SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1996
/ / 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
28 Crosby Drive, Bedford, MA 01730
(Address of principal executive offices, including Zip Code)
(617) 270-8300
(Registrant's telephone number, including area code)
---------------------------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Series A Junior Participating Preferred Stock, $.01 par value
(title of class)
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 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. /x/ YES / / NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $483,592,478 based on the closing price of the
Common Stock on the Nasdaq Stock Market on January 31, 1997.
The number of shares outstanding of the registrant's Common Stock as of
January 31, 1997 was 28,989,583.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May, 14, 1997 are incorporated by reference into Part
III hereof.
2. Portions of the registrant's 1996 Annual Report to Stockholders for the
fiscal year ended December 28, 1996 are incorporated by reference into
Parts I, II and IV hereof.
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Shiva, Shiva with design (the company logo), NetModem, NetModem/E, NetBridge,
NetSerial, TeleBridge, Hublet, LanRover, AirSoft, ShivaPPP, ShivaIntegrator,
PowerBurst, WebRover and EtherGate are registered trademarks of Shiva
Corporation. ShivOS, Tariff Management, isdn with design, ShivaPort,
ShivaRemote, Shiva Dial-in SDK, Shiva AccessPort, ISSAK, Remote-Centric,
DIAT and LanRover Access Switch are trademarks of Shiva Corporation. All
other trademarks belong to their respective companies.
<PAGE>
PART I
ITEM 1. Business
General
Shiva Corporation (the "Company") is a leader in the design, development,
manufacture and sale of hardware and software products that enable transparent
remote connectivity to enterprise networks from any location having access to
switched analog or digital telephone service. The Company also provides
Internet Service Providers ("ISPs") and local exchange, inter-exchange and
competitive access telephone carriers ("Carriers") a flexible architecture to
support their public data network remote access service offerings. Founded in
1985, the Company has applied its expertise in internetworking, personal
computer ("PC") software and telephony to pioneer the "remote node" approach
to remote network access. Shiva's remote node solution enables a remote PC to
access an existing network as a fully functional network node, thereby
allowing users to access network resources from their remote PCs as if they
were directly connected to the enterprise or public network. Shiva servers
enable users to connect to computing resources from home, while traveling, or
as part of a branch office or multi-user worksite.
The Company offers a full line of remote access solutions, technical training
and services supporting telecommuters and remote offices to large enterprise
networks and to the ISPs and Carriers providing remote access to the public
data networks. The enterprise-based remote access servers, such as the
LanRover Access Switch(TM), LanRover(R) and ShivaIntegrator(R) product
families, enable network managers of large networks to link telecommuters,
mobile professionals and branch offices with dial-in access to Local Area
Networks ("LANs") offering either transparent remote node PC-to-LAN
connections or LAN-to-LAN dial up connections through both public and private
telephone networks. The Company's technology also provides LAN-based users
the ability to make dial-out connections from the desktop to the Internet or
other on-line services. Network managers can control and manage remote user
access into the enterprise-based servers with the Shiva AccessManager security
and accounting solution. Shiva AccessManager is a Windows-based application
which provides comprehensive, centralized and cost-effective remote access
management. For the remote office and smaller branch, the Company provides
the Shiva AccessPort(TM) ISDN client router and the NetModem(R) server, as
well as ShivaRemote(TM) client software and PowerBurst(R) remote node
acceleration software for enhanced performance. The Company also offers other
communications products, such as the ShivaPort(TM) product family of
communications servers, that permit users to connect terminals, printers,
modems and other serial devices to Ethernet networks. The Company markets
its products in domestic and international markets through both direct and
indirect distribution channels to reach a wide range of customers.
In June 1996, the Company issued 691,587 shares of Common Stock in exchange
for all the outstanding shares of AirSoft, Inc. (the "AirSoft Acquisition").
AirSoft, Inc. ("AirSoft") designs, manufactures and sells performance
enhancement software products, including PowerBurst, a remote node
accelerator designed to improve the performance of file-system based
applications such as electronic mail, spreadsheets and word processors.
In August 1995, the Company acquired Spider Systems Ltd. ("Spider"), a
leading digital internetworking company based in Edinburgh, United Kingdom,
in exchange for 3,923,606 shares of Common Stock (the "Spider Acquisition").
The Spider Acquisition provided the Company with advanced network access
technology including ISDN, frame relay and X.25, a range of internetworking
products and network integration services. The ShivaIntegrator and ShivaPort
product families incorporate the technologies acquired from Spider.
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. The Company's actual results may vary significantly from
those stated in any forward looking statements. Factors that may cause such
differences include, but are not limited to, market acceptance of the
Company's products, the development of competitive products, limitations on
financial and other resources required to engage in product development
activities or to acquire or license third party technology and factors
adversely affecting the demand for, or use of, the Company's products. The
Company believes that factors affecting the ability of the Company's
products to achieve broad market acceptance include; but are not limited to
product performance, price, ease of adoption and displacement of existing
approaches.
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Products
Remote Access Products
The LanRover Remote Access Server Product Family
Shiva's LanRover family of high-performance, multi-platform, multi-protocol
remote access servers are designed to meet the needs of both network managers
and end-users in corporate environments. They provide remote node dial-in
access to the full range of network services, including electronic mail and
file transfer, as well as providing access to databases and mainframe
applications. LanRover servers support DOS, Windows, Macintosh, UNIX, and
terminal users and IPX, TCP/IP, AppleTalk, NetBEUI, and 802.2/LLC protocols.
The LanRover family enables shared dial-out to on-line information services
and send-fax support for LAN-attached PCs, in addition to LAN-to-LAN services
over analog or digital dial-up lines. For network managers, the LanRover
family offers centralized network management from a LAN-based Windows PC or
Macintosh; in-band and out-of-band management from IPX, TCP/IP and AppleTalk
and SNMP support as well as full security features.
The LanRover product family is available for Ethernet or Token Ring
environments in 2, 4 or 8 port configurations of either asynchronous ports or
V.34 analog modems. The LanRover/PLUS, also available for Ethernet or Token
Ring networks, is a modular server that supports up to eight V.34 modems,
ISDN BRI, or high speed asynchronous serial modules, or any combination of
services. The LanRover/Plus is field upgradable to analog and digital remote
access. For branch offices, the Company offers the LanRover/2E PLUS, a two-
port LanRover/PLUS with an integrated V.34 modem, ISDN BRI and a high-speed
serial card.
The LanRover Access Switch Product Family
The LanRover Access Switch is a high capacity remote access concentrator which
brings LanRover functionality to a new cooperative multiprocessing
architecture with industry standard high speed buses and extensive call
control capabilities. Designed to support over one hundred sessions, it
addresses the needs of corporate enterprises, Carriers, and ISPs. The
LanRover Access Switch supports all major remote networking functionality
including single user dial-in, dial-out for LAN based users, and LAN-to-LAN
routing for branch and home office connectivity over T1, E1, or T1/E1 PRI.
The LanRover Access Switch offers extensive management and accounting
capabilities via Shiva Net Manager(TM) or Shiva Enterprise Manager(TM), as
well as support for a range of security options including centralized security
and third party security such as TACACS and TACACS+, RADIUS, Security Dynamics
and AssureNet Pathways.
PowerBurst Remote Node Acceleration Technology
PowerBurst addresses both the bandwidth and latency issues associated with
dial-up links by employing caching algorithms that are designed to improve the
efficiency of communication over the remote node link, resulting in
significant increases in dial-in performance. PowerBurst accelerates a wide
variety of applications, including leading file-system-based e-mail,
databases, spreadsheets, and word processors. The block-level caching
algorithm allows PowerBurst to maximize performance while ensuring data
integrity. PowerBurst is currently the only acceleration solution fully
integrated into a remote access server operating system and dial-in client.
This integration in Shiva's LanRover Plus, LanRover Access Switch, and
ShivaRemote(TM) client software, ensures compatibility, interoperability, and
ease of deployment. PowerBurst is designed to reduce connect time and the
telecommunications charges associated with remote node access and is part of
a growing family of Shiva Tariff Management(TM) technologies developed to
increase performance and reduce the overall cost of remote access ownership.
Shiva AccessManager
The Shiva AccessManager is a standards-based security and accounting solution
that allows large enterprises, Internet Service Providers, and carriers to
control and manage remote user access. The Shiva AccessManager is a
protocol-independent authentication, authorization and accounting solution
for Windows NT, Windows 95 and Windows 3.11 environments. The Shiva
AccessManager can act as a proxy client for multiple user list servers
including various UNIX platforms, Microsoft NT Domains, Novell Netware
Bindery and Novell Network Directory Services. It is interoperable with any
RADIUS/TACACS compliant network access server and a wide variety of third
party network security servers such as Security Dynamics, AssureNet Pathways,
and Vasco. It provides a standards-based (ODBC) database interface that
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allows detailed accounting data to be stored and manipulated to generate user
specific billing/charge-back reports. These reports can provide organizations
with detailed cost analyses that can be supported by graphical management
statistics and allow network and business managers to view utilization and
trends.
The Shiva AccessPort Product Family
The Shiva AccessPort is an ISDN client router that connects telecommuters and
small office users to the corporate LAN and the Internet using ISDN. Shiva
AccessPort has one basic rate ISDN interface and support for multi-link PPP
which allows for aggregation of the two ISDN b-channels. In addition, two
analog ports are available for users to integrate phone and fax capabilities
over the ISDN phone line. Shiva AccessPort/D is available without the analog
ports for data only applications. Shiva AccessPort products route both IP
and IPX protocols and perform simultaneous bridging. As a complement to
Shiva's LanRover and LanRover Access Switch central site servers, the Shiva
AccessPort includes Wizard Installation software for ease of installation and
use, as well as Monitor software to monitor ISDN usage statistics and call
activity. Tariff Management technologies are employed in the Shiva
AccessPort to reduce the phone charges associated with remote access while
multiple levels of security ensure that data is kept private.
The NetModem Product Family
The Company provides the single-port NetModem/E 28.8 for the remote access
needs of smaller branch offices and workgroups. The NetModem/E 28.8 is an
integrated, stand-alone device consisting of a dedicated communications
server, V.34 modem and Ethernet interface. In addition to dial-in access, the
NetModem/E 28.8 provides shared dial-out access to on-line information
services and the Internet which allows users to send faxes from the desktop
and support LAN to LAN routing.
The ShivaIntegrator Product Family
ShivaIntegrator is a family of ISDN remote access systems which combine on-
demand ISDN networking with a host of Tariff Management features designed to
save on phone charges. The ShivaIntegrator 150 is a branch office router
with one serial line interface that supports frame relay and one Basic Rate
ISDN interface for connection to the central site or other branch offices.
The ShivaIntegrator 500 is a central site concentrator which supports Primary
Rate ISDN and provides up to 46 simultaneous connections to remote locations
and V.35 interface for leased line connections.
In fiscal 1996, 1995, and 1994 revenues from remote access products were
approximately $174,084,000 million, $83,924,000 million, and $44,825,000
million, respectively, or 87%, 71% and 55% of revenues, respectively.
Communications Products
The ShivaPort Product Family
ShivaPort is a high performance multi-protocol communications server for
Ethernet networks, available in 8, 16, or 32 port configurations. ShivaPort
products permit users to connect large numbers of terminals, printers,
modems and other serial devices to a LAN. It provides simple terminal
access, security, printing and network management features.
Other Communications Products
The Company also develops and sells other communications products including
WAN communications software products and Appletalk products. The Company
licensed communications protocol software products on a royalty basis to many
of the world's leading computer and information systems manufacturers who
sell these software products with their computer systems or embed them in
products they sell. The Company sold the protocol software business to
Spider Software Limited in December 1996. The Appletalk products are
designed to meet a variety of LAN communications needs of Macintosh users.
In fiscal 1996, 1995 and 1994 revenues from communications products were
approximately $16,847.000 million, $24,061,000 million and $27,763,000
million respectively, or 8%, 20% and 34% of revenues, respectively.
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Foreign and Domestic Operations and Export Sales
The information required by this item may be found under Note 12 of the
Notes to Consolidated Financial Statements and under the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", contained in the Company's Annual Report to Stockholders for the
fiscal year ending December 28, 1996 (the "1996 Annual Report to
Stockholders") and is incorporated herein by reference.
Markets and Customers
During 1996 several fundamental changes occurred in the remote access
industry that in turn affected the markets that the Company serves.
A significant change relates to the broad and rapid adoption of the Internet
which significantly affected the Company's two major market segments -- (1)
the private sector, consisting of large enterprises such as corporations and
governmental bodies and (2) the public sector consisting of Carriers and
Internet service providers ("ISP's"). The increased demand for access to the
Internet caused an increase in need for remote access products in the private
sector and stimulated the market for service providers requiring remote access
equipment. The Company has attempted to meet this demand by expanding its
research and development activities as well as the scope of its products.
Since the two segments have different requirements, the type of product and
services required by each is different and each is characterized by different
competitive environments. The private sector is characterized by the need
for greater breadth of protocol and operating systems support, greater
network management resources and more intensive hourly usage over a
concentrated period of time than the public sector. Shiva's major
competitors in this segment are Cisco, U.S. Robotics and Bay Networks. By
contrast, the public sector is characterized by higher call volumes,
continuous operation and limited network management staff thereby requiring
more support from Shiva. The major competitors in this segment are Ascend,
U.S. Robotics and Cisco.
Competition
Competitive factors in the remote access market include breadth of product
features, product quality and functionality, marketing and sales resources
and customer service and support. Although historically price has not been
a significant factor in the market for the Company's products, the Company
witnessed the beginning of pricing pressures in 1996, especially with the
LanRover product.
Many of the Company's current and potential competitors have greater
financial, marketing, technical and other resources than the Company. There
can be no assurance that the Company will be able to compete successfully
with new competitors. In addition, since the lower end segments of both
markets have numerous competitors, the Company's market share may decline in
the event any one or several of its competitors expands its existing market.
increased competition could have a material adverse effect on the Company's
business.
Sales and Marketing
The Company markets its products through numerous indirect distribution
channels worldwide, including distributors, value-added resellers and OEM
strategic partners. The Company actively supports its indirect channel
marketing partners with its own sales and marketing organization. The
Company's sales staff solicits prospective customers, provides technical
advice with respect to the Company's products and works closely with
particular partners through which larger customers purchase its products.
The Company believes that the active participation of its sales staff in the
selling process, in conjunction with the efforts of its distributors and
resellers, is necessary in order to provide customers with the level of
support required for successful integration of remote access solutions in
enterprise networks.
The Company conducts its North American sales and marketing activities
from its principal office in Bedford, Massachusetts, as well as from four
other North American sales offices. In international markets, the Company
markets its products through its Wokingham, United Kingdom office as well as
field sales offices in France, Germany, Sweden, South Africa, Singapore,
Australia, and the Netherlands and through distributors and resellers in most
European countries, South America, Asia, Africa and the Pacific Rim.
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In fiscal 1996, sales to a major strategic partner accounted for 14% of the
Company's total revenues. A reduction in sales to this partner would
adversely affect the Company's operating results.
The Company provides most of its distributors and resellers with product
return rights for stock balancing or product evaluation. The Company also
provides most of its distributors and resellers with price protection rights.
