35% and 32% of revenues in the three-month and six-month periods ended July 4, 1998, respectively, compared to 19% and 25% in the comparable periods in fiscal 1997. The increase in OEM revenues was primarily due to increased revenues from Nortel, partially offset by decreased revenues from IBM. International revenues accounted for 32% and 36% of revenues in the three-month and six-month periods ended July 4, 1998, respectively, compared with 45% and 53% in the corresponding periods in fiscal 1997. International revenues were lower in the three-month and six-month periods ended July 4, 1998 due to weakness in Europe and the Pacific Rim. International revenues represented a higher proportion of total revenues in the six-month period ended June 28, 1997 due to the impact of the return provisions and price protection provisions that significantly reduced revenues from the Company's North American distribution channels in 1997. Gross Profit. Gross profit was $20,732,000 and $40,214,000, in the three-month and six-month periods ended July 4, 1998, respectively, compared to $23,789,000 and $33,309,000 in the comparable periods in fiscal 1997. This represented 54% and 53% of revenues in the three- month and six-month periods ended July 4, 1998, respectively, compared to 60% and 47% in the corresponding periods in 1997. Gross profit in the six-month period ended June 28, 1997 included the negative impact of price protection provisions of $6,700,000, as discussed above, and provisions for slow-moving inventories. The provisions for slow- moving inventories increased cost of revenues by $6,463,000, and related to V.34 modem cards, for which demand had decreased due to the availability of 56K modem technology, and certain other products. Excluding the impact of these provisions, gross profit as a percentage of revenues would have been 60% in the six-month period ended June 28, 1997. Gross profit as a percentage of revenues was negatively impacted in the three-month and six-month periods ended July 4, 1998 due to the professional services revenue and OEM product revenues from Nortel. Each of these revenue streams from Nortel carried lower gross profit percentages than the Company's non-Nortel product revenues, and significantly lower gross profit percentages than the Nortel royalty revenues recorded in the year earlier periods. The lower gross profit percentages on the professional services revenue and the OEM product revenues from Nortel are partially offset by the 100% gross profit on the $2,000,000 LanRover Access Switch revenue related to the previously mentioned license agreement with Nortel. In the future, the Company's gross margins may be affected by several factors, including but not limited to the competitive pricing environment, product mix, the distribution channels used, changes in component costs and the introduction of new products. Research and Development. Research and development expenses during the six-month period ended July 4, 1998 related to the development of new and existing remote access products, including products which incorporate technology to support virtual private networking. Research and development expenses decreased to $4,640,000 and $9,221,000 in the three-month and six-month periods ended July 4, 1998 from $5,778,000 and $11,739,000 during the comparable periods in fiscal 1997. The decrease in these expenses was primarily due to the restructuring of the Nortel arrangement in fiscal 1998 under which Nortel contracted with the Company for the development of carrier class remote access technology. Under the terms of the 1998 Agreement, the Company has recognized $6,000,000 in professional services revenue during each of the first two quarters of fiscal 1998 as work was performed. Accordingly, expenses related to these development efforts of $3,711,000 and $7,422,000 in the three-month and six-month periods ended July 4, 1998, respectively, have been included in cost of service revenues in the accompanying statement of operations. Customer funded development fees under cost sharing relationships (including those with Nortel in fiscal 1997), which are reflected as an offset to research and development expenses, were $1,818,000 and $3,454,000 in the three-month and six-month periods ended June 28, 1997. There were no such fees recorded in the three-month and six- month periods ended July 4, 1998. There were no capitalized software development costs in the three-month period ended July 4, 1998, compared with $245,000 for the comparable period in fiscal 1997. Capitalized software development costs were $88,000 for the six-month period ended July 4, 1998, compared with $400,000 in the comparable period in fiscal 1997. Gross research and development expenses increased to $8,352,000 and $16,731,000, respectively, in the three- month and six-month periods ended July 4, 1998 from $7,840,000 and $15,593,000 in the comparable periods in fiscal 1997. The Company anticipates continued significant investment in research and develop- ment primarily focused on providing remote access solutions for the business access market. Selling, General and Administrative. Selling, general and administrative expenses decreased to $15,202,000 and $30,010,000 in the three-month and six-month periods ended July 4, 1998 from $20,409,000 and $38,307,000 in the comparable periods in fiscal 1997. These expenses represented 40% and 39% of revenues in the three-month and six-month periods ended July 4, 1998, respectively, compared to 51% and 54% in the corresponding periods in 1997. The decrease in gross expenses was due to several factors, including lower personnel costs due to the restructuring of the Company's sales and marketing organization as discussed below, as well as decreased costs incurred for travel, channel and marketing programs, trade shows, recruiting, temporary help and various facilities related expenses. These decreases were partially offset by increased bad debt expense. Selling, general and administrative expenses in the three-month and six-month periods ended June 28, 1997 are net of expenses reimbursed by Nortel of $1,532,000 and $2,208,000, respectively, related to Shiva's Service Provider Group (SPG), a worldwide business unit comprised of technical sales and support personnel that had been dedicated to marketing Nortel's remote access equipment to carriers and service providers through the first quarter of fiscal 1998. Expenses reimbursed by Nortel in the first quarter of 1998 were $1,018,000. Nortel no longer funds the SPG unit. Restructuring Expenses. The Company recorded restructuring expenses of $9,435,000 and $11,065,000 in the three-month and six-month periods ended July 4, 1998, respectively. Restructuring expenses primarily consisted of $4,585,000 in severance, benefits and other personnel related expenses, $3,570,000 in non-cash expenses for fixed asset write-downs and $1,280,000 in professional fees, facilities and other costs. These restructuring expenses were primarily a result of a formal plan announced by the Company on April 15, 1998 to