-----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, JO9NxA8IKvUJQAi0O6XnS9WMf0ZgVAZlAX3Kh/ihqFdPbyoCaVWTI5wdsYbMcTI1 pQQzIYX+UjNWd0epdESl1A== 0000879136-97-000026.txt : 19971114 0000879136-97-000026.hdr.sgml : 19971114 ACCESSION NUMBER: 0000879136-97-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971112 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: 97712956 BUSINESS ADDRESS: STREET 1: 28 CROSBY DR CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 6172708300 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 September 27, 1997 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 of (IRS Employer Identification No.) 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 September 27, 1997 was 29,536,942. 1 SHIVA CORPORATION INDEX Part I Financial Information Page Item 1 Consolidated Financial Statements Consolidated Balance Sheet September 27, 1997 and December 28, 1996 Consolidated Statement of Operations Three and nine months ended September 27, 1997 and September 28, 1996 Consolidated Statement of Cash Flows Nine months ended September 27, 1997 and September 28, 1996 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 5 Other Information Item 6 Exhibits and Reports on Form 8-K Signature 2 SHIVA CORPORATION Consolidated Balance Sheet (in thousands, except share related data)
September 27, December 28, 1997 1996 ------------- ------------ (unaudited) Assets Current assets: Cash, and cash equivalents $ 56,935 $ 72,067 Short-term investments 41,830 35,035 Accounts receivable, net of allowances of $9,992 at September 27, 1997 and $10,347 at December 28, 1996 24,641 39,904 Inventories 17,125 17,958 Deferred income taxes 10,176 4,420 Prepaid expenses and other current assets 1,712 1,602 ----------- ---------- Total current assets 152,419 170,986 Property, plant and equipment, net 25,867 23,855 Deferred income taxes 4,055 1,372 Other assets 3,596 1,837 ----------- ---------- Total assets $ 185,937 $ 198,050 =========== ========== Liabilities and stockholders' equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 129 $ 367 Accounts payable 13,574 17,130 Accrued compensation and benefits 4,319 5,871 Accrued expenses 15,218 13,748 Deferred revenue 4,445 3,406 ----------- ---------- Total current liabilities 37,685 40,522 Long-term debt and capital lease - 122 obligations Deferred income taxes 543 572 ----------- ---------- Total liabilities 38,228 41,216 ----------- ---------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value value; 1,000,000 shares authorized at September 27, 1997 and December 28, 1996, none issued - - Common stock, $.01 par value; 100,000,000 shares authorized, 29,536,942 and 28,891,216 shares issued and outstanding at September 27, 1997 and December 28, 1996, respectively 295 289 Additional paid-in capital 152,513 149,564 Unrealized gain on investments 161 175 Cumulative translation adjustment (221) 349 Retained earnings (accumulated deficit) (5,039) 6,457 ----------- ---------- Total stockholders' equity 147,709 156,834 ----------- ---------- Total liabilities and stockholders' equity $ 185,937 $ 198,050 =========== ========== The accompanying notes are an integral part of the consolidated financial statements.
3 SHIVA CORPORATION Consolidated Statement of Operations (in thousands except per share data) (unaudited)
Three months ended Nine months ended ---------------------------- --------------------------- September 27, September 28, September 27, September 28, 1997 1996 1997 1996 ------------- ------------- ------------- ------------- Product and other revenues $ 31,082 $ 57,109 $ 93,217 $ 151,903 Royalty revenues 4,499 - 13,261 - --------- --------- --------- --------- Total revenues 35,581 57,109 106,478 151,903 Cost of product and other revenues 15,319 23,761 52,907 62,543 --------- --------- --------- --------- Gross profit 20,262 33,348 53,571 89,360 --------- --------- --------- --------- Operating expenses: Research and development 6,937 5,974 18,676 16,630 Selling, general and administrative 17,622 18,338 55,929 49,844 Merger expenses - - - 1,987 --------- --------- --------- -------- Total operating expenses 24,559 24,312 74,605 68,461 --------- --------- --------- --------- Income (loss) from (4,297) 9,036 (21,034) 20,899 operations Interest income 887 836 2,787 3,167 Interest and other expense (26) (85) (294) (383) --------- --------- --------- --------- Income (loss) before income taxes (3,436) 9,787 (18,541) 23,683 Income tax provision (benefit) (1,306) 3,760 (7,045) 8,342 --------- ---------- ---------- ---------- Net income (loss) $ (2,130) $ 6,027 $ (11,496) $ 15,341 ========= ========== ========= ========== Net income (loss) per share $ (0.07) $ 0.19 $ (0.39) $ 0.49 ========= ========== ========= ========== Shares used in computing net income (loss) per share 29,387 31,906 29,165 31,499 ========= ========== ========= ========== The accompanying notes are an integral part of the consolidated financial statements.