Stock balancing rights permit distributors to return products to the Company
for credit against future product purchases, within specified limits.
Product evaluation rights, available in some markets, permit end-users to
return products to the Company, through the distributor or reseller from whom
such products were purchased, within thirty days of purchase if such end-user
is not fully satisfied. Price protection rights require that the Company
grant retroactive price adjustments for inventories of the Company's products
held by distributors or resellers if the Company lowers its prices for such
products. Although the Company believes that it has adequate reserves to
cover product returns and price reductions, there can be no assurance that
the Company will not experience significant returns or price protection
adjustments in the future or that such reserves will be adequate to cover
such returns and price reductions.
Strategic Partnerships
The Company has developed and maintained strategic partnerships with a major
communications equipment company, Northern Telecom Limited ("Nortel"),
computer operating system vendors such as Microsoft ("Microsoft"), Internet
applications providers such as Netscape ("Netscape"), and major information
systems providers, such as IBM, Motorola and Hewlett-Packard ("HP"). The
partnerships allow the Company to address the rapid expansion of the
remote access market by providing worldwide sales, marketing and service
networks for the Company's technology and products. They also provide an
opportunity for technology and product exchanges.
The Company and Nortel are OEM and joint development partners. Through
this relationship, Nortel, which is a major provider of telecommunications
equipment, will distribute a Nortel RAPPORT version of the Company's LanRover
Access Switch to provide solutions for ISPs and other telecommunications
companies. The end-products will allow for the Internet thruway application
which is the loading of data calls from a central office switch to a data
network, such as a frame relay, resulting in minimization of congestion on
the voice network. Nortel will also manufacture and distribute a Nortel
RAPPORT version of the Shiva AccessPort.
The Company and IBM are OEM and joint development partners. The Company
manufactures IBM versions of its LanRover products that IBM markets as its
8235 products worldwide. The 8235 functionality has also been integrated
into its 8250/8260 switching hub product line. In addition, all of the
Company's Token Ring network products are designed with the IBM Token Ring
chip set. During 1996 the Shiva/IBM OEM relationship was expanded to include
the Company's LanRover Access Switch product which is marketed as the IBM
I-40 line. In general, the IBM partnership is intended to ensure that the
Company's products provide effective remote access solutions to IBM SNA
networking environments for the Fortune 500 type enterprise accounts.
Customer Service and Support
The Company believes that a high level of user support is essential to
achieving customer satisfaction. The majority of the Company's service and
support activities historically have been related to software and network
configuration issues which are provided by telephone and on-line access to
and from the Company's principal offices. With the market acceptance of the
LanRover Access Switch, installation, on-site maintenance and deployment
services have become increasingly important to ensure successful
implementations of the product at customer sites. The Company also provides
technical support and training to channel and strategic partners. The
Company provides a one-year warranty on its hardware products and a ninety day
software media warranty. After the expiration of the hardware warranty
period, the Company provides hardware repair services on a fee basis. Software
upgrades are also available for purchase on a fee basis. Both hardware
repairs and software upgrades may be purchased as part of a comprehensive
support program as well. Comprehensive support programs provide toll-free
telephone support lines, overnight exchange of products, on-site hardware
maintenance, and free or discounted hardware and software revisions and
upgrades. In addition, the Company provides on-line services that are used
to distribute technical advice and software updates. On-line services include
a fax back service, a bulletin board service and an electronic mail access
service, as well as ISSAK(TM), which is the Company's technical knowledge
base.
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Research and Development
The Company's research and development efforts are focused on developing new
products and core technologies for the remote access market and further
enhancing the functionality, reliability, performance and flexibility of
existing products. Extensive input concerning product development is
obtained from users, both directly and through indirect marketing channel
partners. The Company also receives input from active participation in
industry groups responsible for establishing technical standards.
In 1996, the Company completed development and introduced the LanRover
Access Switch high-end remote access switch. It has extended the product line
into new markets such as Internet Service Providers and Carrier customers
providing Internet access services. The Company is also focusing its
development efforts on additional remote access and telecommuter needs and
providing access to switched digital services. Certain of these emerging
digital services are already supported by the Company's current product
design. The Spider Acquisition added ISDN, X.25 and Frame Relay technology
to the Company's portfolio. During 1996, ISDN and Frame Relay protocols were
introduced into the base ShivOS operating system servicing Shiva servers.
With the AirSoft Acquisition, the Company augmented its technology portfolio
with protocol acceleration technologies that have been integrated into the
Company's remote access server to accelerate performance of Novell file access
applications over dial-up lines. Future applications of this technology will
include acceleration of web-based (HTTP) applications over the Internet.
The Company's success will depend upon its ability to enhance and expand
its existing products, and to develop new products in a timely manner that
will achieve market acceptance. To meet the challenges of rapidly changing
technology, the Company has invested and expects to continue to invest
heavily in the development of new products and core technologies; however,
there can be no assurance that the Company will be able to respond
effectively to technological changes or new industry standards or
developments. The Company's business would be adversely affected if the
Company were to incur significant delays or were to be unsuccessful in
developing new products or enhancements, or if any such products or
enhancements did not gain market acceptance.
In fiscal 1996, 1995 and 1994, the Company's research and development
expenditures were approximately $23,186,000, $14,787,000 and
$9,972,000, respectively, or 12% of revenues in each period.
Customer-funded development fees reimbursed to the Company and government
funded research and development grants, which are reflected as an offset
to research and development expenses, were approximately $1,718,000,
$955,000 and $901,000, respectively for fiscal 1996, 1995 and 1994.
Manufacturing
The Company uses two principal subcontractors, Lockheed Commercial
Electronics Company and Solectron Scotland Limited, for the manufacture of
substantially all of its products. The Company's internal manufacturing
operation which is located in Bedford, Massachusetts consists primarily of
material planning, procurement, final assembly and test, and quality
assurance and distribution. The Company's products undergo automated testing,
comprehensive quality audits, functional testing, and environmental stress
screening to ensure quality and reliability.
The Company's manufacturing strategy is to optimize cost, quality,
delivery and flexibility to the Company's customer base through a leveraged
external manufacturing model. This strategy allows capacity increases while
avoiding the capital investment required to establish and maintain additional
manufacturing facilities. The Company believes that this strategy allows it
to focus its resources on product design, quality assurance, marketing, and
customer support. Although the Company believes that new suppliers could be
evaluated and integrated in a relatively short period of time, this strategy
could lead to short-term product supply interruptions.
Materials used by the Company in its manufacturing processes include
semiconductors, such as microprocessors, memory chips and other integrated
circuits, printed circuit boards, cable assemblies and pre-formed
metal/plastic enclosures. The chipsets used in certain of the Company's Token
Ring connectivity products and modem products are currently available only
from IBM and Rockwell International, respectively. The Company also sources
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certain microprocessors from Motorola. To date, the Company has not
experienced significant delays in the receipt of key components. The
inability to obtain a sufficient supply of key components as required, or to
develop alternative sources if and as required in the future, could result in
delays or reductions in product shipments which, in turn, could have a
material adverse effect on the Company's results of operations.
Intellectual Property
Although the Company believes that its continued success will depend
primarily on its continuing innovation, sales, marketing and technical
expertise, product support and customer relations, the Company believes it
also needs to protect the proprietary technology contained in its products.
The Company has applications pending for six United States patents and
received a United States patent in 1996. The Company primarily relies on a
combination of copyright, trademark, trade secret laws and contractual
provisions to establish and protect proprietary rights in its products. The
Company typically enters into confidentiality and/or license agreements with
its employees, strategic technology partners, indirect channel marketing
partners, customers and suppliers and limits access to and distribution of
its proprietary information.
There can be no assurance that these protections will be adequate to deter
misappropriation of the Company's technologies or independent third-party
development of similar technologies. In addition, the laws of some
countries do not protect the Company's proprietary rights to the same extent
as do the laws of the United States.
The Company is subject to the risk of litigation alleging infringement of
third-party intellectual property rights. There can be no assurance that
third parties will not assert infringement claims against the Company with
respect to current or future products. Any such assertion could require the
Company to pay damages and could require the Company to develop non-
infringing technology or acquire licenses to the technology that is the
subject of asserted infringement resulting in product delays or increased
costs or both.
Employees
At December 28, 1996, the Company employed 670 individuals on a full-time
basis. Of these, 201 were involved in engineering, 302 in sales, marketing
and customer support, 72 in manufacturing and 95 in administration, finance
and strategic planning. The Company considers its relations with its
employees to be good and has not experienced any interruption of operations
as a result of labor disagreements.
Competition for technical personnel in the Company's industry is intense.
The Company believes that its future success will depend on its continued
ability to attract and retain qualified personnel.
Executive Officers
The executive officers of the Company as of March 14, 1997, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Frank A. Ingari 47 President, Chief Executive Officer and
Chairman of the Board of Directors
Steven J. Benson 38 Senior Vice President, Worldwide Sales
and Marketing
Jean-Pierre Boespflug (1)(2) 42 Senior Vice President, Research and
Development
Cynthia M. Deysher 39 Senior Vice President, Finance and
Administration and Chief Financial
Officer
Peter H. Howells (3) 43 Vice President, Shiva Access Manager
Division
Richard Lanchantin (4) 41 Vice President, Customer Service
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<FN>
(1) Mr. Boespflug became an executive officer of the Company in February 1997.
(2) Mr. Guy A. Daniello became an executive officer of the Company in January
1996, and Mr. Daniello resigned in February 1997.
(3) Effective February 26, 1997, the Company redesignated its "executive
officers" under the Securities Exchange Act of 1934. As a result of this
redesignation, this person is no longer an "executive officer" of the
Company under such Act.
(4) Mr. Lanchantin became an executive officer of the Company in March 1996.
</TABLE>
Mr. Ingari joined the Company as its President and Chief Executive Officer
and as a director in September 1993. He has served as the Chairman of the
Board of Directors since July 20, 1995. From September 1995 to January 1996
he served as Acting Vice President, Research and Development. From March 1992
to September 1993, Mr. Ingari was Vice President of Marketing at Lotus
Development Corporation. From January 1991 to March 1992, Mr. Ingari served
as Chairman and Chief Executive Officer of ONTOS, Inc., a supplier of object-
oriented database management systems and application development software.
From 1987 to January 1991, Mr. Ingari served as Vice President and General
Manager of the Emerging Markets Business Group at Lotus Development
Corporation.
Mr. Benson joined the Company as its Vice President of Sales in September
1992. In October 1995, Mr. Benson's title changed to Senior Vice President,
Worldwide Sales and Marketing. From January 1988 to August 1992, Mr. Benson
served as Director of Sales and Marketing for the Portable Computing Group of
Lotus Development Corporation.
Mr. Boespflug joined the Company as Vice President, International Business
Operations in April 1994 and became its Vice President, Strategic Planning in
September 1995. Early in 1996 Mr. Boespflug was appointed as Vice President
of Shiva's Service Provider Group. Mr. Boespflug was appointed Senior Vice
President of Research and Development in February 1997. From October 1991 to
February 1994, Mr. Boespflug served as Vice President of European Operations
at Wellfleet Communications, Inc., a supplier of internetworking equipment.
From November 1988 to October 1991, Mr. Boespflug served as Vice President of
European Operations at Cisco Systems, Inc., a supplier of network routers and
bridges.
Ms. Deysher joined the Company in January 1994 as its Vice President, Finance
and Administration, Chief Financial Officer and Treasurer. In October 1995,
Ms. Deysher's title changed to Senior Vice President, Finance and Administra-
tion and Chief Financial Officer. Ms. Deysher resigned as the Company's
Treasurer in September 1995 when she delegated treasury duties to a member of
her staff who was elected Treasurer. Ms. Deysher resumed the position of
Treasurer in September 1996. From April 1989 to November 1993, Ms. Deysher
served as Chief Financial Officer, Corporate Vice President Finance,
Administration and Manufacturing of Bytex Corporation, a wide and local area
network company.
Mr. Howells joined the Company as its Vice President, Network Services
Division, when the Spider Acquisition closed in August 1995. In February 1997
Mr. Howells was appointed Vice President, Shiva Access Manager Division.
From September 1990 to August 1995, Mr. Howells held various positions at
Spider, most recently serving as the Divisional Director of the Networks
Division.
Mr. Lanchantin joined the Company in March 1996 as Vice President, Customer
Service. From November 1994 to March 1996, Mr. Lanchantin served as Senior
Director, Global Enterprise, at IBM/Lotus Development Corporation. From June
1992 to November 1994, Mr. Lanchantin served as Director Field Support
Services at Lotus Development Corporation. From May 1989 to June 1992, Mr.
Lanchantin served as Technical Manager, North American Sales at Lotus Develop-
ment Corporation.
Executive officers of the Company are elected by the Board of Directors on an
annual basis and serve until their successors are duly elected and qualified.
There are no family relationships among any of the executive officers of the
Company.
8
<PAGE>
ITEM 2. Properties
In February 1996, the Company relocated its principal offices to a facility of
approximately 117,139 square feet in Bedford, Massachusetts. The Company
occupies this facility under a lease that expires in February 2006. In
addition, in May, 1996 the Company entered into a lease which expires in
September, 2003 of a building consisting of approximately 51,000 square feet
also in Bedford which houses its manufacturing and sales training operations
the Company's primary European headquarters are located in a facility it owns
consisting of approximately 35,000 square feet in Edinburgh, United Kingdom.
The Company also leases sales offices in New York, Georgia, California,
Washington, France, Australia, South Africa, the United Kingdom, Germany, the
Netherlands, Sweden, and Singapore. The Company believes that its facilities
are well maintained and in good operating condition, and are adequate to meet
its anticipated level of operations for the foreseeable future.
ITEM 3. Legal Proceedings
On January 17, 1997, a Complaint was filed against the Company in the
Superior Court of the State of California for the County of Los Angeles,
Abraham Schwartz and Norman Marcus v. Shiva Corporation. The plaintiffs
purport to bring this action on behalf of a class of purchasers of the
Company's common stock between September 17, 1996 and January 7, 1997. The
Complaint asserts that the Company made false or misleading statements in
violation of state and federal law, including: state law negligent
misrepresentation, fraud, and deceit, California Corporation Code Sec. 1507,
25400, and 25500, California Civil Code Sec. 1709-10, and Section 12(2) of the
Securities Act of 1933, 15 U.S.C. Sec. 771(2). On behalf of the purported
class, the plaintiffs seek compensatory damages, treble damages under
California law, punitive damages under California law, punitive damages,
attorneys' fees, costs and interest. On February 14, 1997 the Company filed a
demurrer to the Complaint. The Company believes the claim to be entirely
without merit 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.
ITEM 4. Submission Of Matters To Vote Of Security Holders
None
PART II
ITEM 5. Market For The Company's Common Equity And Related Stockholder
Matters
The information required by this item may be found in the section
captioned "Quarterly Financial Information" appearing in the 1996 Annual
Report to Stockholders, and is incorporated herein by reference.
ITEM 6. Selected Financial Data
Information required by this item may be found in the section captioned
"Financial Highlights" appearing in the 1996 Annual Report to Stockholders,
and is incorporated herein by reference.