restructure its worldwide operations and align its financial model with the recently announced strategic focus on providing remote access solutions for business. Specifically, Shiva will close operations at the Edinburgh, Scotland, facility and will relocate certain technical support staff to the Wokingham, United Kingdom, facility. The Edinburgh facility was primarily focused on jointly funded engineering activities with Nortel. The Company further expects to take an additional charge of $1,000,000 to $3,000,000 in the third quarter of 1998 to complete its restructuring effort. This will bring total anticipated 1998 restructuring charges to $12,000,000 to $14,000,000, which includes $1,630,000 of charges related to the restructuring of the Company's sales and marketing operations, which were recorded in the first quarter of 1998. As of July 4, 1998 the Company has paid approximately $3,129,000 of these charges. The Company anticipates that substantially all of the remaining cash charges will be paid out from the Company's cash and short-term investment balances by the end of fiscal 1998. Interest Income and Expense. Interest income decreased during the three-month period ended July 4, 1998 over the corresponding period in fiscal 1997 primarily as a result of the cash used in the acquisition of Isolation Systems, Limited. Interest income increased during the six-month period ended July 4, 1998 over the corresponding period in fiscal 1997 primarily due to the Company's shift from federal tax- exempt securities into taxable securities, which resulted in a higher overall yield on its investments. Interest and other income (expense) for the three-month period ended July 4, 1998 increased due to the inclusion of $600,000 of income resulting from the previously mentioned option exercised by Nortel for certain items related to intellectual property. Income Tax Benefit. The Company's effective tax rate in each of the three-month and six-month periods ended July 4, 1998 was 32%, down from 38% in each of the three-month and six-month periods ended June 28, 1997, primarily due to the impact of nondeductible restructuring charges. Foreign Currency Fluctuations Foreign currency fluctuations did not have a significant impact on the comparison of the results of operations in the three-month and six- month periods ended July 4, 1998 with those of the comparable periods in fiscal 1997. However, the Company's international operations will continue to be exposed to adverse movements in foreign currency exchange rates which may have a material adverse impact on the Company's financial results. The Company enters into forward exchange contracts to hedge those currency exposures related to certain assets and liabilities denominated in non-functional currencies and does not generally hedge anticipated foreign currency cash flows. Year 2000 The Company recognizes that it must ensure that its products and operations will not be adversely impacted by Year 2000 software failures (the "Year 2000 issue") which can arise in time-sensitive software applications which utilize a field of two digits to define the applicable year. In such applications, a date using "00" as the year may be recognized as the year 1900 rather than the year 2000. The Company is in the process of evaluating its products for Year 2000 compliance and is currently aware that the SpiderManager and the Shiva Access Manager products are not Year 2000 compliant. The SpiderManager product will display the year number in the activity log date field as three digits. The Company believes that this characteristic does not have any system operational implications for the product. Therefore, the Company does not anticipate having to undertake additional research and development efforts or incur additional expenses in this regard. The Shiva Access Manager NT 1.0 product uses only two digits to store year information. The system interprets these two digits as being in the twentieth century before year 2000, and will interpret the two digits as being in the twenty- first century after year 2000. The Company believes that this date calculation methodology could reactivate previously terminated user accounts and may produce incorrect log files if both twentieth and twenty-first century dates are involved. This issue has been corrected in Shiva Access Manager NT version 2.0 and greater, and the company strongly recommends that its customers upgrade to version 2.0 to correct the problem. The Company does not anticipate having to undertake additional research and development efforts or incur additional expenses for this issue. In addition, the Company recently discovered that certain versions of its Shiva Access Manager product may contain an additional Year 2000 issue. The Company is currently investigating this issue, and has not yet determined the nature and extent of this issue. Therefore, the Company can not currently determine the extent of any additional research and development efforts or additional expenses which may be required to remedy this Year 2000 issue. In addition, the Company is in the process of replacing many of its business and operating computer systems with software which, when upgraded, will be Year 2000 compatible. The Company is planning to complete all necessary Year 2000 upgrades of its major systems in 1998, and is currently identifying and developing conversion strategies for its remaining systems that may be impacted by the Year 2000 issue. While the Company does not believe that the Year 2000 issue will have a material impact on the Company, there can be no assurance that unanticipated problems will not arise that will have a material adverse effect on the Company's business and results of operations. Liquidity and Capital Resources As of July 4, 1998, the Company had $21,113,000 of cash and cash equivalents and $45,914,000 of short-term investments. Working capital decreased by 37% to $68,008,000 at July 4, 1998 from $108,314,000 at January 3, 1998. Net cash provided by operations totaled $14,163,000 for the six-month period ended July 4, 1998 compared with $538,000 during the comparable period in fiscal 1997. Net cash provided by operations in the six- month period ended July 4, 1998 resulted primarily from the net loss adjusted for non-cash expenses including in-process research and development, as well as the decrease in accounts receivable and inventories and the increase in accrued expenses, partially offset by a decrease in accounts payable. The decrease in accounts receivable is primarily due to increased collection activities, and the decrease in inventories is due to improved inventory management. The increase in accrued expenses is primarily due to accrued severance costs related to the restructuring of the Company mentioned previously. Net cash provided by operations in the six-month period ended June 28, 1997 resulted primarily from the decrease in accounts receivable, partially offset by the net loss adjusted for non-cash expenses and the increase in deferred income taxes. The decrease in accounts