4 SHIVA CORPORATION Consolidated Statement of Cash Flows Increase (Decrease) in Cash and Cash Equivalents (in thousands)
Nine Months Ended ---------------------------- September 27, September 28, 1997 1996 ------------- ------------- (unaudited) Cash flows from operating activities Net income (loss) $ (11,496) $ 15,341 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 7,430 4,553 Deferred income taxes (8,123) (1,511) Changes in assets and liabilities: Accounts receivable 14,633 (25,940) Inventories 658 (6,277) Prepaid expenses and other (89) (472) current assets Accounts payable (3,285) 5,999 Accrued compensation and benefits (1,400) 339 Accrued expenses 2,251 12,000 Deferred revenue 1,061 (854) Other long term liabilities (17) (15) --------- --------- Net cash provided by operating activities 1,623 3,163 --------- --------- Cash flows from investing activities Purchases of property, plant and equipment (8,788) (10,851) Capitalized software development costs (889) (843) Purchases of short-term investments (23,104) (24,502) Proceeds from maturity and sales of short-term investments 16,309 7,858 Change in other assets (2,176) (279) --------- --------- Net cash used by investing activities (18,648) (28,617) --------- --------- Cash flows from financing activities Principal payments on long-term debt and capital lease obligations (344) (590) Proceeds from exercise of stock options and stock purchase plans 2,014 2,732 --------- --------- Net cash provided by financing activities 1,670 2,142 --------- --------- Effects of exchange rate changes on cash and cash equivalents 223 (141) --------- --------- Net decrease in cash and cash equivalents (15,132) (23,453) Cash and cash equivalents, beginning of period 72,067 93,203 --------- --------- Cash and cash equivalents, end of period $ 56,935 $ 69,750 ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
5 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, consisting only of those of a normal recurring nature, 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. 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 December 28, 1996. The results of operations for the three-month and nine-month periods ended September 27, 1997 are not necessarily indicative of the results expected for the full fiscal year. 2. NET INCOME (LOSS) PER SHARE: Net income per share is calculated based on the weighted average number of common shares and common equivalent shares assumed outstanding during the period. Net loss per share excludes common equivalent shares because their effect is antidilutive. 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents, and those with maturities of greater than three months to be short-term investments. At September 27, 1997, the Company had cash and cash equivalents of $56,935,000 and short- term investments of $41,830,000, including an unrealized gain of $161,000 recorded as a separate component of stockholders' equity in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company's short-term investments at September 27, 1997, classified as available-for-sale, consist of municipal securities with various maturity dates through June 1999. Realized gains or losses on the sale of securities are calculated using the specific identification method. Realized gains and losses on its securities in the three-month and nine-month periods ended September 27, 1997 were not material. 4. INVENTORIES: Inventories consist of the following:
September 27, December 28, (in thousands) 1997 1996 Raw materials $ 7,903 $ 6,218 Work-in-process 433 1,506 Finished goods 8,789 10,234 ------- ------- $17,125 $17,958 ======= =======
6 5. RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which replaces primary and fully diluted earnings per share with basic and diluted earnings per share. SFAS No. 128 is effective for the Company beginning in the fourth quarter of fiscal 1997 and requires restatement of all previously reported interim and annual earnings per share data. Under SFAS No. 128, the primary earnings per share calculation will be modified to exclude the dilutive effect of common stock equivalents in determining basic earnings per share. The Company expects that basic earnings per share would not be materially different compared to primary earnings per share in the three- month and nine-month periods ended September 27, 1997 due to the net loss, and would result in an increase of $.02 and $.05 per share in the three-month and nine-month periods ended September 28, 1996, respectively. The impact of the adoption of SFAS No. 128 on the calculation of fully diluted earnings per share is not expected to be material for the three-month and nine-month periods ended September 28, 1996, respectively. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company will implement SFAS No. 130 and SFAS No. 131 as required in fiscal 1998. These standards will require the Company to report and display certain information related to comprehensive income and operating segments. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues. Revenues in the three-month and nine-month periods ended September 27, 1997 were $35,581,000 and $106,478,000, respectively. These amounts represent decreases of 38% and 30% from the corresponding periods in fiscal 1996. The decline in revenues in the three-month period ended September 27, 1997 compared to the same period in fiscal 1996 was primarily due to lower revenues from the Company's LanRover and LanRover Access Switch product lines. The decline in revenues in the nine-month period ended September 27, 1997 compared to the same period in fiscal 1996 was due to lower revenues from the Company's LanRover product line and other communications products. Revenues from LanRover products were $13,475,000 and $39,238,000 in the three-month and nine-month periods ended September 27, 1997, respectively, compared to $22,916,000 and $70,008,000 in the corresponding periods in fiscal 1996. These declines in LanRover revenues were primarily due to price decreases which became effective in the second quarter of fiscal 1997 and lower volume shipments in the three-month and nine-month periods ended September 27, 1997. LanRover revenues for the nine-month period ended September 27, 1997 were also impacted by increased return provisions and price protection provisions of $3,900,000 recorded in the first quarter. The price protection provisions related to the LanRover were recorded to account for first quarter pricing actions, which became effective in the second quarter of fiscal 1997, taken in response to increased price competition. Revenues from the LanRover Access Switch, which began volume shipments in the second quarter of fiscal 1996, were $14,700,000 and $45,947,000 in the three-month and nine-month periods ended September 27, 1997, respectively, compared to $22,366,000 and $41,267,000 in the corresponding periods in fiscal 1996. Revenues from the LanRover Access Switch in the three-month and nine-month periods ended September 27, 1997 include royalty revenues attributable to an agreement with Northern Telecom Limited (the "Nortel Agreement"), under which the Company earns royalties, subject to quarterly minimums in fiscal 1997, based on sales of the Nortel Rapport 112, an OEM version of the LanRover Access Switch. The decline in revenues from the LanRover Access Switch in the three-month period ended September 27, 1997 compared to the same period in fiscal 1996 is due to the transition of the Nortel relationship from an OEM relationship where Nortel purchased certain products from the Company for resale, to a royalty arrangement, which results in lower, but 100 percent margin, revenues, and a decline in sales through the premium value-added reseller ("PVAR") channel due in part to weakness in the mid-tier Internet Service Provider ("ISP") market in North America. Revenues from the LanRover Access Switch in the nine-month period ended September 27, 1997 were negatively impacted by price protection provisions of $2,800,000 recorded in the first quarter of fiscal 1997 to account for first quarter price reductions that became effective in the second quarter of fiscal 1997. The price reductions were in response to increased price competition and price reductions on V.34 modem cards due in part to the availability of 56K modem technology in the access concentrator market. Revenues from other communications products decreased 46% and 60% in the three-month and nine-month periods ended September 27, 1997, respectively, compared to the corresponding periods in fiscal 1996, primarily due to lower volume shipments. The Company anticipates that revenues from other communications products will continue to decline and will account for a decreasing percentage of revenue in future periods. 8 International revenues accounted for 43% and 50% of revenues in the three-month and nine-month periods ended September 27, 1997, respectively. International revenues accounted for 30% and 36% of revenues in the corresponding periods in fiscal 1996. International revenues represented a higher proportion of total revenues in fiscal 1997 due to decreased revenues in North America. Revenues in North America decreased due to several factors discussed above, including lower Access Switch revenues from Nortel, the decline in sales through the PVAR channel and the price protection reserves recorded in the first quarter of fiscal 1997. Sales to OEM customers accounted for 26% and 25% of revenues in the three-month and nine-month periods ended September 27, 1997, respectively, compared to 28% and 23% in the corresponding periods in fiscal 1996. The absolute decline in OEM revenues in the three-month and nine-month periods ended September 27, 1997 compared to the corresponding periods in fiscal 1996 is primarily due to lower revenues from IBM and the transition of the Nortel relationship as previously mentioned. Sales to Nortel accounted for 23% and 16% of revenues in the three-month and nine-month periods in fiscal 1997, respectively, compared to 18% and 12% of revenues in each of the corresponding periods in fiscal 1996. 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 $2,439,000, or 6% of gross revenues, and $13,784,000, or 11% of gross revenues, in the three-month and nine-month periods ended September 27, 1997, respectively. Provisions for product returns in the corresponding periods in fiscal 1996 were $3,326,000 and $7,304,000, respectively, and represented 6% and 5% of gross revenues in each period, respectively. The increase in the provision for product returns in the nine-month period ended September 27, 1997 compared to the same period in fiscal 1996 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. Gross Profit. Gross profit as a percentage of revenues was 57% and 50% in the three-month and nine-month periods ended September 27, 1997, respectively, compared to 58% and 59% in the corresponding periods in fiscal 1996. Gross profit as a percentage of revenue decreased in the three-month period ended September 27, 1997 over the same period in fiscal 1996 primarily due to an increase in manufacturing overhead costs as a percentage of revenue due to the lower revenue