-----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, E2VjwFqaQsGsxBrQxmxDLdqvQEmKUf4D6UWR1vL9QuZsD50PfRDId3BaUXlchkxd jep1hiCMYSYu1Z2tm6KABw== 0000879136-99-000005.txt : 19990122 0000879136-99-000005.hdr.sgml : 19990122 ACCESSION NUMBER: 0000879136-99-000005 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980404 FILED AS OF DATE: 19990121 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/A SEC ACT: SEC FILE NUMBER: 000-24918 FILM NUMBER: 99509384 BUSINESS ADDRESS: STREET 1: 20 CROSBY DR CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 7816871000 MAIL ADDRESS: STREET 1: 20 CROSBY DR CITY: BEDFORD STATE: MA ZIP: 01730 10-Q/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A Amendment No. 1 (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly period ended April 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 000-24918 --------- 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 April 4, 1998 was 30,301,804. 1 RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION While responding to a comment letter received from the staff of the Securities and Exchange Commission (the "SEC"), the Company reviewed staff guidance issued on September 15, 1998 with respect to the method used to value acquired in-process research and development ("R&D") associated with the Company's acquisition of Isolation Systems Limited ("Isolation") in the first quarter of 1998. As a result of this review, the Company has modified the method used to value such acquired in-process R&D. Initial calculations to value the acquired in-process R&D were based upon a methodology that focused on the after-tax cash flows attributable to the technology, on an overall basis, without regard to the stage of completion of individual projects, and the selection of an appropriate rate of return to reflect the risk associated with the stage of completion of the technology. Revised calculations were based upon the methodology set forth in the SEC's September 1998 letter to the AICPA that requires consideration of the stage of completion of the individual in-process R&D projects at the date of acquisition. As a result of applying the revised calculations, the Company has restated its financial statements for the quarters ended April 4, July 4, and October 3, 1998 (See Note 8 to the Company's consolidated financial statements). This Quarterly Report on Form 10Q/A amends and restates items 1 and 2 of Part I and item 6 of Part II of the Company's Quarterly Report on Form 10-Q previously filed for the quarter ended April 4, 1998. 2 SHIVA CORPORATION Consolidated Balance Sheet (in thousands, except share related data)
April 4, January 3, 1998 1998 --------- --------- (unaudited) (As Restated- See Note 8) Assets Current assets: Cash and cash equivalents $ 23,942 $ 58,915 Short-term investments 46,040 36,868 Accounts receivable, net of allowances of $9,203 at April 4, 1998 and $8,037 at January 3, 1998 20,012 23,169 Inventories 10,844 14,058 Deferred income taxes 8,683 8,683 Prepaid expenses and other current assets 2,139 2,369 -------- -------- Total current assets 111,660 144,062 Property, plant and equipment, net 25,644 26,093 Deferred income taxes 10,088 8,840 Goodwill 34,581 - Other assets 5,228 3,251 -------- -------- Total assets $187,201 $182,246 ======== ======== Liabilities and stockholders' equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 8 $ 118 Accounts payable 8,129 9,258 Accrued expenses 23,914 22,304 Deferred revenue 10,729 4,068 -------- -------- Total current liabilities 42,780 35,748 Deferred income taxes 561 554 -------- -------- Total liabilities 43,341 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, 30,301,804 and 29,605,848 shares issued and outstanding at April 4, 1998 and January 3, 1998, respectively 303 296 Additional paid-in capital 153,949 153,036 Treasury stock at cost, 106,115 shares at April 4, 1998 (1,307) - Unrealized gain on investments 89 110 Cumulative translation adjustment (139) (308) Accumulated deficit (9,035) (7,190) -------- -------- Total stockholders' equity 143,860 145,944 -------- -------- Total liabilities and stockholders' equity $187,201 $182,246 ======== ======== 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 --------------------------- April 4, March 29, 1998 1997 -------- --------- (As Restated- See Note 8) Revenues: Product $ 29,816 $ 25,368 Service 8,174 1,541 Royalty 41 4,250 -------- -------- Total revenues 38,031 31,159 -------- -------- Cost of revenues: Product 13,355 20,087 Service 5,194 1,552 -------- -------- Total cost of revenues 