receivable was due to decreased revenue levels and the previously mentioned increase in product return and price protection provisions, as well as increased collection activity. Net cash used by investing activities totaled $51,711,000 for the six- month period ended July 4, 1998, compared to $1,710,000 during the comparable period in fiscal 1997. Investment activity in the six- month period ended July 4, 1998 consisted primarily of payments related to the purchase of Isolation Systems, Limited, as well as the net purchase of short-term investments and fixed assets. Investment activity in the six-month period ended June 28, 1997 consisted primarily of purchases of short-term investments and fixed assets, partially offset by proceeds from short-term investments upon maturity or sale. Net cash used by financing activities totaled $212,000 for the six- month period ended July 4, 1998, compared to net cash provided of $442,000 in the comparable period in fiscal 1997. Net cash used by financing activities for the six-month period ended July 4, 1998 primarily consisted of the purchase of treasury stock, partially offset by proceeds from stock option exercises. Net cash provided by financing activities in the six-month period ended June 28, 1997 consisted of proceeds from stock option exercises, partially offset by principal payments on long-term debt and capital lease obligations. The Company has a $5,000,000 unsecured revolving credit facility with a bank which expires in March 1999. The terms of the credit facility require the Company to comply with certain restrictive financial covenants. Borrowings under this facility bear interest at the bank's prime rate. At July 4, 1998, available borrowings were reduced by outstanding letters of credit of $837,000 which expire at various dates in 1998. The Company had no borrowings outstanding under this line at July 4, 1998. At July 4, 1998, the Company was in violation of certain covenants of this credit facility which have been waived by the bank. There can be no assurance that the bank will waive any such violations in the future, which could require the Company to obtain an alternative credit facility on terms less favorable than the current facility. The Company also has a foreign credit facility of approximately $2,613,000, all of which was available at July 4, 1998. Available borrowings under this facility are decreased by guarantees on certain foreign currency transactions. The terms of the foreign credit facility require the Company to comply with certain restrictive financial covenants. There were no borrowings outstanding under this foreign credit facility at July 4, 1998. The Company enters into forward exchange contracts to hedge against certain foreign currency transactions for periods consistent with the terms of the underlying transactions. The forward exchange contracts have maturities that do not exceed one year. At July 4, 1998, the Company had outstanding forward exchange contracts to purchase $5,198,000 and to sell $1,379,000 in various currencies which matured on July 23, 1998. The Company believes that its existing cash and short-term investment balances, together with borrowings available under the Company's bank credit facilities, will be sufficient to meet the Company's cash requirements for at least the next twelve months. Factors That May Affect Future Results Certain information contained herein, and information provided by the Company or statements made by its employees may, from time to time, contain "forward-looking" information which involve risks and uncertainties. Any statements contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere herein that are not historical facts may be "forward-looking" statements. Certain information contained herein concerning the Company's anticipated plans and strategies for its business, available cash and cash equivalents and sources of financing, research and development and other expenditures, effects of the restructuring actions, ability to achieve Year 2000 compliance, and effects of the 1998 Agreement with Nortel consists of forward- looking statements. Without limiting the foregoing, the words "believes," "expects," "anticipates," "plans," and similar expressions are intended to identify forward-looking statements. The Company's actual future results may differ significantly from those stated in any forward-looking statements. Factors that may cause such differences include, but are not limited to, the factors discussed below. The Company's quarterly operating results may vary significantly from quarter to quarter depending on factors such as the timing of significant orders and shipments of its products, changes and delays in product development, new product introductions by the Company and its competitors, the mix of distribution channels through which the Company's products are sold and seasonal customer buying patterns. There can be no assurance that the Company will be able to achieve future revenue growth and profitability on a quarterly or annual basis. Revenues can be difficult to forecast due to the fact that the Company's sales cycle varies substantially depending upon market, distribution mechanism and end-user customer. The Company's expense levels are based, in part, on its expectations as to future revenues. If revenue levels are below expectations, operating results may be adversely affected. In addition, the Company's distribution partners typically stock significant levels of inventory, and the Company's revenues may fluctuate based on the level of partner inventories in any particular quarter. The Company has been party to a strategic relationship with Nortel since 1995 which has evolved over time. Under the terms of the 1998 Agreement with Nortel signed on February 27, 1998, Nortel will purchase minimum quarterly amounts of the Company's products within a minimum aggregate amount of $40,000,000 over the term of the contract, which began in the three-month period ended April 4, 1998. There can be no assurance that Nortel will purchase in excess of the minimum amount or that the Company will be able to fulfill such orders from Nortel and thus recognize the revenue associated with such orders, in a linear fashion over the contract term. Non-linear order patterns from Nortel could cause material fluctuations in the Company's quarterly financial results. In addition, the Company has received professional services revenue from Nortel, through the second quarter of fiscal 1998, related to the development of carrier class remote access technology. There is no obligation on the part of Nortel to contract for additional such development services nor does the Company expect to provide such services beyond the second quarter of fiscal 1998. Revenues from Nortel have exceeded 10% of total revenues in the six- month period ended July 4, 1998 and in fiscal 1997 and 1996. On March 26, 1998, the Company completed its acquisition of Isolation Systems, Limited , a leading developer of VPN hardware and software solutions based in Toronto, Ontario. Achieving