base, partially offset by the 100 percent margin royalty revenues from Nortel. In addition, gross profit in the three-month period ended September 27, 1997 was negatively impacted by the unbundling of several high margin software components formerly incorporated in the LanRover from the base hardware and software (the "LanRover Power Base"). The Company now sells the LanRover Power Base separately from three value-added feature software modules, known as the LanRover Power Series, which are designed to enhance the connectivity, security and performance of the LanRover Power Base, depending upon the module. Since sales of the LanRover Power Base carry lower gross margins than the LanRover Power Series software modules, the gross margins from the LanRover product line may continue to decline depending upon the number of LanRover Power Series software modules sold. Gross profit as a percentage of revenues decreased in the nine-month period ended September 27, 1997 from the corresponding period in fiscal 1996 primarily due to reserves recorded in the first quarter of fiscal 1997, consisting of the previously mentioned price protection reserves totaling $6,700,000, and provisions for slow- moving inventories of $6,463,000, partially offset by pure margin royalty revenues from Nortel. The provisions for slow-moving inventories increased cost of revenues and related primarily to V.34 modem cards, for which demand has slowed due to the availability of 56K modem technology, and certain other products. In the future, gross margins are likely to decrease due to continued price competition. The Company's gross margins may also be affected by several factors, including, but not limited to the level of royalty revenues from Nortel, product mix, the distribution channels used, changes in component costs and the introduction of new products. Research and Development. Research and development expenses increased to $6,937,000 and $18,676,000 in the three-month and nine-month periods ended September 27, 1997, respectively, from $5,974,000 and $16,630,000 in the corresponding periods in fiscal 1996. These expenses represented 19% and 18% of revenues in the three-month and nine-month periods ended September 27, 1997, respectively, compared to 11% in each of the corresponding periods in fiscal 1996. Research and development expenditures in the three-month and nine-month periods ended September 27, 1997 related to the development of new and existing remote access products, including the LanRover D/56, 56K modules for the LanRover Access Switch and the VantagePath family of products which incorporate technology to support virtual private networking. The increase in these expenses was primarily due to increased costs of prototype materials, increased personnel and associated overhead costs, and temporary help. Customer-funded development fees reimbursed to the Company, which are reflected as an offset to research and development expenses, increased to $1,500,000 and $4,954,000 in the three-month and nine-month periods ended September 27, 1997, respectively, from $536,000 and $1,387,000 in the corresponding periods of fiscal 1996. The increase in customer-funded development fees in fiscal 1997 was primarily due to cost sharing arrangements with Nortel, where Nortel funds certain costs associated with development of products and product features specific to the carrier and service provider markets. Capitalized software costs were $488,000 and $888,000 in the three-month and nine-month periods ended September 27, 1997, respectively, compared to $251,000 and $844,000 in the corresponding periods in fiscal 1996. The Company anticipates continued significant investment in research and development. 9 Selling, General and Administrative. Selling, general and administrative expenses decreased to $17,622,000 in the three-month period ended September 27, 1997 from $18,338,000 in the corresponding period in fiscal 1996. Selling, general and administrative expenses increased to $55,929,000 in nine-month period ended September 27, 1997 from $49,844,000 in the comparable period in fiscal 1996. These expenses represented 50% and 53% of revenues in the three-month and nine-month periods ended September 27, 1997, respectively, compared to 32% and 33% of revenues in the corresponding periods in fiscal 1996, respectively. The decrease in gross expenses in the three-month period ended September 27, 1997 was primarily due to lower channel program spending associated with the Company's PVAR channel. The increase in gross expenses in the nine-month period ended September 27, 1997 was primarily due to increased costs incurred for advertising, trade shows, travel, sales incentives, various professional fees and facilities. Selling, general and administrative expenses in the three- month and nine-month periods ended September 27, 1997 are net of expenses reimbursed by Nortel related to Shiva's Service Provider Group (SPG), a worldwide business unit comprised of technical sales and support personnel which markets Nortel's remote access equipment to carriers and service providers. Interest Income and Expense. Interest income increased in the three- month period ended September 27, 1997 over the corresponding period in fiscal 1996 due to higher overall yields on its investment balances. Interest income declined in the nine-month period ended September 27, 1997 compared to the corresponding period in fiscal 1996 primarily due to the Company's shift to federal tax-exempt securities during the second quarter of fiscal 1996, which resulted in a lower yield on its investment