18,549 21,639 -------- -------- Gross profit 19,482 9,520 -------- -------- Operating expenses: Research and development 4,580 5,961 Selling, general and administrative 14,808 17,898 In-process research and development 2,100 - Restructuring expenses 1,630 - -------- -------- Total operating expenses 23,118 23,859 -------- -------- Loss from operations (3,636) (14,339) Interest income 1,123 962 Interest and other expense (200) (122) -------- -------- Loss before income taxes (2,713) (13,499) Income tax benefit (868) (5,129) -------- -------- Net loss $ (1,845) $ (8,370) ======== ======== Net loss per share - basic and diluted $ (0.06) $ (0.29) ======== ======== Shares used in computing net loss per share - basic and diluted 29,854 28,972 ======== ======== 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)
Three Months Ended --------------------------- April 4, March 29, 1998 1997 -------- --------- (As Restated- See Note 8) Cash flows from operating activities: Net loss $ (1,845) $ (8,370) Adjustments to reconcile net loss to net cash provided (used) by operating activities: In-process research and development 2,100 - Depreciation and amortization 2,937 2,235 Deferred income taxes (880) - Changes in assets and liabilities, net of effects of acquisition: Accounts receivable 3,496 14,901 Inventories 3,305 1,302 Prepaid expenses and other current assets 301 (5,277) Accounts payable (1,814) (3,389) Accrued expenses 1,364 (3,044) Deferred revenue 6,656 119 Other long-term liabilities - (10) -------- -------- Net cash provided (used) by operating activities 15,620 (1,533) -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment (1,617) (3,015) Payments for acquisition (38,821) - Capitalized software development costs (88) (155) Purchases of short-term investments (19,688) (5,333) Proceeds from maturity and sales of short-term investments 10,495 6,525 Change in other assets (36) (101) -------- -------- Net cash used by investing activities (49,755) (2,079) -------- -------- Cash flows from financing activities: Principal payments on long-term debt and capital lease obligations (111) (118) Purchases of treasury stock (1,307) - Proceeds from exercise of stock options 553 487 -------- -------- Net cash provided (used) by financing activities (865) 369 -------- -------- Effects of exchange rate changes on cash and cash equivalents 27 385 -------- -------- Net decrease in cash and cash equivalents (34,973) (2,858) Cash and cash equivalents, beginning of period 58,915 72,067 -------- -------- Cash and cash equivalents, end of period $ 23,942 $ 69,209 ======== ======== 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 January 3, 1998. The results of operations for the three-month period ended April 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 April 4, ended March 29, 1998 1997 -------------- --------------- (As restated- See Note 8) Net loss ($1,845,000) ($8,370,000) ============ ============ Weighted average shares outstanding 29,853,766 28,971,621 Common-equivalent shares outstanding - - ------------ ----------- Weighted average and common- equivalent shares outstanding 29,853,766 28,971,621 Basic and diluted net loss per share ($0.06) ($0.29) =========== ============
6 3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: At April 4, 1998, the Company had cash and cash equivalents of $23,942,000 and $46,040,000 of short-term investments, including an unrealized gain of $89,000 recorded as a separate component of stockholders' equity. The Company's short-term investments at April 4, 1998, classified as available-for-sale, consist of municipal securities, corporate debt securities, certificates of deposit, high-grade commercial paper and U.S. Treasury securities, with various maturity dates through February 2000. 4. INVENTORIES:
Inventories consist of the following: April 4, January 3, (in thousands) 1998 1998 -------- ---------- Raw materials $ 5,707 $ 7,199 Work-in-process 111 57 Finished goods 5,026 6,802 ------- ------- $10,844 $14,058 ======= =======