ITEM 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Information required by this item may be found on pages 18 through 25 of
the 1996 Annual Report to Stockholders in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
is incorporated herein by reference.
ITEM 8. Financial Statements And Supplementary Data
Information with respect to this item may be found on pages 26 through 42
of the 1996 Annual Report to Stockholders, and is incorporated herein by
reference and indexed by reference under Item 14(a)(1) below. The Company's
1996 Annual Report to Stockholders is not to be deemed filed as part of this
report except for those parts thereof specifically incorporated herein by
reference.
9
<PAGE>
ITEM 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
Not applicable.
PART III
ITEM 10. Directors And Executive Officers Of The Company
Information with respect to Directors of the Company may be found in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held
May 14, 1997 (the "1997 Proxy Statement") under the caption "Election of
Directors" and is incorporated herein by reference. Information with respect
to Executive Officers of the Company may be found under the section captioned
"Executive Officers of the Company" in Part I of this report. Information
relating to delinquent filings of Forms 3, 4 or 5 by an executive officer or
director or beneficial owner of more than 10% of the shares of common stock
of the Company may be found under the caption "Compliance with Section 16(a)
of the Securities Exchange Act" in the Company's 1997 Proxy Statement, which
1997 Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal
year ended December 28, 1996, and is incorporated herein by reference.
ITEM 11. Executive Compensation
Information required by this item may be found under the captions
"Compensation of Directors" and "Executive Compensation" in the Company's
1997 Proxy Statement, and is incorporated herein by reference.
ITEM 12. Security Ownership Of Certain Beneficial Owners And Management
Information required by this item may be found under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 1997 Proxy Statement, and is incorporated herein by reference.
ITEM 13. Certain Relationships And Related Transactions
None.
ITEM 14 Exhibits, Financial Statement Schedules And Reports On Form 8-K
(a) (1) Consolidated Financial Statements.
The following consolidated financial statements and the Report of
Independent Accountants are included in the Company's 1996 Annual Report to
Stockholders and are incorporated herein by reference.
Report of Independent Accountants for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994
Consolidated Balance Sheet as of December 28, 1996 and December 31, 1995
Consolidated Statement of Operations for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994
Consolidated Statement of Changes in Stockholders Equity for the years ended
December 28, 1996, December 30, 1995 and December 31, 1994
Consolidated Statement of Cash Flows for the years ended December 28, 1996,
December 30, 1995 and December 31, 1994
Notes to Consolidated Financial Statements
The Company's 1996 Annual Report to Stockholders is not to be deemed
filed as part of this report except for those parts thereof specifically
incorporated herein by reference.
10
<PAGE>
(a) (2) Financial Statement Schedules.
Page
Schedule I Report of Independent Accountants
on Financial Statement Schedule S-1
Schedule II Valuation and Qualifying Accounts S-2
Schedules not listed above have been omitted because they are not
applicable, not required, or the information required to be set forth therein
is included in the consolidated financial statements or the notes thereto.
(a) (3) List of Exhibits. The following exhibits are filed as part
of, or incorporated by reference into, this report on Form 10-K:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
<S> <C>
3.1 Restated Articles of Organization of the Company. (1)(5)
3.2 Restated By-Laws of the Company. (1)
4.1 Specimen certificate representing the Common Stock. (8)
4.2 Rights Agreement dated as of September 29, 1995, between the
Company and American Stock Transfer & Trust Company, which
includes as Exhibit A the Form of Certificate of Vote of
Directors Establishing a Series of a Class of Stock, as Exhibit
the Form of Rights Certificate, and as Exhibit C the Summary
Rights to Purchase Preferred Stock. (4)
10.1 Registration Rights Agreement dated as of September 3, 1991 by
and among the Company and the Investors named therein, as amended
by the Amendment to Registration Rights Agreement dated as of
March 29, 1993, as further amended by the Amendment No. 2 to
Registration Rights Agreement dated as of July 28, 1993 and as
further amended by an Amendment dated June 13, 1995. (3)
10.2 Amended and Restated 1988 Stock Plan, as further amended. (3)(6)
10.3 1994 Non-Employee Director Stock Option Plan. (1)(6)
10.4 1994 Employee Stock Purchase Plan. (1)(6)
10.5 1997 Employee Bonus Plan (6)
10.6 Employment Agreement dated September 15, 1994 by and between the
Company and Frank A. Ingari. (1)(6)
10.7 Letter Agreement dated January 27, 1994 by and between the
Company and Cynthia M. Deysher. (2)(6)
10.8 Letter Agreement dated January 2, 1996 by and between the Company
and Guy A. Daniello. (6)
10.9 Incentive and Non-Qualified Stock Option Agreement dated October
19, 1993 between the Company and Frank A. Ingari. (1)(6)
11
<PAGE>
10.10 Incentive and Non-Qualified Stock Option Agreement dated January
29, 1994, between the Company and Cynthia M. Deysher. (1)(6)
10.11 Agreement dated May 15, 1995 between the Company and Northern
Telecom Limited ("Nortel") (3)
10.12 Letter Agreement dated March 15, 1996 between the Company and
Nortel to amend the Agreement dated May 15,1995 between the
Company and Nortel (7)
10.13 First Amendment dated May 16,1996 to the Agreement dated May
15,1995 between the Company and Nortel (7)
10.14+ Memorandum of Understanding ("MOU") dated September 11, 1996
between the Company and Nortel
10.15+ Second Amendment dated October 15, 1996 to the Agreement dated
May 15, 1995 between the Company and Nortel
10.16+ Memorandum of Understanding ("MOU") dated December 23, 1996
between the Company and Nortel
10.17+ Letter Agreement dated January 29, 1997 amending the Memorandum
of Understanding dated December 23, 1996 between the Company and
Nortel
10.18 Lease by and between Beacon Properties, L.P., Landlord and the
Company Tenant, ("Beacon Lease") dated September 5, 1995. (4)
10.19 Amendment #1 to the Beacon Lease, dated October 23, 1995 (8)
10.20 Amendment #2 to the Beacon Lease, dated January 17,1996 (8)
10.21 Lease by and between Walford Company c/o Bernard H. Kayden,
Landlord, and the Company, Tenant, ("Walford Lease") dated May
24, 1996 (7)
11.1 Statement re: Computation of Per Share Earnings
13.1 1996 Annual Report to Stockholders, certain portions of which
have been incorporated herein by reference.
21.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- ---------------------------
<FN>
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (File No. 33-84884)
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1994
(3) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (File No. 33-94134)
(4) Incorporated herein by reference to the Company's Registration Statement
on Form S-1 (File No. 33- 97216)
(5) Incorporated herein by reference to the Company's Registration Statement
on Form S-3 (File No. 333-602)
(6) Indicates a management contract or any compensatory plan, contract or
arrangement with officers who are designated as named executive officers
in the Company's 1997 Proxy Statement.
12
<PAGE>
(7) Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for second quarter 1996.
(8) Incorporated herein by reference to the Company's Annual Report on Form
10-K for fiscal year 1995.
+ Confidential treatment requested
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the last quarter of the fiscal
year ended December 28, 1996.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SHIVA CORPORATION
By: /s/ Frank A. Ingari By: /s/ Larry Whitman
-------------------- -----------------------
Frank A. Ingari Larry Whitman
President and Chief Executive Officer Vice President -
(Principal Executive Officer) Corporate Controller
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ Frank A. Ingari
- -------------------
Frank A. Ingari President March 14, 1997
Chief Executive Officer and
Chairman of the Board
/s/ David C. Cole
- -----------------
David C. Cole Director March 14, 1997
/s/ L. John Doerr
- -----------------
L. John Doerr Director March 14, 1997
/s/ Henry F. McCance
- --------------------
Henry F. McCance Director March 14, 1997
/s/Paul C. O'Brien
- ------------------
Paul C. O'Brien Director March 14, 1997
/s/Mitchell E. Kertzman
- -----------------------
Mitchell E. Kertzman Director March 14, 1997
14
<PAGE>
Schedule I
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of Shiva Corporation:
Our audits of the consolidated financial statements referred to in our report
dated January 23, 1997, appearing on page 43 of the 1996 Annual Report to
Stockholders of Shiva Corporation and its subsidiaries (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement
Schedule listed in Item 14 (a) of this Form 10-K. In our opinion, the
Finanicial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ Price Waterhouse LLP
- ------------------------
PRICE WATERHOUSE LLP
Boston, Massachusetts
January 23, 1997
S-1
<PAGE>
Schedule II
<TABLE>
Shiva Corporation
Valuation and Qualifying Accounts
<CAPTION>
Column A Column B Column C Column D
- ----------------- ---------------------- --------- ---------- ---------
Balance Charged to Charged
Beginning Costs and to Other
For the Period Classification of Period Expenses Accounts
- ----------------- ---------------------- --------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1994 Allowance for doubtful
accounts and returns $ 2,376 $ 7,656 $ 17
December 30, 1995 Allowance for doubtful
accounts and returns $ 3,963 $ 7,731 $(22)
December 28, 1996 Allowance for doubtful
accounts and returns $ 5,252 $14,993 $ 80
</TABLE>
<TABLE>
<CAPTION>
Column E Column F
- ----------------- --------- --------------
Balance at End
For the Period Deductions of Period
- ----------------- --------- --------------
<S> <C> <C>
December 31, 1994 $(6,086) $ 3,963
December 30, 1995 $(6,421) $ 5,252
December 28, 1996 $(9,977) $10,347
</TABLE>
<TABLE>
Shiva Corporation
Deferred Tax Asset Valuation Allowance
<CAPTION>
Column A Column B Column C Column D
- ----------------- ---------------------- --------- ---------- ---------
Balance Charged to Charged
Beginning Costs and to Other
For the Period Classification of Period Expenses Accounts
- ----------------- ---------------------- --------- ---------- ---------
<S> <C> <C> <C> <C>
December 31, 1994 Deferred tax asset
valuation allowance $3,275 $ 797 $ 1,031
December 30, 1995 Deferred tax asset
valuation allowance $4,125 $ 730 $ 3,076
December 28, 1996 Deferred tax asset
valuation allowance $6,531 $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
Column E Column F
- ----------------- --------- --------------
Balance at End
For the Period Deductions of Period
- ----------------- --------- --------------
<S> <C> <C>
December 31, 1994 $ ( 978) $4,125
December 30, 1995 $ (1,400) $6,531
December 28, 1996 $ (5,673) $ 858
</TABLE>
S-2
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Exhibit 10.5
1997 Worldwide Employee Bonus Plan
Plan Purpose
At Shiva, we work hard to provide our customers with high quality products
and services each and every day. As a growing company, we can see the
tangible results of this dedication and loyalty. We know these results
depend on you. We are committed to sharing the company's financial success
with our employees. In the true spirit of a bonus, this plan is designed
to payout only after Shiva has achieved its goals. If the company comes
within **% its plan, we will all share in the rewards of a job well done
This year's plan has been revised to take into account our business goals
for 1997.
It is our hope that the 1997 Employee Bonus Plan will continue to motivate
all plan participants to strive for company prosperity. By working together,
we can all share financially in the company's growth.
Our 1997 Goal
There are numerous ways to measure the success of a company, our investors
consider growth in our operating income to be a key measure of our
performance. And operating income is a measurement that we can all
influence through revenue generation and/or expense control. Therefore, the
bonus pool will be driven by this measure. If our 1997 operating income
does not meet or exceed [*********************], no bonuses will be paid.
If our 1997 operating income equals or is greater than [************], 100%
of the bonus pool will be available for bonuses. This is an aggressive, but
reachable objective.
If we exceed our plan by *%, an additional pool will be made available for
bonuses. These bonuses will be awarded at management's discretion.
Eligibility
You are eligible for the Employee Bonus Plan if you are a full-time Shiva
employee, hired before or within 1997 and not participating in Sales
Commission Plans or eligible for quarterly bonuses (unless compensation plan
specifically states otherwise). Your bonus will be pro-rated based upon your
full months of consecutive employment through the year end. Employees who
have salary and/or level changes in 1997 will receive a pro-rated bonus
based on the number of months at each salary level.
Your Bonus Opportunity
Your bonus will be based on a fixed percentage of your base salary. This
percentage is determined by your salary level. (Your direct manager can tell
you the specific bonus potential for your salary level.)
<TABLE>
<CAPTION>
Grade Target Bonus
<S> <C>
I-V **%
VI-VIII **%
IX **%
X **%
Exec. **% (or per compensation plan)
Sr. V.P. **% (or per compensation plan)
CEO **%
</TABLE>
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
There are two parts to your bonus. Your potential bonus is based on our
achievement of the operating income goal and your individual performance as
determined at year-end. This award will be made at management's discretion
and is intended to recognize and reward employees for their overall
contribution to the company throughout the year.
If Shiva achieves [*****************] or more, a special bonus pool will be
established. As mentioned, this pool will be available to provide additional
bonuses to those employees who have made significant contributions to our
success.
The Bonus Pool
The bonus pool will depend on our operating income. If our operating income
meets or exceeds [************], bonuses will be paid according to the
following table:
<TABLE>
<CAPTION>
Operating Income Bonus Award Percentage
<S> <C>
Below [************] *************
[************] to [*************] ***% to ***%
[************] to [*************] ***%
[************] and above *********************
</TABLE>
The actual amount you receive will be based on the bonus potential for your
position. So, for example, if the company's operating income is exactly
[**********] and your performance meets your manager's expectations, you
could receive 100% of your bonus.
The Additional Bonus Pool Trigger - ***%
<TABLE>
<CAPTION>
Operating income Additional Pool
<S> <C>
***-***% **%
***-***% **%
***-***% **%
above ***% *******************
</TABLE>
Example
A person earns $50,000 and is eligible for a **% bonus or $*******. Shiva
meets our operating income target (100%).
Company Operating Income (objective)
The employee automatically is eligible to receive $****** (100% of
the bonus amount)
Employee Performance (subjective)
The manager determines what percentage of the $******* the employee
will receive based on the individual performance based upon the
following guidelines:
If person "exceeds expectations" **%-***%
"fully meets expectations" **%-***%
"meets most expectation" **%-***%
"meets some expectations" **%-***%
"does not meet expectations" ***********
A forced curve will be used. No more than **% of eligible employees may
receive ***%.
<PAGE>
Bonus Payments
Bonuses will be paid as soon as possible following completion of the annual
audit and release of earings. Bonuses will be paid by check and applicable
taxes will be deducted from your payment.
If You Leave Shiva
You must be on the payroll the day that bonuses are distributed to be
eligible for a bonus. If you are on an approved leave, your bonus will be
pro-rated, based on your continuous full months of employment during the
year.
No Guarantees
The Employee Bonus Plan will be updated each year. The plan does not
guarantee that you will be offered a bonus and does not guarantee your
continued employment with the company. The program is based on company and
individual performance and management reserves the exclusive right to modify
or terminate the plan at its discretion at any time.
In Summary
At Shiva, we want to recognize everyone's contributions in helping to make
the company successful. We believe that the Employee Bonus Plan will assist
us in ensuring that individual employees can be recognized for their
achievements. We look forward to us all sharing in our company's success.