balances. Income Tax Provision (Benefit). The Company's effective income tax rate in each of the three-month and nine-month periods ended September 27, 1997 was 38%, compared to 38% and 35% in the three-month and nine- month periods ended September 28, 1996, respectively. The effective income tax rate in the nine-month period in fiscal 1996 reflects a reduction in the net deferred tax asset valuation allowance as a result of certain net operating losses that were realized in the second quarter, partially offset by non-deductible merger expenses. Foreign Currency Fluctuations A portion of the Company's international revenues is denominated in currencies other than the U.S. dollar and is consequently subject to foreign exchange fluctuations. The impact of such fluctuations is offset to the extent that expenses of the Company in international operations are incurred in the same currencies as its revenues. Foreign currency fluctuations did not have a significant impact on the comparison of results of operations in the three-month and nine-month periods ended September 27, 1997 with those of the comparable periods in fiscal 1996. However, the Company's international operations and non-dollar denominated sales 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. All of the Company's products are currently Year 2000 compliant, and therefore, the Company will not have to undertake additional research and development efforts in this regard. 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. 10 Liquidity and Capital Resources As of September 27, 1997, the Company had $56,935,000 of cash and cash equivalents and $41,830,000 of short-term investments. Working capital decreased to $114,734,000 at September 27, 1997 from $130,464,000 at December 28, 1996. Net cash provided by operations totaled $1,623,000 for the nine-month period ended September 27, 1997 compared to $3,163,000 in the comparable period in fiscal 1996. Net cash provided by operations in the nine-month period ended September 27, 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 primarily due to decreased revenue levels. Net cash provided by operations in the nine- month period ended September 28, 1996 consisted primarily of net income adjusted for non-cash expenses including depreciation and amortization, and increased current liabilities, partially offset by increased accounts receivable and inventories. The increase in accounts receivable was due to increased revenue levels. The increase in inventories was necessary to support the Company's revenue growth and the introduction of the LanRover Access Switch product. Net cash used by investing activities totaled $18,648,000 for the nine- month period ended September 27, 1997, compared to $28,617,000 during the comparable period in fiscal 1996. Investment activity in each of the nine-month periods ended September 27, 1997 and September 28, 1996 consisted primarily of purchases of fixed assets and short-term investments, partially offset by proceeds from short-term investments upon maturity or sale. Net cash provided by financing activities totaled $1,670,000 in the nine-month period ended September 27, 1997, compared to $2,142,000 in the comparable period in fiscal 1996. Net cash provided by financing activities in each of the nine-month periods ended September 27, 1997 and September 28, 1996 consisted of proceeds from stock option exercises and purchases of stock under the Company's stock purchase plans, 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 that expires in September 1998. 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 September 27, 1997, available borrowings were reduced by outstanding letters of credit of $836,000 related to certain office leases. The Company had no borrowings outstanding under this facility at September 27, 1997. 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. The hedging activity is intended to offset the impact of currency fluctuations on certain non- functional currency assets and liabilities. The forward exchange contracts have maturities that do not exceed one year. At September 27, 1997, the Company had outstanding forward exchange contracts to sell approximately $458,000 and purchase $320,000 in various currencies. The fair value of outstanding forward exchange contracts approximates the original value due to the relatively short terms, generally less than three months. The Company believes that its existing cash and short-term investment balances, together with borrowings available under the Company's bank lines of credit, will be sufficient to meet the Company's cash requirements for at least the next twelve months. Factors That May Affect Future Results From time to time, information provided by the Company or statements made by its employees may contain "forward-looking" information which involve risks and uncertainties. In particular, statements contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations which are not historical facts may be "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 and the accuracy of the Company's internal estimates of revenue and operating expense levels. 11 The Company is in the process of renegotiating certain of the terms and conditions of its agreement with Nortel, including future distribution rights for the carrier and service provider market, quarterly minimum royalty payments and other cost sharing payments. Absent negotiation of new quarterly minimum payments, commencing in the first quarter of 1998, royalties shall not be payable by Nortel unless and until royalties, determined based on the resale of products by Nortel, exceed certain predetermined levels. Royalty payments from Nortel accounted for greater than 10% of total revenues in the three-month and nine-month periods ended September 27, 1997. There can be no assurance that Shiva will receive continued royalty and cost sharing payments from Nortel and any reductions in such payments could have a significant impact on the Company's future operating results. 