5. COMPREHENSIVE LOSS: 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, as restated, for the three months ended April 4, 1998 was $1,745,000 and includes 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, 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 balances. The acquisition was accounted for as a purchase. Accordingly, the purchase price of approximately $39,724,000 was allocated to the underlying assets and liabilities based on their respective fair values at the date of closing. The estimated fair value of the net assets acquired was $743,000, and $2,100,000 of the purchase price was allocated to in-process R&D. The amount allocated to in-process R&D was determined based upon the methodology set forth in the SEC's September 1998 letter to the AICPA that requires consideration of the stage of completion of the individual in-process R&D projects at the date of acquisition. The in-process R&D was 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 and the in-process R&D will be amortized on a straight-line basis over three years. This excess approximated $36,881,000, and consisted of $34,581,000 recorded as goodwill, while the remaining amount, which has been included in other assets in the accompanying financial statements, consisted of $2,000,000 related to developed technology and $300,000 related to an assembled workforce. 7 Pursuant to an indemnification agreement with Isolation, the Company has a contingent liability up to a maximum of approximately $6,500,000 in relation to certain foreign tax liabilities and associated interest. The obligations of Shiva only arise if Isolation is assessed or reassessed on the basis that a portion of the property sold is of a particular nature. The purpose of the agreement was to ensure that Isolation and its shareholders were not subject to adverse tax consequences as a result of the terms of the Company's agreement to acquire Isolation. The following summary, prepared on an unaudited pro forma basis, combines the results of operations as if Isolation had been acquired as of December 29, 1996; however the one-time charge of $2,100,000 as a result of the purchase price allocated to in- process R&D 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 Three-months ended (in thousands) April 4, 1998 March 29, 1997 ------------------ ------------------ (As Restated - See Note 8) Total revenues $ 39,289 $ 31,386 Operating loss ( 4,656) (18,296) Net loss ( 2,769) (11,051) ---------- ---------- Net loss per share - basic and diluted $ ( 0.09) $ ( 0.38) ========== ==========
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: The Company recorded $1,630,000 of restructuring expenses during the first quarter of fiscal 1998. These expenses, comprised of severance-related costs of $1,482,000 and transition and other costs of $148,000, were the result of the restructuring of the Company's sales and marketing operations. As of April 4, 1998, approximately $1,185,000 of these costs had been paid. 8. RESTATEMENT: While responding to a comment letter received from the staff of the SEC, the Company reviewed staff guidance issued on September 15, 1998 with respect to the method used to value acquired in- process R&D associated with the Company's acquisition of Isolation in the first quarter of 1998. As a result of this review, the Company has modified the method used to value such acquired in-process R&D. Initial calculations to value the acquired in-process R&D were based upon a methodology that focused on the after-tax cash flows attributable to the technology on an overall basis, without regard to the stage of completion of individual projects, and the selection of an appropriate rate of return to reflect the risk associated with the stage of completion of the technology. Revised calculations were based upon the methodology set forth in the SEC's September 1998 letter to the AICPA that requires consideration of the stage of completion of the individual in-process R&D projects at the date of acquisition. After applying the revised calculations, the Company has restated its financial statements for the quarter ended April 4, 1998 and has decreased the amount of the purchase price allocated to acquired in-process R&D associated with the Isolation acquisition from $34,500,000 to $2,100,000 and increased goodwill by $32,400,000. Goodwill will be amortized over a three year period. A summary of the significant effects of the restatement are as follows (in thousands): 8
Statement of Operations: Three-months ended April 4, 1998 ------------------------------------ As Previously Reported As Restated -------------- ----------- Operating expenses $ 55,518 $ 23,118 Loss before income taxes (35,113) (2,713) Income tax benefit (11,236) (868) Net loss (23,877) (1,845) Net loss per share - basic and diluted (0.80) (0.06) Balance Sheet: Goodwill (1) $ - $ 34,581 Other assets (1) 7,409 5,228 Long-term deferred income taxes 20,456 10,088 Total assets 165,169 187,201 Total stockholders' equity 121,828 143,860 (1) Goodwill in the amount of $2,181 was included in other assets prior to restatement.