<PAGE>
Exhibit 10.8
Shiva Corporation
Northwest Park
63 Third Avenue
Burlington, MA 01803
617 270-8300
Fax: 617 270-8599
January 2, 1996
Mr. Guy Daniello
8 Atkinson Gate
Nepean, Ontario
Canada K2G 5H3
Dear Guy,
We are pleased to extend you an offer to join Shiva Corporation as Senior Vice
President, Research and Development, reporting to me. This letter defines the
terms and conditions of the relationship, as follows:
Base Salary: $225,000
Bonus: 50% of base salary, based upon Shiva Corporation's attainment
of corporate objectives (as defined in each annual Shiva
Corporate Bonus Plan) and personal objectives.
Stock Options:
Grants: A total of 130,000 shares to be granted in four equal
installments of 32,500 shares at each of the next four Board
of Directors meetings. The price of each option grant will
be determined at the applicable Board meeting. At any time
prior to the next Board of Directors meeting, you may elect
to accelerate the grant of any portion of the total shares
remaining.
Vesting: Vesting of each option grant will occur according to the
following schedule:
25% of each grant will vest immediately upon date of grant.*
75% of each grant will vest annually, 25% per year, over the
next four years.
*Consistent with the requirement of Section 16(c) of the
Exchange Act, you will be eligible to exercise and sell such
vested stock six (6) months from the date of grant.
Vesting Upon
Change of
Control: All outstanding options granted will be immediately vested
in the event of any material diminution in your position,
duties, responsibilities, title or office or any reduction
in your standard compensation as a result of any change in
control of Shiva Corporation.
Relocation: Relocation terms will be mutually agreed upon within the next
week. The relocation package is anticipated to include
selling and purchase expenditures relating to your primary
residence, moving expenses, househunting trips and tax gross
up if necessary.
We look forward to you joining us at Shiva in this very important position.
Please indicate your acceptance by signing and returning, via facsimile at 617
270-8998, a copy of this letter to me.
Sincerely,
/s/ Frank Ingari
Frank A. Ingari,
Chairman and Chief Executive Officer
Accepted: /s/ Guy A. Daniello Date: January 4, 1996
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Exhibit 10.14
Memorandum of Understanding between Nortel and Shiva for the OEM, Development,
and Support of the ************************************
The purpose of this M.O.U. is to summarize the discussions between Shiva and
Nortel to date, and to confirm the respective intent with respect to the
proposed transaction. Nortel and Shiva plan to develop and sign a contract,
by October 15, 1996, which will be based on the terms and conditions as
outlined in this M.O.U.
Manufacturing Rights
- - Nortel shall have the option to manufacture the **************************
********, within the duration of the contract, according to Shiva's design
specifications. A proposed ****** fee, paid to Shiva for the manufacturing
license, will be negotiated. Reasonable manufacturing transfer and
consulting assistance, will be negotiated. Shiva will make the final
decision as to ******************* the **********. If ********************
the **************** for *******, the *************************.
- - With Shiva's agreement, Nortel shall be *********** to manufacture the
***************** Shiva ************* and Shiva's **********************
***********. Shiva has the right to ********** from a ******************.
- - Nortel shall pay Shiva a royalty, as defined in the royalty structure
section, below, for the ************ shipped to Nortel ********** directly,
or via Nortel's ***************************.
Royalty Structure
- - Nortel shall pay Shiva a royalty equivalent to a **************** of *** of
the ****** price of the product for volumes of ***** units or greater, over
a ******** period, or a *************** of **** of the ******* price of the
product for volumes less than ****** units, over a ******* period. In each
case, Nortel will pay a ***** of **** royalty for each product within the
********** of the agreement, or for the ********* units (whichever comes
first), if the **** or **** royalty is below *****. After the ********, or
********* units, the *** or *** royalty shall only apply. Shiva and Nortel
will negotiate an ******** royalty structure ***** **** units (or ********,
whichever comes first), and for Nortel *********, in the contract.
- - A three months rolling forecast will be provided on a monthly basis (same
as with ********) as well as a first year forecast for business planning
purposes, independent of *************** direction.
- - Prior to Nortel **************, Nortel will work with Shiva to ***********
product/components ***************************. Any ************* or
*********************** will be ***************** to Nortel.
Annual Maintenance and Support
- - Shiva will provide ******** level support to Nortel, for the *************,
similar to that described in Section 7 and Exhibit H of the Shiva/Nortel
Agreement of May 15, 1995 for the ************ product.
- - Nortel agrees to pay Shiva ****** for support of the **********, as
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
described in Section 7 and Exhibit H of the Shiva/Nortel Agreement of May
15, 1995 for the ********* product, in the ************** period, with
support fees for subsequent years to be negotiated by the parties.
Shiva Software Upgrades
- - During the term of any period for which Nortel has paid the agreed-upon
annual maintenance and support fee, Shiva agrees to provide all Shiva
software upgrades to Nortel *************************************. Any
*************** of Shiva upgrades will be negotiated between the parties.
- - Nortel will be the ************* of ******************* software to Nortel
customers (e.g. alpha trial, beta trial, early adopter trial, release
version) ************************************************************
************************.
Nortel OEM Requirements
- - Nortel will re-label (Nortel branding) the ****************, similar to the
****************** and ************* products.
- - Shiva shall, on an ongoing basis, ************** the software, hardware and
documentation, as is currently done for the ************. Details will be
identified in the contract.
- - Shiva shall *********** Nortel's ************* based on ******************
************* as used for the ****************, for those ***************
which both Shiva and Nortel intend ************************************.
Nortel will *************************************************************
*************************************************************************
*************************************************************************
*************************************************************************
*************************************************************************
********************************.
- - Shiva shall provide Nortel with a project plan for each release of the
**************** software and/or hardware (including *************).
- - Nortel shall have the option to ************** the *********** for specific
Nortel customers, requiring ************************.
****************************** Features
- - It is Nortel's intention to ******************* with ************ features
and functions *******************************. Nortel and Shiva will
determine which **************** is most appropriate for ************* the
requested features ********************************************************
****************************************************************. These
functions will include, but are not limited to, the following:
*******************************
*****************************
*********************************
*****************************
***********************
*********************************
Notes: 1. The**************************************** will be sold as part of
the **************** brand.
Intellectual property rights associated with *********************** that
***********************************************************************.
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Intellectual property rights associated with ********************************
*****************************************************************************
with ******************************************************** determined by
agreement between the parties. Intellectual property rights associated with
****************************************************************************
*************************** with *******************************************
*********** determined by agreement between the parties.
This document is a M.O.U. only. Both parties will, in good faith, adhere to
the terms and conditions as outlined in this M.O.U. until a contract is
signed, at which point the contract will be legal and binding and supersede
this M.O.U. Both parties agree to negotiate and sign a contract no later than
October 15, 1996, *********************************************.
/s/ Micky Tsui /s/ Ed Gregory
- ------------------------ -----------------------------
Micky Tsui Ed Gregory
AVP Internet Solutions VP Business Development
Nortel Shiva Corporation
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Exhibit 10.15
AMENDMENT 2
Shiva/Nortel Agreement
This Second Amendment to the Agreement dated as of 15 May 1995 (the
"Agreement") is made as of the 15th day of October, 1996, by and between
Northern Telecom Limited ("Nortel"), on behalf of itself and its affiliates
(as defined in the Agreement), a Canadian corporation having its principal
place of business 8200 Dixie Road, Suite 100, Brampton, Ontario, Canada, and
Shiva Corporation ("Shiva"), a Massachusetts corporation having its
principal place of business at 28 Crosby Drive, Bedford, Massachusetts,
01730, USA.
WHEREAS, Nortel and Shiva want to amend the Agreement to reflect the
following changes to the original Agreement;
****************************** Amendment
A ************************* of Shiva's current *************************
************* product (**************************** or *****************
*******) will be added to the Agreement. *********** will include ******
******* and ********** of the ******** to ********* in the ************
******** and specified *******************. Nortel will have the right to
manufacture the ****************** pursuant to the manufacturing rights set
forth in this Amendment.
NOW, THEREFORE, the parties agree to amend the Agreement as follows,
1.0 Definitions
1.1 New Definition. In addition to the terms defined in the Agreement,
each of the following additional terms shall have the meaning ascribed to it
below:
1.1.1 ********* or **************** shall mean the **************
********************************* product as described in Exhibit R and
Exhibit S;
2.0 ****************** of the ***************
2.1 Shiva's Obligations. Shiva will ********* the ******************
***********************, as described in the Nortel *******************
**************** as set forth in Exhibit R and Exhibit S.
2.2 Nortel's Obligations. Nortel will ****** the ******* contemplated in
Section 2.1 and ************ for the ************** as set forth in Exhibit
R.
2.3 Ownership of the ******************. Intellectual property rights
associated with ************* features that ************** using *********-
provided tool kits shall be owned by ********.
Intellectual property rights associated with *************** features that
********** using ******* software and/or hardware shall be owned by ********
with **************************************** of such features determined by
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
agreement between the parties. ******* hereby grants, with a full reservation
of rights, to ******* a worldwide, ************, ************** perpetual
license of such intellectual property rights to use, modify, sublicense,
support, copy and distribute through multiple tiers of distribution,
including ********* distributors, these intellectual property rights solely
as they are incorporated into the ************. ********* hereby grants
back to ******* a **********, worldwide, ***********, perpetual license
to such modifications. ***************************************************
**************************************************************************
**************************************.
Intellectual property rights associated with ****** developed modifications
using ******* developed software and/or hardware, including, but not limited
to, ******************** and the ********************************** product,
(**** will be reviewed and determined between the parties), as described in
Exhibit S, shall be owned by ***** with ************************************
of such features to ****** to be determined by agreement between the parties.
****** hereby grants to ****** a worldwide, *************, ****************
perpetual license of such intellectual property rights to use, modify, create
derivative works, support, and copy these intellectual property rights solely
as they are incorporated into the **************. ******* hereby grants back
to ******* a **************, worldwide, *************, perpetual licwense to
modifications.
3.0 Manufacturing Rights
3.1 License Grant. Shiva hereby grants Nortel the option to manufacture
the *********************** at anytime, within the duration of the contract,
according to Shiva's design specifications.
3.2 Shiva's Obligations. If Nortel elects to manufacture the **************
subject to the terms of this Amendment, Shiva shall provide reasonable
manufacturing transfer and consulting assistance as part of the license fee
described in Section 3.3. Reasonable manufacturing transfer and consulting
assistance shall include the following:
(1) **********************************
(2) *************************
(3) ****************************************
(4) *********************************************
(5) **************************************
(6) *********************************
(7) ***************************
(8) *****************************************
(9) *********************************
(10) ******************************************
(11) ******************************************************************
**********
3.3 Nortel's Obligations. Nortel shall pay ***************************
********** to Shiva for rights to manufacture the *************** and for
reasonable consultation and training to assist Nortel with their initial
manufacturing production run, as well as reasonable ongoing manufacturing
support. Nortel will share with Shiva, product and quality improvement
ideas as part of the ongoing process, as referenced in items 3.5 and 3.6, as
well as include a comment such as "Access By Shiva" (to be determined by
Shiva) in all ********** documentation, to *******************************
**********************************. In addition Nortel shall
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
pay Shiva a royalty, as defined in the royalty structure section 4.0 below,
for the **************** to Nortel *************** directly, or via Nortel's
******************************.
3.4 Shiva Manufacturing Option. If Nortel is ********************** the
**************************, the *******************************************
license fee shall **********. With Shiva's agreement, Nortel shall be
********************** the ************ Shiva ************** and Shiva's
********************************. Shiva has the right to ********** from ***
*****************************.
3.5 Shiva Manufacturing Consulting Support. Shiva will provide Nortel with
reasonable consultation and training to assist Nortel with their initial
manufacturing product run at Nortel as well as reasonable ongoing
manufacturing support. Nortel will share with Shiva, product and quality
improvement ideas as part of the ongoing process.
Reasonable consultation, training and ongoing manufacturing support are
defined as follows:
A total of ****************** of support will be provided to Nortel by
Shiva ******************************************************************* to
assist Nortel with their initial manufacturing production run, and will be
effective with the signing of this Amendment. *****************************
****************************************************************************.
This *************** ongoing support related to changes resulting from the
ECO/ECR process as well as Shiva's quarterly Manufacturing/Design review
meetings.
3.6 Qualification Support. Nortel and Shiva agree to discuss proposed
design and/or component changes, as well as share component sourcing
information, on an ongoing basis. Nortel will be proactively included in
Shiva's ECO/ECR process as well as Shiva's quarterly Manufacturing/Design
review meetings. Major design discontinuities will require agreement
between the parties and costs associated with the design discontinuities
will be determined by the parties.
Shiva will ********************************************************
(as listed in the document "Functional Specification for the Nortel
AccessPort") for the ********************. Nortel will not generally be
responsible for the associated costs. In those *************************
***********************************************************************
***********************************************************************
***********************************************************************
***********************************************************************
*************************.
4.0 Royalty Structure
Nortel shall pay Shiva a royalty equivalent to a ****************** of ***
************* of the ******* price ************ of the product for volumes
of ***************** units or greater, over a ****************** period,
or a ********************************** of the *************** price of the
product for volumes less than ************************ units, over a ******
******* period. In each case, Nortel will pay a ******* of a *************
******** royalty for each product within the *********** of the Agreement,
or for the ********************* units (whichever comes first), if the
*************** or *************** royalty is ************************.
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
******** After the ********, or ****************** units, **************
************* royalty shall apply with a************************* in the
********** and a ************************** in the *********************.
Royalties for ****************** will be negotiated between the parties. A
three months rolling forecast will be provided on a monthly basis (same as
with **********) as well as a first year forecast for business planning
purposes, independent of ***************** direction. Prior to Nortel
manufacturing, Nortel will work with Shiva to purchase product/components
directly from current Shiva suppliers, with the option to source from Nortel
vendors of choice, with Shiva's prior agreement. In addition, Nortel and
Shiva will discuss the options of sharing costs and sourcing of metal/
plastics components of tooling. Any component or overhead cost reductions
will be passed through to Nortel.
Royalties for Nortel's ********************* will be calculated ***********
**********************************************************, e.g. royalties
owed would be calculated *************************************************
**************************************************************************
*****************************.
5.0 Annual *************, Maintenance and Software Support
5.1 Maintenance and Support
Shiva will provide ******** level support to Nortel, for the ************,
similar to that described in Section 7 and Exhibit H of the Shiva/Nortel
Agreement of May 15, 1995 for the ******* product. Nortel agrees to pay
Shiva ********************************************* for maintenance and
support of the *********, as described in Section 7 and Exhibit H of the
Shiva/Nortel Agreement of May 15, 1995 for the ********* product, for the
duration of this Agreement. During the term of any period for which Nortel
has paid ************************************************, Shiva agrees to
provide all Shiva software upgrades to Nortel ******************************
*******************.
5.2 **************************
Shiva will provide Nortel with a ********* of **************************
*************** and *****************************************************.
Nortel agrees to pay Shiva ***********************************************
*********************************. Nortel will be the **************** of
Nortel ************ software to **************** (e.g., alpha trial, beta
trial, early adopter trial, release version) *****************************
****************************************************************************
****************************************************************************
*****************************************************************************
****************************************************************************
***************************************.
6.0 General Changes to Agreement.
6.1 Exhibit R. Exhibit R is added to the Agreement.
Exhibit S. Exhibit S is added to the Agreement
6.2 Other Terms. Except as set forth above, all other terms and conditions
of the Agreement remain unchanged.]