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'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 nine months of 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 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 56K and other modem technologies. 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. 12 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. 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, currency exchange rate fluctuations, changes in monetary policy and 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. 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. PART II - OTHER INFORMATION Item 1. Legal Proceedings On May 21, 1997, a purported class action complaint was filed against the Company, Frank Ingari, Cynthia Deysher and David Cole, in the United States District Court for the District of Massachusetts, Lirette, et al. v. Shiva Corporation, et al., Civil Action No. 97-11159-WGY. On June 11, 1997, a similar complaint was filed against the same named defendants, Prozan, et al. v. Shiva Corporation, et al., Civil Action No. 97-11320-WGY. The cases have been consolidated, and an amended complaint applicable to all related actions will soon be filed. The initial complaints, to which no response will be made, were brought pursuant to Ch. 10 and 20 of the Securities Exchange Act of 1934 and S.E.C. Rule 10b-5. On behalf of a class of purchasers of the Company's stock between September 10, 1996 through March 31, 1997, the complaints seek damages, interest, fees and expenses. The Company believes it has meritorious defenses to the claims asserted and intends to defend these cases vigorously. The actions are in their earliest stages, and the Company is unable to determine at this time the potential liability, if any. On January 17, 1997, a purported class action complaint against the Company was filed in the Superior Court of the State of California for the County of Los Angeles, Abraham Schwartz and Norman Marcus v. Shiva Corporation, Case No. BC164278. The Company filed a demurrer seeking to dismiss all claims in the Complaint. In response to the demurrer, the plaintiffs filed an Amended Complaint, also purportedly on behalf of a class, which asserted violations of California Corporations Codes 25400, 25500, 25401, 25504, 25501 and 25504.1, California Civil Code Ch. 1709-10, and common law fraud and negligent misrepresentation, against the Company and three individuals: Frank Ingari, Cynthia Deysher and Woody Benson. The Company filed a demurrer seeking to dismiss these claims; and the individuals sought to dismiss the claims for lack of personal jurisdiction. The Court, without prejudice, granted the individuals' motions. The Court dismissed with prejudice all of the claims against the Company brought under the California Corporations Code, but allowed leave to replead certain of the remaining claims. In response, plaintiffs filed a Second Amended Complaint, which seeks damages on behalf of the purported class, including punitive damages, treble damages, attorneys' fees and costs, based on alleged fraud and negligent misrepresentation in violation of California Civil Code Ch. 1709-10 and the common law. The Company has filed a demurrer seeking to have the Second Amended Complaint dismissed, a motion to strike seeking to limit any claims not dismissed to a narrower time frame, and a motion to stay the case on the ground of forum non conveniens. The Court granted the demurrer, and denied the motions to strike and stay. Plaintiffs were granted leave to amend the Complaint, and have stated that they can allege facts sufficient to address the deficiencies of the most recent Complaint identified by the Court. The Company believes it has meritorious defenses to the claims asserted and intends to vigorously defend against the action. The action is in its earliest stages, and the Company is unable to determine at this time the potential liability, if any. 13 Item 5. Other Information Effective October 3, 1997, Mr. Richard J. Egan was appointed by the Board of Directors of the Company to serve as a seventh member of the Board of Directors of the Company. Effective October 27, 1997, James L. Zucco, Jr. replaced Frank A. Ingari as Chief Executive Officer. Mr. Ingari will continue in his role of Chairman of the Board. Mr. Ingari will remain as an employee of the Company until sometime in 1998, at which time all unvested stock options will be cancelled and returned to the pool of available stock options for grant, pursuant to the Company's Stock Option Plans. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.1 Letter agreement dated July 9, 1997 between Shiva Corporation and James F. Finucane regarding offer of employment and compensation as Senior Vice President, Engineering. 10.2 Letter agreement dated August 27, 1997 Between Shiva Corporation and Michael J. Duffy regarding offer of employment and compensation as Senior Vice President, Worldwide Sales. 10.3 Promissory Note dated September 8, 1997 between Shiva Corporation and James L. Zucco, Jr. 11.0 Statement of Computation of Earnings per share included herein on page 16. 27.0 Financial Data Schedule.