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restatement While responding to a comment letter received from the staff of the SEC, the Company reviewed staff guidance issued on September 15, 1998 with respect to the method used to value acquired in- process R&D associated with the Company's acquisition of Isolation in the first quarter of 1998. As a result of this review, the Company has modified the method used to value such acquired in-process R&D. Initial calculations to value the acquired in-process R&D were based upon a methodology that focused on the after-tax cash flows attributable to the technology on an overall basis, without regard to the stage of completion of individual projects, and the selection of an appropriate rate of return to reflect the risk associated with the stage of completion of the technology. Revised calculations were based upon the methodology set forth in the SEC's September 1998 letter to the AICPA that requires consideration of the stage of completion of the individual in-process R&D projects at the date of acquisition. After applying the revised calculations, the Company has restated its financial statements for the quarter ended April 4, 1998 and has decreased the amount of the purchase price allocated to acquired in-process R&D associated with the Isolation acquisition from $34,500,000 to $2,100,000 and increased goodwill by $32,400,000. Goodwill will be amortized over a three year period. 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 will issue purchase orders for a minimum of $5,000,000 per quarter to purchase 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. 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 product in a timely fashion and product availability. These OEM purchases from Nortel will replace the minimum royalty arrangement with the Company that was in effect during fiscal 1997. In addition, the Company will receive 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. Gross margins on sales to Nortel are expected to decline in fiscal 1998 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 to license certain Shiva technology. This option was part of the 1998 Agreement. Pursuant to the terms of the agreement, Shiva will record a total of $26,000,000 ratably over ten quarters beginning in the second quarter of fiscal 1998, for the license and other items related to intellectual property. Revenues. Revenues increased by 22%, to $38,031,000, in the three-month period ended April 4, 1998 from $31,159,000 in the comparable period in fiscal 1997. This increase was principally due to higher service revenues, which increased to $8,174,000 in the three-month period ended April 4, 1998 from $1,541,000 during the comparable period in fiscal 1997. This increase was primarily due to $6,000,000 in professional services revenue from Nortel related to the development of carrier class remote access technology as outlined in the 1998 Agreement. 10 Remote access revenues increased by 2% to $28,236,000 in the three-month period ended April 4, 1998 from $27,692,000 in the comparable period in fiscal 1997. Revenues from the LanRover Access Switch in the three-month period ended April 4, 1998 increased by 28% to $14,539,000 from $11,366,000 during the same period in fiscal 1997, primarily due to higher volume shipments. Revenues from the LanRover Access Switch in the first quarter of 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 in the three-month period ended March 29, 1997. 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. The price protection provisions were recorded to account for pricing actions effective in the second quarter of fiscal 1997 due to increased price competition and price reductions on V.34 modem cards due to the availability of 56K modem technology in the access concentrator market. Revenues from the LanRover product line decreased by 21% to $9,746,000 in the three-month period ended April 4, 1998 from $12,330,000 in the comparable period in fiscal 1997. This decrease was due to lower volume shipments. LanRover revenues in the first quarter of 1997 were impacted by price protection provisions of $3,900,000, which were recorded to account for pricing actions which became effective in the second quarter of fiscal 1997 and were in response to increased price competition. 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 $3,323,000 and $10,619,000 in the three-month periods ended April 4, 1998 and March 29, 1997, respectively, representing 8% and 22% of gross revenues, respectively. The decline in the provision for product returns was primarily the result of increased provisions recorded in the three-month period ended March 29, 1997 to account for slow-moving and discontinued products in the Company's North American distribution channels. Revenues from OEM customers were essentially flat and represented 28% of revenues in the three-month period ended April 4, 1998 compared to 33% in the comparable period in fiscal 1997. International revenues accounted for 39% and 62% of revenues in the three-month periods ended April 4, 1998 and March 29, 1997, respectively. International revenues represented a higher proportion of total revenues in the three-month period ended March 29, 1997 primarily due to the impact of the return provisions and price protection provisions that significantly reduced revenues from the Company's North American distribution channels. Gross Profit. Gross