the anticipated benefits of this acquisition or any other acquisitions the Company may undertake will depend in part upon whether the effective integration of the acquired companies' research and development organizations, products and technologies, and sales, marketing and administrative organizations is accomplished in timely manner. There can be can be no assurance that the Company will be successful in integrating the operations of Isolation Systems, Limited. Moreover, the integration process may temporarily divert management attention from the day-to-day business of the Company. Failure to successfully accomplish the integration of Isolation Systems could have a material adverse effect on the Company's business, financial condition and/or results of operations. The Company's LanRover and LanRover Access Switch products are experiencing increased market competition which has caused the Company to take pricing actions and may require the Company to take future pricing actions. The Company provides most of its distribution partners with product return rights for stock balancing or product evaluation and price protection rights. Stock balancing rights permit a return of products to the Company for credit against future product purchases, within specified limits. Product evaluation rights permit end-users to return products to the Company through the distribution partner from whom such products were purchased, within 30 days of purchase if such end-user is not fully satisfied. Price protection rights require the Company to grant retroactive price adjustments for inventories of the Company's products held by distribution partners if the Company lowers its prices for such products. These price protection provisions have adversely affected and may continue to adversely affect revenues and profitability in the future. There can be no assurance that the Company will not experience significant returns or price protection adjustments in the future or that the Company's reserves will be adequate to cover such returns and price reductions. The Company increasingly relies on sales of the LanRover Access Switch to achieve its revenue and profitability objectives. Sales of other communications products and other remote access products, including the LanRover product, decreased in the first six months of fiscal 1998 and fiscal 1997, due in part to increased competition. There can be no assurance that the Company will be successful in modifying current product offerings to increase sales of its products. The Company depends on third party distributors and value-added resellers for a significant portion of the Company's revenues. The loss of certain of these distributors and resellers could have a material adverse impact on the Company's results of operations. Moreover, many of these distributors and resellers also act as resellers of competitive products. Therefore, there is risk that these distributors and resellers may focus their efforts on marketing products other than those sold by the Company. This may require the Company to offer various incentives to such distributors and resellers, which may adversely impact the Company's results of operations. The market for the Company's products is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. The Company's future success will depend on its ability to enhance its existing products and to introduce new products and services to meet and adapt to changing customer requirements and emerging technologies, such as VPN and other technologies. The introduction of new products requires the Company to manage the transition from its older product offerings in order to minimize the impact on customer ordering patterns, avoid excessive levels of obsolete inventories and to ensure that adequate supplies of new products are available to meet customer demand. The Company's success in accomplishing development objectives depends in large part upon its ability to attract and retain highly skilled technical personnel including, in particular, management personnel in the areas of research and development and technical support. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining the personnel it requires to accomplish its objectives. Delays in new product development or the failure of new products to achieve market acceptance, could have a material adverse effect on the Company's operating results. In addition, there can be no assurance that the Company will be successful in identifying, developing, manufacturing or marketing new product or service offerings or enhancing its existing offerings. The Company operates in a highly competitive market that is characterized by an increasing number of well-funded competitors from diverse industry sectors, including but not limited to suppliers of software, modems, terminal servers, routers, hubs, data communications products and companies offering remote access solutions based on emerging technologies, such as switched digital telephone services, remote access service offerings by telephony providers via telephone networks and other providers through public networks such as the Internet. Increased competition could result in price reductions and loss of market share which would adversely affect the Company's revenues and profitability. There can be no assurance that the Company will be able to continue to compete successfully with new or existing competitors. The Company does business worldwide, both directly and via sales to United States-based original equipment manufacturers, who sell such products internationally. The Company expects that international revenues will continue to account for a significant portion of its total revenues. Although most of the Company's sales are denominated in US Dollars, exchange rate fluctuations could cause the Company's products to become relatively more expensive to customers in a particular country, causing a decline in revenues and profitability in that country. In addition, international sales, particularly in Europe, are typically adversely affected in the third quarter due to a reduction in business activities during the summer months. Furthermore, global and/or regional economic factors and potential changes in laws and regulations affecting the Company's business, including without limitation, communications regulatory standards, safety and emissions control standards, difficulty in staffing and managing foreign operations, longer payment cycles and difficulty in collecting foreign receivables, currency exchange rate fluctuations, changes in monetary and tax policies, tariffs, difficulties in enforcement of intellectual property rights and political uncertainties, could have an adverse impact on the Company's financial condition or future results of operations. Some of the Company's products incorporate encryption, or scrambling, features to protect the security, confidentiality, and integrity of text or data transmissions. Products with encryption features are subject to export restrictions under the laws of the U.S., Canada, and other countries. In