<PAGE>
IN WITNESS of this Second Amendment to the Agreement the parties have
executed this document on the dates set forth below.
SHIVA CORPORATION NORTHERN TELECOM LIMITED
Signature:/s/ Cynthia M. Deysher Signature:/s/ John Ryan
---------------------- ---------------------
Name: Cynthia M. Deysher Name: John Ryan
Title: Senior Vice President, Title: Vice President/General Manager,
Finance and Administration, Multimedia and Internet Solutions
and CFO Enterprise Networks
Signature:/s/ David Archibald
-------------------
Name: David Archibald
Title: VP and Deputy General Counsel
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Exhibit R
(THE CONTENTS OF PAGES 1 - 9 OF EXHIBIT R CONSIST OF CONFIDENTIAL
INFORMATION WHICH HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.)
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Exhibit S
(THE CONTENTS OF EXHIBIT S CONSIST OF CONFIDENTIAL
INFORMATION WHICH HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.)
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Exhibit 10.16
Memorandum of Understanding
This Memorandum of Understanding (MOU), effective as of December 23,
1996 between Shiva Corporation, (hereinafter "Shiva"), having executive
offices 28 Crosby Drive, Bedford Massachusetts, 01730, U.S.A., and
Northern Telecom Inc. on behalf of itself and its Affiliates,
Subsidiaries, and for the benefit of Joint Venture partners (hereinafter
"Nortel") having offices at 2221 Lakeside Blvd., Richardson, TX 75083.
This MOU is intended by the parties to be used solely for the purpose of
negotiating a new agreement which would supersede the existing agreement
between the parties dated May 15, 1995. The new agreement will reflect
the following items:
a) The transition from a **************** payment schedule to a
************** payment model.
b) Right to Manufacture and ******************* Distribution for
************ *************************************************
*********** into the ********** and ********** (herein referred to
*********** *********** are defined as *************************
****************************************************************
*****************************************************************
**********************************************************.
c) Right to Distribute Worldwide into the ***************** will be
in accordance with the terms outlined in Section 5.1.
d) Under this new agreement, the parties will make Joint Investments
in product development. ***** investments will be directed toward
************************* while ****** investments will focus on
**************************************************************.
Rights to the resultant intellectual property is as described in
Paragraph 4.3 of this MOU.
The following sections of this MOU are legally binding on both
parties; Sections 1.1, 1.4, 2.1.1, 2.1.2, 2.2.1, 2.2.2, 2.2.4, 2.3, 5.2.
Any further agreement resulting from such negotiation is subjected to
management and legal approval of both companies.
Overall Objective: The ************************** and ****************
***** is in ****************************************************. The
joint resources and skills, together with the ********************* of
both companies ***************************************************.
This new agreement allows for ***** to be ****************************
**********************************************************************
****************************************************.
Intent: It is the intention of both parties to proceed in good faith
negotiations for all activities and to conclude a definitive agreement
of ************* term before January 31, 1997.
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
Points of Contact:
Shiva: Bob Darabant Nortel: Micky Tsui
Senior Director, Worldwide OEMs AVP, Internet Solutions
MOU Terms and Conditions
1. **********************:
1.1 ****** grants ******** worldwide ***********************, whereby
************ is defined as ******************************************
************************************** ****************************
*******************************. ***************** will be ******* in
the definitive agreement. Both parties agree to update ****************
************* on a quarterly basis to ********************* subject to
mutually acceptable criteria.
1.2 ****** will, upon signing of this MOU ****************************
***********, where possible, *******************************************
**********, and will work with ********************************. This
includes, but is not limited to, the **********************************
*****************************. The parties understand that ***********
**************************************************************8.
1.3 In the event that ***********************************************
***************************************, ***** will *******************,
where possible, with *********** and *********************************
***********************************************************************
****************.
1.4 This ************ set forth in Section 1.1 may only be ***********
subject to mutually agreed upon ********** performance measured against
specific ********* metrics, which may *******************************,
**********************************************************************
***************************. The ******************* metrics will be
established as part of the definitive agreement and will be reviewed and
adjusted on a periodic basis. A notification period, which will be
agreed upon in the definitive agreement, is required under any situation
whereby this ***************************************. In the event the
parties are unable to reach a definitive agreement, ********************
************************************************************************
************************************************************************
********************************, will be due.
1.5 ***** agrees that the ******************************* will not,
during the period of ************************************************
**********************************************************************
***********************************************************************
**********************************************************************
***************************************************. ******* reserves
the right to **********************************************************
***********************************************************************
*******************************.
2. Right to Manufacture and Royalties
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
2.1 Shiva grants Nortel worldwide manufacturing rights for the *******
*** and for **********************************************************
*********************. The **** fee covers all manufacturing rights for
hardware and software associated with the product, transfer
manufacturing know-how package, and assistance for manufacturing start-
up in one Nortel manufacturing facility. Reasonable additional
assistance will be provided with the ******************************* to
be determined in the definitive agreement. Nortel has the right to
manufacture in multiple facilities globally.
2.1.1 ******* agrees to a ************************* fee ***********
******* for the worldwide manufacturing rights of the ***********. This
payment will be due ***************************************. Nortel
further agrees to an additional ************* for paid up manufacturing
rights to all ************************************* including, but not
limited to, ********************************************. This *******
*********** fee will be paid ******* after the acceptance of the **
**************. This combined **************************************
************* product, which ****************************************
**********************************************************************
******************.
2.1.2 Shiva grants Nortel worldwide manufacturing rights for *********
**************************************************** product ***** or
********************** and all *************************, for a *******
************************. This product *****************************
*****. This *** payment will be due ******* after Nortel acceptance of
the product.
2.2 Royalties
2.2.1 Shiva grants to Nortel worldwide distribution rights of the
products listed in Section 2.1 for the ******************* as defined in
Section 1.1 at a royalty rate of *********************** price of the
product.
2.2.2 Upon signing of this MOU, Nortel agrees to ********************
***********************************************************************
*************************************************************. Nortel
will issue purchase orders committing ********************************
************************************************************************
This payment will give Nortel ****************************************
******************** described in Section 2.2.1 and ******************
**************************************** as described in Section 1.4.
2.2.3 In 1997 and prior to any notification of *********** of the
**********************, Nortel agrees to *********************** of
************ on the *********************************** with payment
terms of ***********. Payment of these ************************* is
******** upon ****** meeting its *****************************. These
*************** will be further defined and scheduled as part of the
definitive agreement. Purchase orders for these *********** will be
issued prior to the end of each **********************. These payments
will also give **************************************** as defined in
Section 2.2.1 above.
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
2.2.4 At the end of 1997, ******************************************
****************************************************************. These
***********************************************************************
**********************************. The amount applied will not exceed
*****************************************************. In the event of
notification that **************************************, there will be
no *******************************************. In the event that total
**********************************************, the difference will be
calculated within *********************************** and *************
********************** payment terms.
2.2.5 For product obtained by ****** for ***************, **********
will owe ********************** calculated on the ********************
******************************************. These ******************
will be included in the ******************* as described in paragraph
2.2.4.
2.3 In the event the definitive agreement is not reached within the
allotted time frame stated above, the ******************************* of
********* (referenced in paragraph 2.2.2) will fully apply to ********
***************. These ************ will be ******* under the ********
***************************** through *******************************
********************************************
2.4 ****** grants to ******* access to *****************************
********** under the terms of this Agreement. During this period,
rights for ***************, including *******, will be granted by *****
on substantially similar conditions as agreed to in this Amendment,
subject to the mutual agreement of both parties.
2.5 ***** grants to ******* the right to ************** from *****
******** at ******* plus handling and inventory services fee at *****
**********************. ******* agrees to provide a firm forecast
for such orders subject to a mutually agreed forecast schedule and
process. This process will be further defined in the definitive
agreement. Shiva agrees to ***************************************
********* to Nortel.
3. Service **************************
3.1 ****** agrees to ********* provided ****************************
***************** dedicated to support ****** global *****************
and ******. The intent of this ****** is to increase ****** sales into
****************************** worldwide. The ******* structure,
functions, mode of operations between ****** and *** will be established
as part of the definitive agreement.
3.2 ******* agrees to ***** the ***** of this ***** to ********* in
*****, ** in *****, ** in *****, and to ** in *****. Only the first two
******** are ******** (***************** will be charged to ******, but
not more than ***************** in ***** and **************** in *****,
unless mutually agreed). *********** for *****************************
will be reviewed and approved in early ****. ******* will only **** the
*********** incurred by this *******
3.3 Shiva agrees to ************************************************
subject to the **********. ********* has right to review and approve
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
the ***************************** to this ***** for the sole purposes of
********************************************. These ************* will
continue to be on *************** but ************** to *******. Shiva
and *************** will be subjected to ************************** and
**************************, as part of the definitive agreement.
4. R&D
4.1 ****** agrees, *****************, to ****** the ************ with
************************************* for a total of **************** in
****. The *************** will be based on specific ******************
which **************************** within the **************** and is
agreed to by ********
4.2 ****** agrees to ****************************** in ***** in R&D
related to **************************************************** which
also apply to the **************************.
4.3 As additional *********************, ***************** as described
in paragraph 4.1, ********* shall receive the following:
(a) rights to *****************************************************
**************************************, as required by *******;
(b) a list of committed ******************************************
*************;
(c) for those ****** that are specific to **************************
******************************, at a minimum, at the time the
agreement is terminated, each party will ***** the other party a
**************************************************************
*************************************************************
****************************, during the term of the agreement,
Shiva agrees *************************************************
******************************************************.
The parties agree to determine the specific rights in the definitive
agreement.
4.4 Shiva agrees to include ************************************* and
****************** as part of the ****************************.
4.5 Both parties agree to include *********************************
********************** as part of definitive agreement.
5. Product Purchases
5.1 ******** has the option to purchase product from Shiva at the
following ****************************************
5.1.1: ************************************
5.1.2: *************************************************
*******************************************************
The equivalent of ******************************************* will
be ******** to the **************************************** as described
in Section 2.2.2 provided the ******************* does *****************
****************************.
<PAGE>
CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE SUCH OMISSIONS.
5.2 Upon signing of this MOU, ****** agrees to *********************
***********************************************************************
*********************************************************************
******* also agrees to **********************************************
**********************************************************************
Shiva agrees to ******************************************************
************************************************************************
**************** The terms of ************************, will be agreed
to as a part of the definitive agreement, ****************************
******************************* shall apply with appropriate changes.
6. General
6.1 This agreement does not affect in any form the existing contract
on ******** and ****************.
6.2 Services and Support: Shiva agrees to provide service and support
levels *************************************, including but not
limited to *****************************************************, and
*******************************. Modifications to the current service
and support agreement will be agreed to as part of the definitive
agreement.
7. Co-Marketing: Nortel agrees to provide ********************** of
************* in the ******* product consistent with the ***********
********** concept. Label and art work to be mutually agreed to.
8. Termination:
Both parties agree to address in the definitive agreement conditions and
disposition of ********************************************************
**********************************************:
-*********************************;
-************************.
9. Disclosure
9.1 Disclosure by either party ************************************
**************************** will be made only pursuant to the terms
and conditions of the ************************************************
****************************
9.2 ***************************************************************
**********************************************************************
*********************************************.
This MOU shall remain in force and effect until January 31, 1997, or if
canceled in writing by either party. Cancellation of this MOU shall not
release both parties regarding sections: 1.1, 1.4, 2.1.1, 2.2.2, 2.2.1,
2.2.2, 2.2.4, 2.3, and 5.2. This MOU may only be extended by the mutual
agreement of both parties.
AGREED BY:
SHIVA CORPORATION NORTHERN TELECOM INC.
<PAGE>
By: /s/ Woody Benson By: /s/ Richard Faletti
- -------------------- -----------------------
Name: Woody Benson Name: Richard Faletti
Title: Senior Vice President Title: Vice Presdient, NTI
Date: 12/24/96 Date: 12/23/96
<PAGE>
Exhibit 10.17
Nortel
Telephone: (408) 565-3635 (ESN 655)
Fax: 408 565-3325
29 January, 1997
Shiva Corporation
28 Crosby Drive
Bedford, Mass 01730
Attn.: Cynthia Deysher
RE: Memorandum of Understanding dated December 23, 1996
Northern Telecom Inc. and Shiva Corporation agree that the Memorandum of
Understanding made as of December 23, 1996, between Northern Telecom Inc. and
Shiva Corporation is amended by changing the date "January 31, 1997" in (i)
line 3 of the last paragraph of the second page and (ii) Section 9.2 line 1 of
the second paragraph to read "February 28, 1997."
If you agree with the foregoing please sign and return the enclosed duplicate
of this letter on or before January 31, 1997.
Regards,
/s/ Ken Heffner
Ken Heffner
Vice President, Multimedia Solutions
Northern Telecom Inc.
2221 Lakeside Blvd.
Richardson, Texas 75082
To: Northern Telecom Inc.
We agree.
Shiva Corporation
/s/ Frank Ingari
_______________________________
Signature
Exhibit 11.1
SHIVA CORPORATION
Computation of Net Income Per Share (1)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
----------- ----------- ------------
Weighted Average Common and
Common Equivalent Shares:
<S> <C> <C> <C>
Weighted Average Common Shares
Outstanding During the Period 28,424,797 25,079,951 12,829,790
Weighted Average Common
Equivalent Shares 3,034,100 2,256,903 8,248,847
Dilutive Effect of Common and
Common Equivalent Shares issued
subsequent to October 7, 1993 (2) -- -- 1,866,284
----------- ----------- ------------
31,458,897 27,336,854 22,944,921
=========== =========== ============
Net Income (Loss) $16,841,000 $(4,852,000) $2,040,000
Primary Net Income (Loss)
Per Share $ 0.54 $ (0.18) $ 0.09
- ----------------------
<FN>
(1) Fully diluted net income (loss) per share has not been separately
presented, as the amounts would not be materially different from primary
net income (loss) per share.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, certain common and common equivalent shares issued by the Company
during the twelve months immediately preceding the initial filing of the
registration statement relating to the Company's initial public offering
have been included in the calculation of weighted average shares, using
the treasury stock method and the initial public offering price, as if
these shares were outstanding for all periods prior to the initial public
offering.
</TABLE>
<PAGE>
Exhibit 13.1
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.
Overview
Founded in 1985, Shiva develops, manufactures, markets and supports a full
line of digital and analog remote access products. The Company's products
enable users and user sites at enterprises to connect with corporate
information resources, on-line services and the Internet. The Company markets
its products worldwide through distributors, systems integrators, value-added
resellers and strategic partners that include Northern Telecom Limited
("Nortel"), IBM, Hewlett-Packard and Motorola.
In August 1995, the Company acquired Spider Systems Limited ("Spider"), a
leading digital internetworking company based in Edinburgh, UK, through the
issuance of approximately 3,923,606 shares of its common stock (the "Spider
Acquisition").