profit increased by 105%, to $19,842,000, or 51% of revenues, in the three-month period ended April 4, 1998, compared to $9,520,000, or 31% of revenues, in the comparable period in fiscal 1997. Gross profit in the three-month period ended March 29, 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 three- month period ended March 29, 1997. Gross profit in the three- month period ended April 4, 1998 included $6,000,000 in professional services revenue, as well as 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 period. In the future, the Company's gross margins may be affected by several factors, including but not limited to 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 three-month period ended April 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 by 23%, to $4,580,000, or 12% of revenues, in the three-month period ended April 4, 1998 from $5,961,000, or 19% of revenues, during the comparable period 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 will recognize $6,000,000 in professional services revenue during each of the first two quarters of fiscal 1998 as work is performed. Accordingly, expenses related to these development efforts of $3,711,000 in the three-month period ended April 4, 1998 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), are reflected as an offset to research and development expenses, and were $1,636,000 in the three-month period ended March 29, 1997. There were no such fees recorded in the three-month period ended April 4, 1998. Capitalized software development costs were $88,000 in the three- month period ended April 4, 1998 compared with $155,000 in the comparable period in fiscal 1997. Gross research and development expenses increased by $627,000 to $8,379,000 in the three month period ended April 4, 1998 from $7,752,000 in the comparable period in fiscal 1997. The Company anticipates continued significant investment in research and development primarily focused on providing remote access solutions for the business access market. 11 Selling, General and Administrative. Selling, general and administrative expenses decreased by 17%, to $14,808,000 in the three-month period ended April 4, 1998 from $17,898,000 in the comparable period in fiscal 1997. These expenses represented 39% and 57% of revenues in the three-month periods ended April 4, 1998 and March 29, 1997, respectively. 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 and various facilities related expenses. These decreases were partially offset by increased depreciation and bad debt expense. Selling, general and administrative expenses in the three-month periods ended April 4, 1998 and March 29, 1997 are net of expenses reimbursed by Nortel of $1,018,000 and $676,000, respectively, related to Shiva's Service Provider Group (SPG), a worldwide business unit comprised of technical sales and support personnel dedicated to marketing Nortel's remote access equipment to carriers and service providers. Nortel will no longer fund the SPG unit beginning in the second quarter of fiscal 1998. In-Process Research and Development. In connection with the acquisition of Isolation, the Company allocated $2,100,000 of the purchase price to in-process R&D. This allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the research and development in progress had no alternative future uses. Accordingly, these costs were expensed as of the acquisition date. At the acquisition date, the nature of the acquired in-process R&D principally related to redesign of the technology and software operating system to develop next-generation VPN software technology that would be compliant with evolving industry standards. The remaining efforts included the completion of certain design, coding, prototyping, and testing activities that were necessary to establish that the proposed VPN technologies met their design specifications, including functional, technical, and economic performance requirements. This product would become the basis for the Company's future integrated VPN / remote access products. The Company anticipates incurring costs of approximately $1,000,000 to $2,000,000 over the next several quarters following the acquisition of Isolation, at which time the Company expects to begin selling such products. Management believes the Company has a reasonable chance of successfully completing the in-process R&D, however, there is risk associated with the completion of the projects and there can be no assurance that the developed products will meet with either technological or commercial success. Failure to successfully complete the projects and/or market the resulting products would have a material adverse effect on the results of operations and financial condition of the Company in future periods. The value assigned to purchased in-process R&D was determined by estimating the costs to develop the purchased in-process R&D into commercially viable products, estimating the stage of completion, estimating the resulting net cash flows from the projects and discounting the net cash flows to their present value. The revenue projection used to value the in-process R&D was based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. The estimated revenues for the in-process R&D assumed compound annual growth rates of 90% in the five years following introduction, assuming the successful completion and market acceptance of the products. The estimated revenues for the in- process R&D products were expected to peak within four to five years and then decline sharply as other new products and technologies entered the market. 