countries other than the U.S. and Canada, encryption products may also be subject to import and/or use restrictions. These restrictions may require the Company or its customers to obtain licenses; may require technical modifications to products; and may prohibit sales of some products to certain destinations or customers. In light of these restrictions, the Company's products available abroad may contain significantly weaker encryption capabilities than those available in the U.S. and Canada, and there can be no assurance that the Company will continue to be able to export its products to destinations outside of the U.S. and Canada. Accordingly, these restrictions could potentially have an adverse effect on the Company's business, financial conditions, or results of operations. The Company is exposed to potential credit risks as a result of accounts receivable from distributors, resellers, OEM and direct customers, with respect to which the Company does not generally require collateral. The Company is currently dependent on three subcontractors for the manufacture of significant portions of its products. Although the Company believes that there are a limited number of other qualified subcontract manufacturers for its products, a change in subcontractors could result in delays or reductions in product shipments. In addition, certain components of the Company's products are only available from a limited number of suppliers. The inability to obtain sufficient key components as required could also result in delays or reductions in product shipments. Such delays or reductions could have an adverse effect on the Company's results of operations. The market price of the Company's securities could be subject to wide fluctuations in response to quarter-to-quarter variations in operating results, changes in earnings estimates by analysts, and market conditions in the industry, as well as general economic conditions and other factors external to the Company. Other factors that may affect future results include the accuracy of the Company's internal estimates of revenues and operating expense levels, the outcome of the litigation discussed below under "Legal Proceedings," the Company's ability to complete all necessary Year 2000 upgrades in a timely and cost-effective manner, the realization of the intended benefits of the 1998 restructuring, and material changes in the level of customer-funded research and development activities. Because of the foregoing factors, the Company believes that period-to- period comparisons of its financial results are not necessarily meaningful and expects that its results of operations may fluctuate from period to period in the future. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is a defendant in the following legal proceedings: Lirette, et al. v. Shiva Corporation, et al., Civil Action No. 97- 11159-WGY, a purported class action complaint filed against the Company, Frank Ingari, Cynthia Deysher and David Cole, in the United States District Court for the District of Massachusetts on May 21, 1997 and Abraham Schwartz and Norman Marcus v. Shiva Corporation, Case No. BC164278, a purported class action complaint filed against the Company in the Superior Court of the State of California for the County of Los Angeles on January 17, 1997. The federal court complaint seeks damages, interest, fees and expenses. The state court complaint seeks damages, interest, fees and expenses, including punitive damages and treble damages. The federal matter is in the pre-discovery phase, and a motion to dismiss has been filed and is being considered by the court. The state matter is in discovery. The Company is unable to determine at this time the potential liability, if any, of either of these actions. Accordingly, no provision has been made in the consolidated financial statements for these claims. It is possible that the Company could incur a material loss related to these actions in the future. Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Stockholders (the "Annual Meeting") held on June 18, 1998, the stockholders of the Company approved the election of two Class I Directors. The following table sets forth each Class I Director elected at the Annual Meeting (with the vote results) and each Director whose term of office extended beyond the Annual Meeting:
Term Name Class Will Expire For Withheld - ---- ----- ----------- --- -------- Paul C. O'Brien I 2001 26,992,074 332,115 James L. Zucco, Jr. I 2001 26,992,074 332,115 David C. Cole* II 1999 N/A N/A Richard J. Egan II 1999 N/A N/A Henry F. McCance** III 2000 N/A N/A David B. Yoffie III 2000 N/A N/A * Effective June 18, 1998, Mr. Cole resigned as a member of the Board of Directors and was replaced by Michael E. Lehman. ** Effective June 18, 1998, Mr. McCance resigned as a member of the Board of Directors and was replaced by Carol Herod Sharer.
Item 5. Stockholder Proposals for 1999 Annual Meeting As set forth in the Company's Proxy Statement for its 1998 Annual Meeting of Stockholders (the "1998 Annual Meeting"), stockholder proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for inclusion in the Company's proxy materials for its 1999 Annual Meeting of Stockholders must be received by the Clerk of the Company at the principal offices of the Company no later than December 4, 1998. In addition, the Company's by-laws require that the Company be given advance notice of stockholder nominations for election to the Company's Board of Directors and of other matters which stockholders wish to present for action at an annual meeting of stockholders (other than matters included in the Company's proxy statement in accordance with Rule 14a-8). The required notice must be made in writing and delivered or mailed by first class United States mail, postage prepaid, to the Clerk of the Company at the principal offices of the Company, and received not less than 60 days nor more than 90 days prior to the 1999 Annual Meeting; provided however, that if less than 70 days notice or prior public disclosure of the date of the meeting is given to stockholders, such nomination or other proposal shall have been mailed or delivered to the Clerk not later than the close of business on the 10th day following the date on which the notice of the meeting was mailed or such public disclosure made, whichever occurs first. The 1999 Annual Meeting is currently expected to be held on June 3, 1999. Assuming that this date does not change, in order to comply with the time periods set forth in the Company's by-laws, appropriate notice would need to be provided no earlier than March 5, 1999 and no later than April 5, 1999. The advance notice provisions of the Company's by-laws supersede the notice requirements contained in recent amendments to Rule 14a-4 under the Exchange Act. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit No. Description of Exhibit ----------- ---------------------- Exhibit 10.1 Sublease Between Shiva Corporation, Landlord, and Netcentric Corporation, Tenant, dated May 29, 1998. Exhibit 27.0 Financial Data Schedule.