In June 1996, the Company issued approximately 691,587 shares of its common
stock in exchange for all the outstanding shares of AirSoft, Inc. (the
"AirSoft Acquisition"). AirSoft, Inc. ("AirSoft") designs, manufactures and
sells performance enhancement software products. These products include
PowerBurst(R), a remote node accelerator designed to improve the performance
of file-system-based applications such as electronic mail, spreadsheets and
word processors.
The Spider Acquisition and the AirSoft Acquisition have been accounted for as
poolings of interests, and therefore the consolidated financial information
contained herein has been retroactively combined for all periods presented.
See Notes 1 and 2 of Notes to Consolidated Financial Statements.
The Company derives its revenues from remote access products and other
communications products and services. Remote access products include the
LanRover(R), LanRover Access Switch(TM), Shiva AccessPort(TM),
ShivaIntegrator(R) and the NetModem(R) product lines. Other communications
products and services include communications servers, third-party products,
AppleTalk products, and communications software. The Company also provides a
wide range of service offerings which include consulting, training and
maintenance services.
18
<PAGE>
Results of Operations
The following table sets forth consolidated statement of operations data of
the Company expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Years Percentage Change
---------------------- -------------------
1996 1995 1994 1996 to 1995 to
1995 1994
---------------------- -------------------
<S> <C> <C> <C> <C> <C>
Revenues 100% 100% 100% 69% 46%
Cost of revenues 42 41 43 69 41
---- ---- ---- ---- ----
Gross profit 58 59 57 69 50
Operating expenses:
Research and development 12 12 12 57 48
Selling, general and
administrative 34 38 40 55 38
Merger expenses 1 12 -- (86) *
---- ---- ---- ---- ----
Total operating expenses 47 62 52 28 73
---- ---- ---- ---- ----
Income (loss) from operations 11 (3) 5 * *
Interest expense (income) (2) (1) 1 112 *
---- ---- ---- ---- ----
Income (loss) before income taxes 13 (2) 4 * *
---- ---- ---- ---- ----
Income tax provision 5 2 1 285 159
---- ---- ---- ---- ----
Net income (loss) 8% (4)% 3% *% *%
==== ==== ==== ==== ====
<FN>
* Percentages not meaningful.
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
Results of Operations
Revenues. Revenues increased by 69%, to $200,119,000 in fiscal 1996, from
$118,581,000 in fiscal 1995. Revenues from the Company's remote access
products increased 107% to $174,084,000, or 87% of revenues, in fiscal 1996
from $83,924,000, or 71% of revenues, in fiscal 1995 primarily due to initial
shipments of the LanRover Access Switch and higher unit shipments of the
LanRover product line. Revenues from the LanRover Access Switch, introduced in
the second quarter of fiscal 1996, were $59,015,000, and revenues from
LanRover products were $89,588,000 and $62,892,000 in fiscal 1996 and 1995,
respectively. These increases were partially offset by a 30% decline in
revenues from the Company's other communications products. 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. Sales to OEM customers accounted for 22% of revenues in fiscal 1996,
compared with 10% in 1995. Sales to one major OEM customer accounted for 14%
of revenues 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
$13,421,000 and $7,410,000 in fiscal 1996 and fiscal 1995, respectively,
representing 6% of gross revenues in each period. International revenues
increased to $74,779,000, or 37% of revenues, in fiscal 1996, from
$55,197,000, or 47% of revenues, in fiscal 1995. The percentage decrease in
international revenues in fiscal 1996 was primarily due to increased revenues
to the OEM channel which are classified as domestic.
19
<PAGE>
Gross Profit. Gross profit decreased as a percentage of revenues to 58% in
fiscal 1996, compared to 59% in fiscal 1995. This decrease was primarily
attributable to increased revenues of remote access products to the OEM
channel, which typically result in lower gross margins than the Company's
other sales channels. The overall decrease was partially offset by a change
in product mix towards the LanRover and the LanRover Access Switch, which
carry higher gross margins than the Company's other products.
Research and Development. Research and development expenses increased to
$23,186,000 in fiscal 1996 from $14,787,000 in fiscal 1995, representing
12% of revenues in each period. The absolute increase in these expenses was
primarily due to the hiring of additional research and development staff.
Research and development expenses in fiscal 1996 related primarily to
continued enhancement and development of the Company's remote access products,
including the LanRover Access Switch, a high-end remote access concentrator,
and the Shiva AccessPort, an ISDN client router. Customer-funded development
costs reimbursed to the Company, which are reflected as an offset to research
and development expenses, were $1,718,000 in fiscal 1996, compared to $955,000
in fiscal 1995. Capitalized software development costs were $1,186,000 in
fiscal 1996, compared to $827,000 in fiscal 1995. The Company anticipates
continued significant investment in research and development.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $69,087,000 in fiscal 1996 from $44,662,000 in fiscal
1995. These expenses represented 34% and 38% of revenues in fiscal 1996 and
1995, respectively. The absolute increase in expenses was primarily due to
worldwide expansion of the Company's sales, marketing and administrative
operations necessary to support the Company's growth. Expenses as a
percentage of revenues decreased due to revenues growing at a faster rate than
expenses. The Company plans to further invest in its distribution channels in
order to continue its global market penetration.
Merger Expenses. In fiscal 1996, merger-related expenses of $1,987,000 were
expensed in connection with the AirSoft Acquisition. Merger-related expenses
included $1,675,000 of transaction costs for financial advisor, legal,
regulatory, and accounting fees and other related expenses, and $312,000 of
employee severance payments and other costs. In fiscal 1995, merger-related
expenses of $13,986,000 were expensed in connection with the Spider
Acquisition. Merger-related expenses included $6,275,000 of transaction costs
for financial advisor, legal, regulatory, and accounting fees and other
related expenses, $1,482,000 of employee severance payments, $2,644,000 of
phantom stock compensation and $3,585,000 of integration costs, including
elimination of duplicative assets, employee relocation and travel, and
marketing costs related to the introduction of the combined entity.
Interest Income and Expense. Interest income, net of interest expense,
increased to $3,344,000 in fiscal 1996 from $1,574,000 in fiscal 1995 due to
higher investment balances related to funds generated by the Company's
secondary public offering in November 1995.
Income Tax Provision. The Company's effective tax rate was 35% in fiscal
1996. The Company's effective tax rate differs from the combined federal and
state statutory rates primarily due to the utilization of net operating loss
carryforwards and the impact of tax-exempt interest income, partially offset
by non-deductible merger expenses. In fiscal 1995 the Company had an income
tax provision of $2,386,000, despite a pre-tax loss, primarily due to
nondeductible merger costs incurred in connection with the Spider Acquisition.
20
<PAGE>
Fiscal 1995 Compared to Fiscal 1994
Revenues. Revenues increased by 46%, to $118,581,000 in fiscal 1995 from
$81,058,000 in fiscal 1994, primarily due to higher unit sales of the
Company's products. Revenues from the Company's remote access products
increased by 87%, to $83,924,000, or 71% of revenues in fiscal 1995 from
$44,825,000, or 55% of revenues, in fiscal 1994, primarily due to higher
revenues from the Company's LanRover and ShivaIntegrator products. These
increases were partially offset by a 13% decline in revenues from the
Company's other communications products. Sales to OEM customers accounted for
10% and 9% of revenues in fiscal 1995 and 1994, respectively. 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 $7,410,000 in fiscal 1995 and $7,092,000 in fiscal 1994
representing 6% and 8% of gross revenues in fiscal 1995 and 1994,
respectively. International revenues increased to $55,197,000, or 47% of
revenues, in fiscal 1995 from $41,942,000, or 52% of revenues, in fiscal 1994.
Gross Profit. Gross profit increased as a percentage of revenues to 59% in
fiscal 1995, compared to 57% in fiscal 1994. This increase was primarily
attributable to increased revenues from the Company's LanRover products, which
carry higher gross margins than other communications products, partially
offset by increased European sales of lower-priced products through large
volume distributors.
Research and Development. Research and development expenses increased to
$14,787,000, or 12% of revenues, in fiscal 1995 from $9,972,000, or 12% of
revenues, in fiscal 1994. The absolute increase in these expenses was
primarily due to the hiring of additional research and development staff.
Research and development expenses during fiscal 1995 related primarily to
continued enhancements of the Company's remote access products, including the
ShivaIntegrator product line and a new software release for its LanRover and
NetModem product lines. Customer-funded development costs reimbursed to the
Company and government-funded research and development grants, which are
reflected as an offset to research and development expenses, were $955,000 in
fiscal 1995, compared to $901,000 in fiscal 1994. Capitalized software
development costs were $827,000 in fiscal 1995 compared with $293,000 in
fiscal 1994.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $44,662,000, or 38% of revenues, in fiscal 1995 from
$32,427,000, or 40% of revenues, in fiscal 1994. The absolute increase in
expenses was primarily due to expansion of the Company's worldwide sales and
support operations, as the Company continued to build its distribution
channels.
Merger Expenses. In fiscal 1995, merger-related expenses of $13,986,000 were
expensed in connection with the Spider Acquisition. Merger-related expenses
include $6,275,000 of transaction costs for financial advisor, legal,
regulatory, and accounting fees and other related expenses, $1,482,000 of
employee severance payments, $2,644,000 of phantom stock compensation and
$3,585,000 of integration costs, including elimination of duplicative assets,
employee relocation and travel, and marketing costs related to the
introduction of the combined entity.
Interest Income and Expense. The Company had higher interest income in fiscal
1995, due to investment balances related to funds generated by the Company's
public stock offerings in November 1995 and November 1994. Interest expense
consists primarily of interest incurred on the Company's mortgage on its
European headquarters and capitalized lease obligations.
21
<PAGE>
Income Tax Provision. The Company had an income tax provision of $2,386,000
in fiscal 1995, despite a pre-tax loss, primarily due to nondeductible
merger costs incurred in connection with the Spider Acquisition. The
Company's effective tax rate was 31% in fiscal 1994.
Foreign Currency Fluctuations
A substantial 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 net income impact of such fluctuations,
however, is offset to the extent 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
the results of operations for the periods presented.
Liquidity and Capital Resources
As of December 28, 1996, the Company had $72,067,000 of cash and cash
equivalents and $35,035,000 of short-term investments. Working capital
increased to $130,464,000 at December 28, 1996 from $109,376,000 at December
30, 1995.
Net cash provided by operations totaled $19,552,000 in fiscal 1996. Net cash
provided by operations in fiscal 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 and increased days sales outstanding due in part to
changes in the timing of product shipments where shipments occurred late in
the quarter. The increase in inventories was in anticipation of fourth
quarter sales that did not materialize and to support increased revenue levels
over the prior year. Net cash provided by operations was $2,799,000 in fiscal
1995, despite a net loss and increased accounts receivable, due to increased
current liabilities and non-cash expenses included in the net loss such as
depreciation, amortization and certain merger expenses. The increase in
accounts receivable was due to increased revenue levels.
Net cash used by investing activities totaled $43,517,000 in fiscal 1996,
compared to $16,993,000 in fiscal 1995. Investment activity in fiscal 1996
and 1995 consisted primarily of net purchases of short-term investments as
well as property, plant and equipment to support the Company's growth.
Net cash provided by financing activities, which consisted of proceeds from
stock option exercises, partially offset by payments on long-term debt and
capital lease obligations, totaled $3,595,000 in fiscal 1996. Net cash
provided by financing activities was $72,174,000 in fiscal 1995, and consisted
primarily of proceeds from the Company's secondary offering in November 1995,
partially offset by payments on the Company's outstanding debt and capital
lease obligations.
The Company has a $5,000,000 unsecured revolving credit facility with a bank
which expires in June 1997. Borrowings under the revolving credit facility
bear interest at the bank's prime rate. The terms of the credit facility
require the Company to maintain a minimum level of profitability and specified
financial ratios. At December 28, 1996, available borrowings were reduced by
outstanding letters of credit of $843,000 which expire at various dates in
1997. The Company had no borrowings outstanding under this line at December
28, 1996. The Company also has a foreign credit facility of approximately
$1,695,000 of which approximately $1,259,000 was available at December 28,
1996. Available borrowings under this facility are decreased by the value of
the outstanding debt payable to the European Coal and Steel Community Fund and
22
<PAGE>
guarantees on certain foreign currency transactions. The terms of the foreign
credit facility require the Company to maintain a minimum level of
profitability and specified financial ratios. There were no borrowings
outstanding under this foreign credit facility at December 28, 1996.
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 December 28, 1996, the Company had outstanding
forward exchange contracts to purchase $575,000 and to sell $8,380,000 in
various foreign currencies which matured and settled on January 15, 1997.
The Company believes that its existing cash and short-term investment
balances, together with borrowings available under the Company's bank credit
facilities, are sufficient to meet the Company's cash requirements for the
foreseeable future.
Recently Enacted Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125), which provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 will be effective for the
Company's fiscal year 1997. The Company has reviewed the implications of the
statement, and based on its initial evaluation, believes that it will not have
a material impact on the Company's financial position or results of operations
upon adoption.
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.
The Company is in the process of transitioning its relationship with Nortel to
one in which Nortel is able to distribute certain of the Company's products to
the telco market under a royalty-based arrangement. The new relationship may
result in decreased Company product revenues and the loss of direct control
over those market sectors that Nortel will supply with the Company's products.
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 continue its growth in revenues or sustain its 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.
23
<PAGE>
The Company's LanRover product is experiencing increased market competition
which may require 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.
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, did not meet the Company's expectations in 1996 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
LanRover 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.
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 Shiva 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. 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.
24
<PAGE>
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.
Contingencies
On January 17, 1997, a complaint, Abraham Schwartz and Norman Marcus v. Shiva
Corporation, was filed against the Company in the Superior Court of the State
of California for the County of Los Angeles. The plaintiffs purport to bring
this action on behalf of a class of purchasers of the Company's common stock
between September 17, 1996 and January 7, 1997. The Complaint asserts that
the Company made false or misleading statements in violation of state and
federal law, including: state law negligent misrepresentation, fraud, and
deceit, California Corporation Code Chapters 1507, 25400, and 25500,
California Civil Code Chapters 1709-10, and Section 12(2) of the Securities
Act of 1933, 15 U.S.C. Chapter 771(2). On behalf of the purported class, the
plaintiffs seek compensatory damages, treble damages under California law,
punitive damages under California law, punitive damages, attorneys' fees,
costs and interest. On February 24, 1997, the Company filed a demurrer to the
complaint. The Company believes the claim to be without merit 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.