12 Gross margins and operating expenses were estimated based on historical results and management beliefs regarding anticipated factors affecting profit margins. The Company anticipated that gross margins as a percentage of revenues would decline over time as new competitors and competing technologies entered the marketplace. Additionally, the Company anticipated that operating expenses as a percentage of revenues would decline over time due to purchasing power increases and general economies of scale. The rates utilized to discount the net cash flows to their present value were based on cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth, profitability and developmental projects, a discount rate of 30 percent was deemed appropriate for the in- process R&D. This discount rate was commensurate with Isolation's stage of development and the uncertainties in the economic estimates as described above. The Company believed that the foregoing assumptions used in Isolation's in-process R&D analysis were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate product sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. The Company continues to work towards the completion of the acquired in-process R&D. The risks associated with these efforts are still considered high and no assurance can be made that the products resulting from in-process R&D will meet with market acceptance. In addition, delays in the introduction of such products may have an adverse impact on the Company's results of operations and financial condition in future periods. Restructuring Expenses. The Company recorded restructuring expenses of $1,630,000 in the three-month period ended April 4, 1998. These expenses, comprised primarily of severance costs, were the result of the restructuring of the Company's sales and marketing operations in order to support the Company's strategic focus on providing remote access solutions for the business access market. In addition to the restructuring action discussed above, on April 15, 1998, the Company announced a worldwide restructuring to align its financial model with the recently announced strategic focus on providing remote access solutions for business. As a result of this restructuring, Shiva expects to recognize a pre- tax charge in the second quarter of fiscal 1998 of approximately $9,000,000 to $12,000,000. It is anticipated that these actions will yield approximately $10,000,000 to $15,000,000 in annualized savings, the impact of which is expected to begin in the third quarter of fiscal 1998. This restructuring will result in the elimination of approximately 125 positions worldwide, during the next several months. 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. Interest Income and Expense. Interest income increased during the three-month period ended April 4, 1998 over the corresponding period in fiscal 1997 due to the Company's shift from federal tax- exempt securities into taxable securities which resulted in a higher overall yield on its investments. In the future, the Company expects net interest income and expense to decline due to the loss of interest income as a result of the cash used in the acquisition of Isolation. Income Tax Benefit. The Company's effective tax rate in the three month period ended April 4, 1998 was 32%, down from 38% in the three-month period ended March 29, 1997, primarily due to the impact of nondeductible restructuring charges. 13 Foreign Currency Fluctuations Foreign currency fluctuations did not have a significant impact on the comparison of the results of operations in the three-month period ended April 4, 1998 with those of the comparable period 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 believes that all of its products are currently Year 2000 compliant with the exception of the SpiderManager product, which 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 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. 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 April 4, 1998, the Company had $23,942,000 of cash and cash equivalents and $46,040,000 of short-term investments. Working capital decreased by 36% to $68,880,000 at April 4, 1998 from $108,314,000 at January 3, 1998. Net cash provided by operations totaled $15,620,000 for the three- month period ended April 4, 1998 compared with net cash used by operations of $1,533,000 during the comparable period in fiscal 1997. Net cash provided by operations in the three-month period ended April 4, 1998 resulted primarily from the net loss adjusted for non-cash expenses including in-process R&D, as well as the decrease in accounts receivable and inventories and an increase in deferred revenue. The decrease in accounts receivable is primarily due to increased collection activities, and the decrease in inventories is due to better inventory management. The increase in deferred revenue is primarily due to cash payments received from Nortel during the quarter that relate to professional services that will be provided during the second quarter of fiscal 1998. Net cash used by operations in the three- month period ended March 29, 1997 resulted primarily from the net loss and decreased current liabilities, partially offset by decreased accounts receivable. The decrease in accounts receivable