(b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K dated April 9, 1998 pursuant to Item 2 thereof, reporting the completion of its acquisition of substantially all of the assets of Isolation Systems, Limited, an Ontario corporation, for approximately US$37,000,000 in cash pursuant to an Asset Purchase Agreement dated as of February 18, 1998 between the Company and Isolation Systems, Limited. In addition, the Company assumed substantially all the liabilities of Isolation Systems, Limited as part of the acquisition, including the payment of transaction fees associated with the acquisition of approximately in the aggregate of US$1,900,000. On June 8, 1998 the Company filed an amendment to this Current Report on Form 8-K/A to include certain financial information with respect to Isolation Systems, Limited and the Company. SIGNATURE Pursuant to the requirements 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. SHIVA CORPORATION Date: August 18, 1998 by: /s/ Robert P. Cirrone --------------------- Senior Vice President, Finance and Administration, and Chief Financial Officer (Principal Financial and Accounting Officer) SHIVA CORPORATION EXHIBIT INDEX
Exhibit No. Descripton of Exhibit - ----------- --------------------- Exhibit 10.1 Sublease Between Shiva Corporation, Landlord, and Netcentric Corporation, Tenant, dated May 29, 1998. Exhibit 27.0 Financial Data Schedule. - ---------------------------------------
EX-10 2 Exhibit 10.1 SUBLEASE BETWEEN SHIVA CORPORATION AND ---------------------------------- NETCENTRIC CORPORATION 1. Basic Lease Provisions 1.1. Date and parties. This sublease (Lease) is made 29th of May, 1998, between Shiva Corporation, (Landlord) and NetCentric Corporation (Tenant). Landlord is a Massachusetts corporation with principal offices at 28 Crosby Drive, Bedford, MA 01730. Tenant is a corporation organized under the laws of Delaware with current principal offices at 17 Monsignor O'Brien Hwy., Cambridge, MA 12141. 1.2. Premises. Landlord leases to Tenant 18,850 rentable square feet of office space, (per attached plan), including certain common areas on the first floor of 28 Crosby Drive, Bedford, MA, (the Premises) as shown cross-hatched on the attached floor plan (Exhibit A). The Premises contain the fixtures, improvements, and other property now installed. Tenant and and its agents, employees, and invitees have the non-exclusive right with others designated by Landlord to the free use of the common areas in the Building and of the land (Land) on which the Building is located for the common areas' intended and normal purpose. Common areas include: sidewalks, parking areas, driveways, hallways on first floor, bathrooms on first floor, cafeteria, loading dock, trash compactor, and showers on first floor, common entrances, lobby and other similar public areas and access ways. Landlord may change the common areas if the changes do not materially and unreasonably interfere with Tenant's access to the Premises or use of them. 1.3. Use. Tenant shall use the Premises for office or general office only, unless Landlord gives its advance written consent to another use. 1.4. Term. The Lease begins (Beginning Date) on August 1, 1998. The Lease ends (Ending Date) July 31, 2001, thirty-six (36) months from the Beginning Date, unless ended earlier under this Lease. 1.5. Termination. Tenant may terminate the lease after two (2) years with six (6) months' prior written notice and a termination payment equaled to unamortized leasing costs by the Landlord. 1.6. Demising costs. Landlord shall be responsible for all costs associated with demising the premises. This includes: installation of common hallway access doors, building standard tenant entry door off the common area lobby, two (2) key card security system readers and securing of doorway leading to Landlord's Engineering Lab. 1.7. Tenant's improvements. Landlord will provide Tenant with an allowance of up to $25,000 in order to complete interior renovations to the Lease Premises, including any required architectural services, upgrade of Tenant entrance and reconfiguration of the existing telephone/data cabling. 1.8. Substantial completion. Landlord shall use its best efforts to sub- stantially complete the Premises by July 31, 1998. Substantially complete means: A. Completing Tenant's improvements so that Tenant can use the Premises for their intended purposes without material inter- ference to Tenant conducting its ordinary business activities and the only incomplete items are minor or insubstantial details of construction, mechanical adjustments, or finishing touches like touchup plastering or painting; B. Tenant, its employees, agents, and invitees, have ready access to the Building and Premises through the lobby, entranceways, and hallways. 2. Rent and Security 2.1. Rent. Tenant shall pay Rent to Landlord, according to the following schedule: Per square foot Monthly 8/1/98 through 7/31/99 $14.50 $22,777.08 8/1/99 through 7/31/00 $15.50 $24,347.92 8/1/00 through 7/31/01 $16.50 $25,918.75 The rent shall be paid; by the first day of each month during the Term. If Tenant fails to pay part or all of the Rent within ten (10) days after it is due, the Tenant shall also pay interest at the rate of twelve percent (12%) per year of the amount due, or the maximum then allowed by applicable law, whichever is less, on the remaining unpaid balance, retroactive to the date originally due until paid. 2.2. Other Payments. Rental is quoted on a gross basis, net of Tenant electric, which is $1.25 per square foot, to be paid in amount of $1,963.54 monthly. 2.3. Use of Furniture. Tenant shall have the use of existing furniture in the Premises which are shown in Exhibit `A' attached. Tenant shall be responsible to return such furniture in good condition, normal wear and tear excepted. The furniture rental payment shall be $1.50 per square foot or $2,356.25 per month. 