25
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Balance Sheet
(In thousands, except share related data)
<CAPTION>
December 28, December 30,
1996 1995
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 72,067 $ 93,203
Short-term investments 35,035 9,125
Accounts receivable, net of allowances of
$10,347 at December 28, 1996 and $5,252 at
December 30, 1995 39,904 22,982
Inventories 17,958 7,846
Prepaid expenses and other current assets 6,022 2,351
-------- --------
Total current assets 170,986 135,507
Property, plant and equipment, net 23,855 12,965
Deferred income taxes 1,372 548
Other assets 1,837 1,103
-------- --------
Total assets $198,050 $150,123
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 367 $ 700
Accounts payable 17,130 9,032
Accrued compensation and benefits 5,871 5,367
Accrued expenses 13,748 7,509
Deferred revenue 3,406 3,523
-------- --------
Total current liabilities 40,522 26,131
Long-term debt and capital lease obligations 122 452
Other long-term liabilities -- 401
Deferred income taxes 572 235
-------- --------
Total liabilities 41,216 27,219
-------- --------
Commitments and Contingencies (Notes 13 and 14)
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized at December 28, 1996 and December 30,
1995, none issued -- --
Common stock, $.01 par value; 100,000,000 and
50,000,000 shares authorized, 28,891,216 and
27,960,580 shares issued and outstanding at
December 28, 1996 and December 30, 1995,
respectively 289 280
Additional paid-in capital 149,564 133,457
Unrealized gain on investments 175 137
Cumulative translation adjustment 349 (586)
Retained earnings (accumulated deficit) 6,457 (10,384)
-------- --------
Total stockholders' equity 156,834 122,904
-------- --------
Total liabilities and stockholders' equity $198,050 $150,123
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
26
<PAGE>
<TABLE>
Shiva Corporation
Consolidated Statement of Operations
(In thousands, except per share data)
<CAPTION>
Year Ended
December 28, December 30, December 31,
1996 1995 1994
------------ ----------- ------------
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
------------ ----------- ------------
<S> <C> <C> <C>
Revenues $200,119 $118,581 $81,058
Cost of revenues 83,177 49,186 34,800
------------ ----------- ------------
Gross profit 116,942 69,395 46,258
------------ ----------- ------------
Operating expenses:
Research and development 23,186 14,787 9,972
Selling, general and administrative 69,087 44,662 32,427
Merger expenses 1,987 13,986 ---
------------ ----------- ------------
Total operating expenses 94,260 73,435 42,399
------------ ----------- ------------
Income (loss) from operations 22,682 (4,040) 3,859
Interest income 4,139 2,279 224
Interest and other expense (795) (705) (1,122)
------------ ----------- ------------
Income (loss) before income taxes 26,026 (2,466) 2,961
Income tax provision 9,185 2,386 921
------------ ----------- ------------
Net income (loss) $ 16,841 $ (4,852) $ 2,040
============ =========== ============
Net income (loss) per share $ 0.54 $ (0.18) $ 0.09
============ =========== ============
Shares used in computing net income
(loss) per share 31,459 27,337 22,945
============ =========== ============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
27
<PAGE>
<TABLE>
Shiva Corporation
Consolidated Statement of Changes in Stockholders Equity
(In thousands, except share related data)
<CAPTION>
Convertible Preferred
Stock Common Stock
--------------------- -----------------
Number of Number of Par
Shares Amount Shares Value
--------- ------ --------- -----
<S> <C> <C> <C> <C>
Balance At January 1, 1994 4,621,294 $6,174 11,268,265 $113
Exercise of Class C convertible
preferred stock warrants 409,836 2,000 -- --
Issuance of common stock to officer -- -- 177,778 2
Issuance of common stock -- -- 396,608 4
Initial public offering, net of
stock issuance costs of $1,032 -- -- 4,130,266 41
Conversion of preferred stock (5,031,130) (8,174) 7,719,536 77
Exercise of stock options -- -- 785,634 8
ESOP transactions, net -- -- -- --
Tax benefit related to stock options -- -- -- --
Currency translation adjustments -- -- -- --
Net income -- -- -- --
Dividends paid -- -- -- --
--------- ------ --------- -----
Balance at December 31, 1994 -- -- 24,478,087 245
Exercise of stock options -- -- 1,117,557 11
Issuance of common stock in
settlement of dividend payable -- -- 20,014 --
Issuance of common stock in
settlement of phantom stock plan -- -- 31,462 1
Issuance of common stock under
employee stock purchase plan -- -- 21,582 --
Secondary public offering, net of
stock issuance costs of $583 -- -- 2,291,878 23
Tax benefit related to stock options -- -- -- --
Unrealized gain on investments -- -- -- --
Currency translation adjustments -- -- -- --
Net loss -- -- -- --
Elimination of Spider net income for the
three-month period ended March 31, 1995 -- -- -- --
--------- ------ --------- -----
Balance at December 30, 1995 -- -- 27,960,580 280
Exercise of stock options -- -- 899,048 9
Issuance of common stock under employee
stock purchase plan -- -- 31,588 --
Tax benefit related to stock options -- -- -- --
Unrealized gain on investments -- -- -- --
Currency translation adjustments -- -- -- --
Net income -- -- -- --
--------- ------ --------- -----
Balance at December 28, 1996 -- $ -- 28,891,216 $289
========= ====== ========= =====
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share related data)
<CAPTION>
Additional Unrealized Cumulative
Paid-In gain on translation
capital investments adjustment
---------- ----------- -----------
<S> <C> <C> <C>
Balance At January 1, 1994 $ 6,804 $ -- $ (897)
Exercise of Class C convertible
preferred stock warrants -- -- --
Issuance of common stock to
officer 998 -- --
Issuance of common stock 4,547 -- --
Initial public offering, net of
stock issuance costs of $1,032 27,737 -- --
Conversion of preferred stock 8,097 -- --
Exercise of stock options 644 -- --
ESOP transactions, net -- -- --
Tax benefit related to stock options 448 -- --
Currency translation adjustments -- -- 429
Net income -- -- --
Dividends paid -- -- --
---------- ----------- -----------
Balance at December 31, 1994 49,275 -- (468)
Exercise of stock options 1,736 -- --
Issuance of common stock in
settlement of dividend payable 406 -- --
Issuance of common stock in
settlement of phantom stock plan 2,283 -- --
Issuance of common stock under
employee stock purchase plan 314 -- --
Secondary public offering, net of
stock issuance costs of $583 76,115 -- --
Tax benefit related to stock options 3,328 -- --
Unrealized gain on investments -- 137 --
Currency translation adjustments -- -- (118)
Net loss -- -- --
Elimination of Spider net income
for the three-month period ended
March 31, 1995 -- -- --
---------- ----------- -----------
Balance at December 30, 1995 133,457 137 (586)
Exercise of stock options 3,516 -- --
Issuance of common stock under
employee stock purchase plan 772 -- --
Tax benefit related to stock options 11,819 -- --
Unrealized gain on investments -- 38 --
Currency translation adjustments -- -- 935
Net income -- -- --
---------- ----------- -----------
Balance at December 28, 1996 $149,564 $175 $ 349
========== =========== ===========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share related data)
<CAPTION>
Retained
Unearned earnings Total
ESOP (accumulated stockholders'
compensation deficit) equity
------------ ------------- -------------
<S> <C> <C> <C>
Balance At January 1, 1994 $ -- $(6,122) $ 6,072
Exercise of Class C convertible
preferred stock warrants -- -- 2,000
Issuance of common stock to officer -- -- 1,000
Issuance of common stock -- -- 4,551
Initial public offering, net of
stock issuance costs of $1,032 -- -- 27,778
Conversion of preferred stock -- -- --
Exercise of stock options -- -- 652
ESOP transactions, net (305) -- (305)
Tax benefit related to stock options -- -- 448
Currency translation adjustments -- -- 429
Net income -- 2,040 2,040
Dividends paid -- (551) (551)
------------ ------------- -------------
Balance at December 31, 1994 (305) (4,633) 44,114
Exercise of stock options -- -- 1,747
Issuance of common stock in
settlement of dividend payable -- -- 406
Issuance of common stock in
settlement of phantom stock plan 305 -- 2,589
Issuance of common stock under
employee stock purchase plan -- -- 314
Secondary public offering, net of
stock issuance costs of $583 -- -- 76,138
Tax benefit related to stock options -- -- 3,328
Unrealized gain on investments -- -- 137
Currency translation adjustments -- -- (118)
Net loss -- (4,852) (4,852)
Elimination of Spider net income
for the three-month period ended
March 31, 1995 -- (899) (899)
------------ ------------- -------------
Balance at December 30, 1995 -- (10,384) 122,904
Exercise of stock options -- -- 3,525
Issuance of common stock under
employee stock purchase plan -- -- 772
Tax benefit related to stock options -- -- 11,819
Unrealized gain on investments -- -- 38
Currency translation adjustments -- -- 935
Net income -- 16,841 16,841
------------ ------------- -------------
Balance at December 28, 1996 $ -- $ 6,457 $156,834
============ ============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
28
<PAGE>
<TABLE>
Shiva Corporation
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
<CAPTION>
Year Ended
---------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ -----------
(Fiscal 1996) (Fiscal 1995)(Fiscal 1994)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $16,841 $(4,852) $2,040
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Merger expenses -- 3,766 --
Depreciation and amortization 6,968 3,756 2,716
Deferred income taxes (2) (811) (336)
Changes in assets and liabilities:
Accounts receivable (15,675) (7,906) (3,496)
Inventories (9,804) (2,023) (865)
Prepaid expenses and other current assets 391 (67) (330)
Accounts payable 7,585 122 1,750
Accrued compensation and benefits 360 2,444 601
Accrued expenses 13,434 6,548 2,011
Deferred revenue (134) 1,846 804
Other long-term liabilities (412) (24) (23)
------------ ------------ -----------
Net cash provided by operating
activities 19,552 2,799 4,872
------------ ------------ -----------
Cash flows from investing activities
Purchase of property, plant and
equipment (16,089) (7,031) (3,300)
Capitalized software development costs (1,183) (827) (293)
Purchases of short-term investments (34,136) (11,188) --
Proceeds from maturities of short-term
investments 8,264 2,200 --
Change in other assets (373) (147) (173)
---------- ------------ ---------
Net cash used by investing
activities (43,517) (16,993) (3,766)
------------ ------------ -----------
Cash flows from financing activities
Net repayments under short-term debt -- (1,885) (1,213)
Proceeds from long-term debt -- -- 615
Principal payments on long-term
debt and capital lease obligations (702) (4,075) (1,080)
Proceeds from issuance of convertible
preferred stock, net -- -- 2,000
Proceeds from issuance of common
stock, net -- 76,138 33,328
Proceeds from exercise of stock options 4,297 2,054 652
Dividends paid -- (58) (235)
------------ ------------ ---------
Net cash provided by financing
activities 3,595 72,174 34,067
--------- ------------ ---------
Effects of exchange rate changes on cash
and cash equivalents (766) 153 72
------------ ------------ ---------
Net increase (decrease) in cash and
cash equivalents (21,136) 58,133 35,245
Cash and cash equivalents, beginning
of period 93,203 36,068 823
Elimination of Spider net cash activity
for the three months ended March
31, 1995 -- (998) --
------------ ------------ ---------
Cash and cash equivalents, end of period $72,067 $93,203 $36,068
============ ============ =========
Supplemental disclosure of cash flow
information
Interest paid $ 195 $ 748 $ 1,127
Income taxes paid $ 471 $ 143 $ 366
Supplemental disclosure of noncash
financing activities
Issuance of common stock in
settlement of dividend payable $ -- $ 406 $ --
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
29
<PAGE>
SHIVA CORPORATION
Notes to Consolidated Financial Statements
1. Nature of Business And Summary of Significant Accounting Policies
Shiva Corporation (the "Company") is a leading provider of mission-critical
remote access solutions that enable users to connect with corporate
information resources, on-line services, and the Internet. The Company
markets its products worldwide primarily through distributors, systems
integrators, resellers and original equipment manufacturers.
A summary of the Company's significant accounting policies follows:
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The consolidated financial information
contained herein include the accounts of Spider Systems Limited ("Spider") and
AirSoft, Inc. ("AirSoft") for all periods presented (see Note 2).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized upon shipment provided that no
significant Company obligations remain and collection of the related
receivable is probable. The Company provides most of its distributors and
resellers with price protection rights and return rights for stock rotation or
product evaluation. An allowance for estimated future returns is recorded at
the time revenue is recognized based on the Company's return policies and
historical experience. Although the Company believes it has adequate
reserves to cover product returns and price protection rights, there can be no
assurance that the Company will not experience significant returns or price
protection adjustments in the future or that such reserves will be adequate to
cover such returns and price protection rights. Revenue from technical
support and product maintenance contracts is deferred and recognized ratably
over the period the services are performed.
The Company provides a one-year warranty on hardware products and a ninety-day
warranty on software media. A provision is made at the time of sale for
product warranty costs. The Company has historically provided customers with
a variety of technical support services, including free services which it is
not contractually obligated to provide. A provision is made at the time of
sale for the cost of such free services.
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. The Company invests
its excess cash in U.S. Treasury securities, municipal securities, money
market funds of major financial institutions, high-grade commercial paper and
time deposits that are subject to minimal credit and market risk.
All of the Company's cash equivalents and short-term investments are recorded
at fair value and classified as available-for-sale in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's investments at
December 28, 1996 and December 30, 1995 include unrealized gains of $175,000
and $137,000,
30
<PAGE>
respectively, recorded as a separate component of stockholders' equity. The
Company's short-term investments at December 28, 1996 have various maturity
dates through 1998. Realized gains or losses on the sale of securities are
calculated using the specific identification method. There were no such
realized gains or losses in fiscal 1996 or 1995.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk include accounts receivable which are primarily due from
distributors, resellers and OEM customers throughout North America and
Europe. The Company performs ongoing evaluations of customers' financial
condition and, generally, does not require collateral. In addition, the
Company maintains reserves for potential credit losses, and such losses, in
the aggregate, have not exceeded management expectations. At December 28,
1996, one customer accounted for 19% of the accounts receivable balance.
Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash, cash equivalents and short-term investments, accounts receivable,
accounts payable, long-term debt and capital lease obligations approximate
their fair value at December 28, 1996, and December 30, 1995.
Forward Foreign Exchange Contracts
The Company enters into forward foreign exchange contracts as a hedge against
exposure to fluctuations in exchange rates associated with certain
transactions denominated in foreign currencies, including intercompany and
trade accounts receivable and payable, and does not use them for trading
purposes. The contracts are marked to market with gains and losses, not
material in amount, recognized currently in interest and other expense in
the accompanying financial statements and generally offset exchange gains or
losses on the related transactions. Cash flows from the contracts are
classified as cash flows from operating activities. Exposure to credit risk
for these contracts is minimal since the counterparties are major financial
institutions, and is generally limited to the unrealized gains on such
contracts should any counterparties fail to perform as contracted. Exposure
to market risk is limited to movements in currency rates. At December 28,
1996, the Company had outstanding forward exchange contracts to purchase
$575,000 and to sell $8,380,000 in various foreign currencies which matured
and settled on January 15, 1997. The fair value of outstanding forward
exchange contracts approximates the original value due to the relatively
short terms, generally less than three months.
Inventories
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out method.
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent new product
introductions. There can be no assurance that products or technologies
developed by others will not make the Company's inventories obsolete.
The Company is currently dependent on two 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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Equipment held under capital leases is stated at the lower of the fair market
value of the equipment or the present value of the minimum lease payments at
31
<PAGE>
the inception of the leases and is amortized on a straight-line basis over the
shorter of the lives of the related assets or the term of the leases.
Maintenance and repair costs are expensed as incurred. Upon sale or retire-
ment of property, plant and equipment, the applicable cost of the disposed
asset and the related accumulated depreciation are eliminated. Any resulting
gains or losses are reflected in results of operations.