was due to decreased revenue levels and the previously mentioned increase in product return and price protection provisions. Net cash used by investing activities totaled $49,755,000 for the three-month period ended April 4, 1998, compared to $2,079,000 during the comparable period in fiscal 1997. Investment activity in the three-month period ended April 4, 1998 consisted primarily of payments related to the purchase of Isolation, as well as the purchase of short-term investments and fixed assets. Investment activity in the three-month period ended March 29, 1997 consisted primarily of purchases of fixed assets, partially offset by proceeds from short-term investments upon maturity or sale. 14 Net cash used by financing activities totaled $865,000 for the three-month period ended April 4, 1998, compared to net cash provided of $369,000 in the comparable period in fiscal 1997. Net cash used by financing activities for the three-month period ended April 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 three-month period ended March 29, 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 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 April 4, 1998, available borrowings were reduced by outstanding letters of credit of $834,000 which expire at various dates in 1998. The Company had no borrowings outstanding under this line at April 4, 1998. The Company also has a foreign credit facility of approximately $2,666,000, all of which was available at April 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 April 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 April 4, 1998, the Company had outstanding forward exchange contracts to purchase $495,000 and to sell $261,000 in various currencies which will mature by 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 new 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. 15 The Company has been party to a strategic relationship with Nortel since 1995 which has evolved over time. Under the terms of a new 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, and will continue to receive, 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 or for the Company to provide such services beyond the second quarter of fiscal 1998. Revenues from Nortel accounted for 16% and 14% of revenues in fiscal 1997 and 1996, respectively. On March 26, 1998, the Company completed its acquisition of Isolation, 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 a timely manner. There can be can be no assurance that the Company will be successful in integrating the operations of Isolation. 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 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 quarter 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. 16 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. 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 Isolation Acquisition and the ability of the Company to integrate the acquired business into the Company's existing operations, and material changes in the level of customer-funded research and development activities. 17 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 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit No. Description of Exhibit ----------- ---------------------- Exhibit 10.1* Agreement by and between the Company and Northern Telecom Limited dated February 27, 1998 is incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 4, 1998 (File No. 000-24918). Exhibit 10.2* Amendment dated March 13, 1998 to the Agreement by and between the Company and Northern Telecom Limited dated February 27, 1998 is incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 4, 1998 (File No. 000-24918). Exhibit 27 Restated Financial Data Schedule ----------------------------------------- * Confidential treatment previously granted as to certain portions of such document.
(b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated February 20, 1998 pursuant to the Item 5 thereof, reporting the Company's announcement of the execution of a definitive agreement to acquire the majority of the assets of Isolation, a privately-held Ontario corporation, for approximately $37,000,000 in cash, subject to closing adjustments. 18 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: January 21, 1999 by: /s/ Robert P. Cirrone --------------------- Senior Vice President, Finance and Administration, and Chief Financial Officer (Principal Financial and Accounting Officer) 19 EXHIBIT INDEX -------------
Exhibit No. Description of Exhibit ----------- ---------------------- Exhibit 10.1* Agreement by and between the Company and Northern Telecom Limited dated February 27, 1998 is incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 4, 1998 (File No. 000-24918). Exhibit 10.2* Amendment dated March 13, 1998 to the Agreement by and between the Company and Northern Telecom Limited dated February 27, 1998 is incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 4, 1998 (File No. 000-24918). Exhibit 27 Restated Financial Data Schedule ----------------------------------------- * Confidential treatment previously granted as to certain portions of such document.
EX-27 2
5 1000 3-MOS JAN-02-1999 JAN-03-1998 APR-04-1998 23,942 46,040 29,214 9,202 10,844 111,660 48,645 23,001 187,201 42,780 0 0 0 303 143,557 187,201 38,031 38,031 18,549 18,549 23,118 663 200 (2,713) (868) (1,845) 0 0 0 (1,845) (0.06) (0.06)
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