(b) Reports on Form 8-K: The Company filed no reports on Form 8- K during the three month period ended September 27, 1997. 14 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: November 11, 1997 by: /s/ Larry D. Whitman ---------------------------- Vice President and Corporate Controller (Principal Financial and Accounting Officer) 15 SHIVA CORPORATION EXHIBIT INDEX
Exhibit No. Description of Exhibit - ----------- ---------------------- 10.1 Letter agreement dated July 9, 1997 between Shiva Corporation and James F. Finucane regarding offer of employment and compensation as Senior Vice President, Engineering. 10.2 Letter agreement dated August 27, 1997 Between Shiva Corporation and Michael J. Duffy regarding offer of employment and compensation as Senior Vice President, Worldwide Sales. 10.3 Promissory Note dated September 8, 1997 between Shiva Corporation and James L. Zucco, Jr. 11.0 Statement of Computation of Earnings per share included herein on page 16. 27.0 Financial Data Schedule.
16 EX-10.1 2 Exhibit 10.1 July 9, 1997 Mr. James F. Finucane 78 Seney Drive Bernardsville, NJ 07924 Dear Jim, On behalf of Shiva Corporation, I am pleased to offer you the position of Senior Vice President, Engineering reporting directly to me. Your initial base compensation will be $7884.62 bi-weekly, which is $205,000 annualized. You will be eligible for a 50% bonus based on the Shiva Bonus Plan guidelines. Your recurring compensation will include a base salary and an annual bonus based on the company meeting its operating plan and other objectives set between us and with the Board of Directors. Under the terms of the Shiva Corporation 1988 Stock Option Plan, stock option grants are subject to approval and grant by the Compensation Committee of the Board of Directors. Shiva Corporation management will recommend to the Compensation Committee that you be granted an initial stock grant in the amount of 275,000 shares at the time of the next Compensation Committee meeting after your start date or written consent in lieu of such meeting, according to the then current standard stock option terms and conditions. Your initial vesting schedule is as follows: 68,750 (25%) will vest immediately upon date of grant 17,187.5 (6.25%) will vest 1 year after date of grant and 17,187.5 (6.25%) will continue to vest quarterly for the remaining eleven quarters thereafter. In the event of a change of control of Shiva within one year of your start date, 50% of your outstanding options will vest immediately. In the event of a change of control of Shiva after one year of your You are entitled to participate immediately upon your start date in our benefit programs. Shiva expects that you will be pleased with the company's medical and disability programs. Reasonable relocation and family visit expenses will be provided. After the completion of 60 days of employment you will receive a hiring bonus of $40,000. In the event of your termination other than for cause, you will be eligible to receive severance pay for one year or until you find other suitable employment. This offer is contingent upon your compliance with the Immigration Reform and Control Act. In addition, enclosed is a Non-Disclosure Agreement and I-9 Form for your review that all Shiva employees are required to sign. We look forward to your joining Shiva. If you have any questions, please do not hesitate to call me at 617-270-8890. Sincerely, James L. Zucco, Jr. President & COO Shiva Corporation Acceptance: ------------------------------ EX-10.2 3 Exhibit 10.2 August 27, 1997 Michael Duffy 34 Elderberry Lane Duxbury, MA 02332 Dear Michael: On behalf of Shiva Corporation, I am pleased to offer you the position of Senior Vice President, Worldwide Sales, reporting directly to me. Your initial base compensation will be $8,653.85 bi-weekly, which is $225,000 annualized. Your 1997 bonus will be guaranteed at $175,000 prorated, pursuant to the Shiva Bonus Plan guidelines. Your 1998 bonus will be guaranteed at $87,500 with eligibility for a total bonus of $175,000 for the year. Your recurring compensation will include a base salary and an annual bonus based on the company meeting its operating plan and other objectives set between us and with the Board of Directors. After the completion of 30 days of employment, you will receive a $50,000 hiring bonus. Under the terms of the Shiva Corporation 1988 or 1997 Stock Option Plans, stock option grants are subject to approval and grant by the Compensation Committee of the Board of Directors. Shiva Corporation management will recommend to the Compensation Committee that you be granted an initial stock grant in the amount of 275,000 shares at the time of the next Compensation Committee meeting after your start date or via written consent in lieu of such meeting, according to the then current standard stock option terms and conditions. Your initial vesting schedule is as follows: 68,750 (25%) will vest immediately upon date of grant 17,187.5 (6.25%) will vest 15 months after date of grant, and 17,187.5 (6.25%) will continue to vest quarterly for the remaining eleven quarters thereafter. In the event of a change of control of Shiva within one year of your start date, 50% of your outstanding options will vest immediately. In the event of a change of control of Shiva after one year of your start date, 100% of your outstanding stock options will vest immediately. You are entitled to participate immediately upon your start date in our benefits programs. Shiva expects that you will be pleased with the company's medical and disability programs. In the event of your involuntary termination other than for cause, you will be eligible to receive severance pay of $350,000. This offer is contingent upon your compliance with the Immigration Reform and Control Act. In addition, enclosed is a Non-Disclosure Agreement and I-9 Form for your review that all Shiva employees are required to sign. We look forward to your joining Shiva. If you have any questions, please do not hesitate to call me at (617) 270-8890. Sincerely, James Zucco President & COO Acceptance: Date: ---------------------------------- ------------ EX-10.3 4 Exhibit 10.3 Promissory Note On September 8, 1997, for value received, the undersigned promises to pay to the order of Shiva Corporation the total amount of $700,000.00. This note is payable five years from the date of this Promissory Note (September 8, 2002). In the event that your employment with Shiva Corporation is terminated, either voluntarily or involuntarily, during the five year term of this note, then the balance due on this note shall be payable on demand, and, if no demand is made, then ninety (90) days after the undersigned ceases to be employed by Shiva Corporation. By: /s/ James L. Zucco, Jr. Name Address EX-11 5 Exhibit 11 SHIVA CORPORATION Computation of Net Income (Loss) Per Share(1)
Three months ended Nine months ended September 27, September 28, September 27, September 28, 1997 1996 1997 1996 ------------- ------------- ------------- ------------- Weighted Average Common and Common Equivalent Shares: Weighted Average Common Shares Outstanding During the Period 29,387,230 28,581,648 29,165,388 28,317,851 Weighted Average Common Equivalent Shares - 3,324,775 - 3,181,488 ---------- ---------- ---------- ---------- 29,387,230 31,906,423 29,165,388 31,499,339 ========== ========== ========== ========== Net Income (Loss) ($2,130,000) $6,027,000 ($11,496,000) $15,341,000 Primary Net Income (Loss) Per Share ($0.07) $0.19 ($0.39) $0.49 (1) Fully diluted net income per share has not been separately presented, as the amounts would not be materially different from primary net income per share. Net loss per share excludes common equivalent shares because their effect is antidilutive.
EX-27 6
5 9-MOS JAN-03-1998 DEC-29-1996 SEP-27-1997 56,935 41,830 34,633 9,992 17,125 152,419 43,854 17,987 185,937 37,685 0 0 0 295 147,414 185,937 93,217 106,478 52,907 52,907 74,605 469 294 (18,541) (7,045) (11,496) 0 0 0 (11,496) (.39) (.39)
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