2.4. Security Deposit. The Tenant has deposited ($45,554.16) (Security Deposit) with Landlord to secure Tenant's performance of its Lease obligations. If Tenant defaults Landlord may,after giving five (5) days advance notice to Tenant, without prejudice to Landlord's other remedies, apply part or all of the Security Deposit to cure Tenant's default. If Landlord so uses part or all of the Security Deposit, the Tenant shall within ten (10) days after written demand, pay Landlord the amount used to restore the Security Deposit to its original amount. Although Landlord may mix the Security Deposit with its own funds, the Security Deposit shall bear interest at normal bank account interest rates (currently 3 percent per year). Any part of the Security Deposit not used by Landlord as permitted by this paragraph and any accumulated interest that has not been paid to Tenant shall be returned to Tenant within Thirty (30) days after the Lease ends. 3. Affirmative Obligations 3.1. Services and Utilities. Service. Landlord shall provide at its expense: A. Heating, ventilation, and air conditioning (HVAC) for the Premises during business hours to maintain temperatures for comfortable use and occupancy in light of Tenant's space plan (Business Hours. means: Monday through Friday, 8:00 a.m. through 6:00 p.m. and 8:00 a.m. through 1:00 a.m. on Saturday, but excludes the following holidays or the days on which the holidays are designated for observance: New Year's Day, Presidents' Day, Memorial Day, July Fourth, Labor Day, Thanksgiving Day, and Christmas Day. B. Janitorial services to the Premises; C. Hot and cold water sufficient for drinking, lavatory, toilet, and ordinary cleaning purposes to be drawn from approved fixtures in the Premises on the floor on which the Premises are located; D. Electricity to the Premises during business hours that provides electric current in reasonable amounts necessary for normal office use, lighting, and HVAC; E. Replacement of lighting tubes, lamp ballasts, and bulbs; F. Extermination and pest control when necessary; G. Maintenance of common areas in a manner comparable to other first class office buildings in the Bedford area. The maintenance shall include cleaning, HVAC, illumination, snow shoveling, deicing, repairs, replacements, lawn care, and landscaping. H. Receptionist for visitors I. Night security guard service J. Access to and use of Landlord's cafeteria facilities 3.2. 24 Hour Access. Tenant, its employees, agents, and invitees shall have access to the Premises twenty-four (24) hours a day, seven (7) days a week. During nonbusiness hours, Landlord may restrict access by requiring persons to show a badge or identification card issued by Landlord. Landlord shall not be liable for denying entry to any person unable to show the proper identification. 3.3. Landlord's Repairs. Landlord shall pay for and make all other repairs and replacements to the Premises, common areas and Building (including Building fixtures and equipment). 3.4. Signage. Tenant will be allowed to add its name to the new signs, recently installed by the Building owner, at its own expense. In addition Tenant will be allowed to place appropriate signage on the wall above the Reception desk and on the Tenant's entrance doorway, at Tenant's expense. 4. Insurance and Indemnification 4.1. Property Insurance. Each party shall keep its personal property and trade fixtures in the Premises and Building insured with "all risks" insurance in an amount to cover one hundred (100) percent of the replace- ment cost of the property and fixtures. 4.2. Liability Insurance. Each party shall maintain contractual and comprehensive general liability insurance, including public liability and property damage, with a minimum combined single limit of liability of one million dollars ($1,000,000.00) for personal injuries or deaths of persons occurring in or about the Building and Premises naming the following as additional insureds: A. Shiva Corporation B. EOP-Crosby Corporate Ctr. LLC By the Beginning Date and upon each renewal of its insurance policies, Tenant shall give certificates of insurance to Landlord. 4.3. Indemnification. 4.3.1. Tenant's Indemnity. Tenant indemnifies, defends, and holds Landlord and the additional insureds listed in this Lease harmless from claims: for personal injury, death, or property damage; A. for incidents occurring on or about the Premises or Building; and B. caused by the negligence or willful misconduct of Tenant, its agents, employees, or invitees. C. When the claim is caused by the joint negligence or willful misconduct of Tenant and Landlord or Tenant and a third party unrelated to Tenant, except Tenant's agent employees, or invitees, Tenant's duty to defend, indemnify, and hold Landlord harmless shall be in proportion to Tenant's allocable share of the joint negligence or willful misconduct. 4.3.2. Landlord's Indemnity. Landlord indemnifies, defends, and holds Tenant harmless from claims: for personal injury, death, or property damage; A. for incidents occurring in or about the Premises or Building; and B. caused by the negligence or willful misconduct of Landlord, its agents, employees, or invitees. C. When the claim is caused by the joint negligence or willful misconduct of Landlord and Tenant or Landlord and a third party unrelated to Landlord, except Landlord's agent employees, or invitees, Landlord's duty to defend, indemnify, and hold Landlord harmless shall be in proportion to Landlord's allocable share of the joint negligence or willful misconduct. 4.3.3. Release of Claims. The parties release each other from any claims either party (Injured Party) has against the other. This release is limited to the extent the claim is covered by the Injured Party's insurance. 5. Loss of Premises 5.1. Repair of Damage. If the Premises are damaged in part or whole from any cause and the Premises can be substantially repaired and restored within thirty (30) days from the date of the damage using standard working methods and procedures, Landlord shall at its expense promptly and diligently repair and restore the Premises to substantially the same condition as existed before the damage. This repair and restoration shall be made within thirty (30) days from the date of the damage unless the delay is due to causes beyond Landlord's reasonable control. If the Premises cannot be repaired and restored within the thirty (30) day period, then either party may, within ten (10) days after determining that the repairs and restoration cannot be made within thirty (30) days cancel the Lease by giving notice to the other party. Nevertheless, if the Premises are not repaired and restored within thirty (30) days from the date of the damage, then Tenant may cancel the Lease at any time after the thirtieth (30th) day following the date of damage. Tenant shall not be able to cancel this Lease if its willful misconduct causes the damage unless Landlord is not promptly and diligently repairing and restoring the Premises. 5.2. Abatement. Unless the damage is caused by Tenant's willful misconduct, the Rent shall abate in proportion to that part of the Premises that is unfit for use in Tenants business. The abatement shall consider the nature and extent of interference to Tenant's ability to conduct business in the Premises and the need for access and essential services. The abatement shall continue from the date the damage occurred until ten (10) business days after Landlord completes the repairs and restoration to the Premises, or the part rendered unusable and notice to Tenant that the repairs and restoration are completed, or until Tenant again uses the Premises or the part rendered unusable, whichever is first. 5.3. Cancellation. If either party cancels this Lease as permitted by this section, then this Lease shall end on the day specified in the cancellation notice. The Rent and other charges shall be payable up to the cancellation date and shall account for any abatement. Landlord shall promptly refund to Tenant any prepaid, unaccrued Rent and accounting for any abatement, plus security deposit, if any, less any sum then owing by Tenant to Landlord. 6. Default 6.1. Tenant's Default. Each of the following constitutes a default (Default): A. Tenant's failure to pay Rent within seven (7) days after Tenant receives notice from Landlord of Tenant's failure to pay Rent; B. Tenant's failure to perform or observe any other Tenant obligation after a period of thirty (30) business days or the additional time, if any, that is reasonably necessary to promptly and diligently cure the failure, after it receives notice from Landlord setting forth in reasonable detail the nature and extent of the failure and identifying the applicable Lease provision(s); C. Tenant's abandoning or vacating the Premises if Tenant fails to timely pay the Rent by the due date; D. Tenant's failure to vacate or stay any of the following within ninety (90) days: a petition in bankruptcy is filed by or against Tenant; Tenant is adjudicated as bankrupt or insolvent; a receiver, trustee, or liquidator is appointed for all or a substantial part of Tenant's property; or Tenant makes an assignment for the benefit of creditors. 6.2. Rent. If Landlord ends this Lease or ends Tenant's right to possess the Premises because of a Default, Landlord may hold Tenant liable for Rent and other indebtedness accrued to the date the Lease ends. Tenant shall also be liable the Rent and other indebtedness that otherwise would have been payable by Tenant during the remainder of the Term had there been no Default, reduced by any sums Landlord receives by reletting the Premises during the Term. 6.3. Other Expenses. Tenant shall also be liable for that part of the following sums paid by Landlord and attributable to that part of the Term ended due to Tenant's Default: A. reasonable broker's fees incurred by Landlord for reletting part or all of the Premises prorated for that part of the reletting Term ending concurrently with the then current Term of this Lease; B. the cost of removing and storing Tenant's property; C. the cost of minor repairs, alterations, and remodeling necessary to put the Premises in a condition reasonably acceptable to a new Tenant; and D. other necessary and reasonable expenses incurred by Landlord in enforcing its remedies. 6.4. Landlord's Default. Landlord's failure to perform or observe any of its Lease obligations after a period of thirty (30) business days or the additional time, if any, that is reasonably necessary to promptly and diligently cure the failure after receiving notice from tenant of a Default The notice shall give in reasonable detail the nature and extent of the failure and identify the Lease provision(s) containing the obligation(s). 7. Nondisturbance 7.1. Quiet Possession. If Tenant is not in default, and subject to the Lease terms, Landlord warrants that Tenant's peaceable and quiet enjoyment of the Premises shall not be disturbed by anyone. 8. Landlord's Rights 8.1. Right to Enter. Landlord and its agents, servants, and employees may enter the Premises at reasonable times, and at any time if an emergency, without charge, liability, or abatement of Rent, to: A. examine the Premises, make repairs, alterations, improvements, and additions either required by the Lease or advisable to preserve the integrity, safety, and good order of part of all of the Premises or Building; B. provide janitorial and other services required by the Lease; C. show the Premises to prospective lenders or purchasers and during the ninety (90) days immediately before this Lease ends to prospective tenants. 9. Miscellaneous 9.1. Notices. Unless a Lease provision expressly authorizes verbal notice, all notices under this Lease shall be in writing and sent by registered or certified mail, postage prepaid, as follows: To Tenant: Before Term begins: 17 Msgr. O'Brien Hwy. Cambridge, MA 02141 After Term begins: 28 Crosby Drive Bedford, MA 01730 and To Landlord: 28 Crosby Drive Bedford, MA 01730 Either party may change these persons or addresses by giving notice as provided above. Notice shall be considered given and received on the latest original delivery or attempted delivery date as indicated on the postage receipt(s) of all persons and addresses to which notice is to be given. 9.2. Partial Invalidity. If any Lease provision is invalid or unenforceable to any extent, then that provision and the remainder of this Lease shall continue in effect and be enforceable to the fullest extent permitted by law. 9.3. Waiver. The failure of either party to exercise any of its rights is not a waiver of those rights. A party waives only those rights specified in writing and signed by the party waiving its rights. 9.4. Binding on Successors. This Lease shall bind the parties' heirs, successors, representatives, and permitted assigns. 9.5. Governing Law. This Lease shall be governed by the laws of the Commonwealth of Massachusetts. 9.6. Survival of Remedies. The parties' remedies shall survive the ending of this Lease when the ending is caused by the Default of the other party. 9.7. Entire Agreement. This Lease contains the entire agreement between the parties about the Premises and Building. This Lease shall be modified only by a writing signed by both parties. 9.8. Early Termination of the Main Lease. Should Landlord exercise its option to terminate the main lease early, notice will be sent to Tenant at the same time notice is sent to Sub-landlord. 9.9. Lab Cooling. Landlord will provide comparable alternative cooling to the lab, should the current equipment cease to be available or operable. LANDLORD: Shiva Corporation SIGNATURE /s/ Larry Whitman NAME Larry Whitman TITLE Vice President of Finance TENANT: NetCentric Corporation SIGNATURE /s/ Joseph S. Kowalczyk NAME Joseph S. Kowalczyk TITLE Chief Financial Officer EX-27 3
5 1000 6-MOS JAN-02-1999 JAN-03-1998 JUL-04-1998 21,113 45,914 27,641 8,148 10,939 108,244 49,299 29,114 158,416 40,236 0 0 0 304 117,315 158,416 76,325 76,325 36,111 36,111 84,796 251 (415) (42,153) (13,489) (28,664) 0 0 0 (28,664) (.95) (.95)
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