Research and Development and Capitalized Software Development Costs
Research and development costs, other than certain software development costs,
are charged to expense as incurred. Software development costs incurred
subsequent to the establishment of technological feasibility, and prior to
general release of the product to the public, are capitalized and amortized to
cost of sales on a straight-line basis over the estimated useful lives of the
related products, generally eighteen to thirty-six months. It is reasonably
possible that the remaining estimated useful lives of the related products
could be reduced in the future due to competitive pressures. Unamortized
software development costs of $1,134,000 and $703,000 are included in other
assets at December 28, 1996 and December 30, 1995, respectively.
Amortization expense was $777,000, $370,000 and $310,000 in fiscal 1996, 1995
and 1994, respectively.
The Company receives fees under product development contracts with certain
customers. Product development fees are recorded as a reduction of research
and development costs as work is performed pursuant to the related contracts
and defined milestones are attained. Losses, if any, are provided for at the
time that management determines that development costs will exceed related
fees. Payments received under product development contracts prior to the
completion of the related work and attainment of milestones are recorded as
deferred liabilities. In fiscal 1996, 1995 and 1994 the Company recorded
product development fees of $1,718,000, $955,000 and $766,000, respectively,
and incurred development costs of $922,000, $1,135,000 and $820,000,
respectively, under such contracts.
Advertising Costs
Advertising costs, other than certain direct-response advertising costs, are
charged to expense as incurred. The Company has not incurred significant
costs associated with direct-response advertising in fiscal 1996, 1995, and
1994, and there were no capitalized advertising costs at December 28, 1996, or
December 30, 1995. Advertising costs were $3,177,000, $3,042,000, and
$2,589,000 in fiscal 1996, 1995, and 1994, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
is an asset and liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences, utilizing current tax rates, of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Deferred tax assets are recognized, net of any valuation allowance, for the
estimated future tax effects of deductible temporary differences and tax
operating loss and credit carryforwards. Deferred income tax expense
represents the change in the net deferred tax asset and liability balances.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees." Since it is the Company's policy to grant options
with an exercise price equal to the quoted market price of the underlying
stock on the grant date, no compensation cost has been recognized for its
stock option and employee stock purchase plans. In January 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation."
(See Note 10).
32
<PAGE>
Foreign Currency Translation
Financial statements of international subsidiaries, where the local currency
is the functional currency, are translated using period-end exchange rates for
assets and liabilities and at average rates during the period for results of
operations. The resulting foreign currency translation adjustments are
included as a separate component of stockholders' equity. For international
subsidiaries where the functional currency is other than the local currency,
monetary assets and liabilities are translated using period-end exchange
rates, non-monetary assets and liabilities are translated at historical rates
and results of operations are translated at average rates for the period. The
resulting foreign currency translation adjustments are included in interest
and other expense in the accompanying financial statements. Gains or losses
resulting from foreign currency translation were immaterial in fiscal 1996,
1995, and 1994.
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 the
effect is antidilutive. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, certain common and common equivalent shares issued
by the Company during the twelve months immediately preceding the initial
filing of the registration statement relating to the Company's initial public
offering have been included in the calculation of weighted average shares,
using the treasury stock method and the initial public offering price, as if
these shares were outstanding for all periods prior to the initial public
offering.
2. Business Combinations
In June 1996, the Company issued approximately 691,587 shares of common stock
in exchange for all outstanding shares of AirSoft (the "AirSoft Acquisition")
in a business combination accounted for as a pooling of interests. AirSoft
designs, develops, manufactures and sells performance enhancement software
products. The consolidated financial statements for all periods presented have
been retroactively combined to reflect the AirSoft Acquisition. No adjustments
to conform accounting methods were required; however, certain amounts have
been reclassified with regard to the presentation of the financial information
of the companies.
The following information shows revenue and net income (loss) for the separate
companies for the periods preceding the AirSoft Acquisition:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
-------------------------------------------------------
December 30, December 31, March 30,
1995 1994 1996
------------ ----------- ------------------
(Fiscal 1995) (Fiscal 1994) (unaudited)
<S> <C> <C> <C>
Revenues:
Shiva $117,721 $80,971 $42,513
AirSoft 860 87 796
------------ ----------- ------------------
$118,581 $81,058 $43,309
Net income (loss):
Shiva ($2,879) $3,881 $ 4,366
AirSoft (1,973) (1,841) (27)
------------ ----------- ------------------
($4,852) $2,040 $ 4,339
============ =========== ==================
</TABLE>
Merger-related expenses of $1,987,000 were expensed upon consummation of the
AirSoft Acquisition in the quarter ended June 29, 1996. Merger-related
expenses include $1,675,000 of transaction costs for financial advisor, legal,
regulatory, and accounting fees and other related expenses, and $312,000 of
employee severance payments and other costs.
33
<PAGE>
In August 1995, the Company issued approximately 3,923,606 shares of common
stock in exchange for all outstanding shares of Spider (the "Spider
Acquisition") in a business combination accounted for as a pooling of
interests. Spider is a digital internetworking company based in Edinburgh,
UK which designs, develops, manufactures and sells advanced network access
hardware and software products. The consolidated financial statements for all
periods presented have been retroactively combined to reflect the Spider
Acquisition.
Spider's fiscal year end of March 31 has been changed to conform to the
Company's fiscal year end. Spider's results of operations for the year ended
March 31, 1995 have been combined with the Company's results of operations for
the year ended December 31, 1994. The results of operations for fiscal 1995
are for the twelve months ended December 30, 1995, for both Shiva and Spider.
Spider's unaudited results of operations for the three months ended March 31,
1995 (including revenues, operating income, and net income of $12,592,000,
$1,350,000 and $899,000 respectively) have been included in the combined
results of operations for fiscal 1994 and 1995. Therefore, Spider's net
income for the three-month period ended March 31, 1995 has been eliminated
from stockholders' equity.
Merger-related expenses of $13,986,000 were expensed upon consummation of the
Spider Acquisition in the quarter ended September 30, 1995. Merger-related
expenses include $6,275,000 of transaction costs for financial advisor, legal,
regulatory and accounting fees and other related expenses, $1,482,000 of
employee severance payments, $2,644,000 of phantom stock compensation and
$3,585,000 of integration costs, including elimination of duplicative assets,
employee relocation and travel, and marketing costs related to the
introduction of the combined entity.
3. Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments consist of the following:
<TABLE>
<CAPTION>
(In thousands)
December 28, 1996 Amortized Unrealized
Cost Gain Market Value
--------- ---------- ------------
<S> <C> <C> <C>
Cash and cash equivalents:
Municipal securities $ 48,204 $ 16 $ 48,220
Money market funds 6,921 -- 6,921
Cash held in banks 16,926 -- 16,926
--------- ---------- ------------
Total cash and cash equivalents 72,051 16 72,067
Short-term investments:
Municipal securities 34,876 159 35,035
--------- ---------- ------------
Total cash, cash equivalents and
short-term investments $ 106,927 $ 175 $ 107,102
======== ========== ============
Amortized Unrealized
December 30, 1995 Cost Gain Market Value
--------- ---------- ------------
Cash and cash equivalents:
Money market funds $ 75,382 $ -- $ 75,382
Cash held in banks 16,825 -- 16,825
Commercial paper 996 -- 996
Total cash and cash equivalents 93,203 -- 93,203
Short-term investments:
U.S. Treasury securities 8,988 137 9,125
Total cash, cash equivalents and
short-term investments $ 102,191 $ 137 $ 102,328
========= ======== =========
</TABLE>
34
<PAGE>
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands) December 29, 1996 December 30, 1995
----------------- -----------------
<S> <C> <C>
Raw materials $ 6,218 $3,137
Work-in-process 1,506 1,037
Finished goods 10,234 3,672
----------------- -----------------
$17,958 $7,846
================= =================
</TABLE>
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Useful life December 28, December 30,
(In thousands) (in years) 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Land $ 339 $ 310
Buildings 50 4,301 3,801
Furniture and fixtures 5 3,589 2,395
Machinery and equipment 3-5 25,288 17,009
Leasehold improvements Lease Term 2,461 494
----------- ------------
35,978 24,009
Less - Accumulated depreciation
and amortization 12,123 11,044
----------- ------------
$23,855 $12,965
=========== ============
</TABLE>
Furniture and fixtures include equipment under capital leases of $170,000 at
December 30, 1995. Machinery and equipment include equipment under capital
leases of $206,000 at December 28, 1996 and $2,004,000 at December 30, 1995.
Accumulated amortization related to equipment under capital leases totals
$153,000 and $1,889,000 at December 28, 1996, and December 30, 1995,
respectively. Amortization of equipment under capital leases is included in
depreciation expense. In fiscal 1996, the Company disposed of approximately
$5,474,000 in property and equipment. The resulting loss on these disposals
was not material.
6. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 28, December 30,
(In thousands) 1996 1995
------------ ------------
<S> <C> <C>
Accrued sales and marketing expenses $ 6,360 $2,265
Other accrued expenses 7,388 5,244
------------ ------------
$13,748 $7,509
============ ============
</TABLE>
7. Debt
Short-term Debt
Under the terms of a credit agreement (the "Credit Agreement") with a U.S.
bank, the Company has a $5,000,000 unsecured revolving credit facility (the
"Revolver") which bears interest at the bank's prime rate. At December 28,
1996, available borrowings were reduced by outstanding letters of credit of
$843,000 related to certain office leases. These letters of credit expire at
various dates through 1997. While the Company may repay all or a portion of
35
<PAGE>
the Revolver borrowings at any time, any outstanding principal must be repaid
in full by June 1997. The terms of the Credit Agreement require the Company
to maintain a minimum level of profitability and specified financial ratios.
There were no borrowings outstanding under the Revolver at December 28, 1996
or December 30, 1995.
The Company also has a foreign credit facility secured by all assets of Shiva
Europe Limited of approximately $1,695,000, of which $1,259,000 was available
at December 28, 1996. Available borrowings under this facility are decreased
by the value of the outstanding debt payable to the European Coal and Steel
Community Fund and guarantees on certain foreign currency and other
transactions. Borrowings under the foreign credit facility bear interest at
the bank's prime rate plus 2.5% (8.5% at December 28, 1996). The terms of the
foreign credit facility require the Company to maintain a minimum level of
profitability and specified financial ratios. There were no borrowings
outstanding under the foreign credit facility at December 28, 1996.
Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 28, December 30,
(In thousands) 1996 1995
----------- ------------
<S> <C> <C>
Capital lease obligations at rates of 11.4% to
14.3%, secured by certain equipment; expiring
at various dates through July 1998 $ 65 $378
Mortgage loans:
European Coal and Steel Community Fund ("ECSC")
Loan A payable in semi-annual installments
of $97 plus interest at 8.5%, due March 1997 106 290
Loan C payable in semi-annual installments of
$97 plus interest at 10.0%, due January 1998 318 484
----------- ------------
489 1,152
Less - Current portion 367 700
----------- ------------
$122 $452
=========== ============
</TABLE>
The ECSC mortgage loans are secured by the Company's European headquarters
property in Edinburgh, U.K.
8. Income Taxes
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
December 28, December 30, December 31,
(In thousands) 1996 1995 1994
------------ ------------ ------------
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
------------ ------------ ------------
<S> <C> <C> <C>
Domestic $22,906 $ 2,387 $1,113
Foreign 3,120 (4,853) 1,848
------------ ------------ ------------
$26,026 $(2,466) $2,961
============ ============ ============
</TABLE>
36
<PAGE>
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
(In thousands) Year Ended
--------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------- -------------
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
------------- ------------- ------------
<S> <C> <C> <C>
Current:
Federal $7,561 $3,401 $725
State 1,013 186 (39)
Foreign 613 (390) 571
------------- ------------- ------------
9,187 3,197 1,257
Deferred:
Federal (1,244) (333) (34)
State 923 (75) (192)
Foreign 319 (403) (110)
------------- ------------- ------------
(2) (811) (336)
------------- ------------- ------------
$9,185 $2,386 $921
============= ============= ============
</TABLE>
The significant components of the net deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
December 28, December 30,
(In thousands) 1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible $4,275 $2,675
Net operating loss carryforwards 2,381 4,635
Tax credit carryforwards 597 891
Other 58 424
------------ ------------
Gross deferred tax assets 7,311 8,625
============ ============
Deferred tax liabilities:
Capitalized software development costs (406) (245)
Depreciation (736) (832)
Other (91) (244)
------------ ------------
Gross deferred tax liabilities (1,233) (1,321)
Deferred tax asset valuation allowance (858) (6,531)
------------ ------------
$5,220 $ 773
============ ============
</TABLE>
The difference between the income tax provision and income taxes computed
using the applicable U.S. statutory federal tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------
December 28, December 30, December 31
1996 1995 1994
------------ ----------- -----------
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
------------ ----------- -----------
<S> <C> <C> <C>
Taxes computed at federal
statutory rate 35% 35% 35%
State income taxes, net of federal
tax benefit 5 (16) (1)
Foreign income taxed at different rates -- (2) --
Research and development tax credits -- 3 (9)
Change in valuation allowance (6) 27 (6)
Non-deductible merger expenses 3 (127) --
Tax exempt interest (3) -- --
Other 1 (17) 12
Effective income tax rate 35% (97)% 31%
</TABLE
37
<PAGE>
At December 28, 1996, the Company had federal and state net operating loss
carryforwards of approximately $4,352,000 which expire at various dates
through 2011. The Company also had federal and state research and development
tax credit carryforwards of $597,000, which expire at various dates through
2011. Ownership changes, as defined by the Internal Revenue Code, may limit
the amount of net operating loss and tax credit carryforwards that can be
utilized to offset future taxable income or tax liability.
The deferred tax valuation allowance decreased by $5,673,000 due to the
realization of deferred tax assets related to employee stock options and the
change in the amount of AirSoft's net operating losses and tax credits
expected to be utilized in the carryforward period. Of this amount,
$3,976,000 related to employee stock options and was therefore recorded as a
credit to stockholders' equity. The Company has recorded a valuation
allowance for the tax benefit of certain net operating loss carryforwards with
substantial limitations since realization of these future benefits is not
sufficiently assured at December 28, 1996. The deferred tax asset recognized
reflects the benefit of future deductible temporary differences and net
operating loss and credit carryforwards expected to be realized. Realization
of the asset is dependent on generating sufficient taxable income and,
although not assured, management believes that it is more likely than not that
the deferred tax asset will be realized.
9. Stockholders' Equity
Stockholder Rights Plan
On September 20, 1995 the Company's Board of Directors adopted a Stockholder
Rights Plan and pursuant thereto declared a dividend of one preferred stock
purchase right for each outstanding share of common stock to stockholders of
record at the close of business on October 13, 1995. Each right entitles
holders of the Company's common stock to purchase one one-hundredth of a share
(a "Unit") of a new series of junior participating preferred stock, $.01 par
value per share, at an exercise price of $300.00 per unit, subject to
adjustment. The rights are exercisable and become exercisable for common
stock only under certain circumstances and in the event of particular events
relating to a change in control of the Company. The rights may be redeemed by
the Company under certain circumstances pursuant to the plan. The rights
expire on October 13, 2005, unless earlier redeemed or exchanged. The rights
have certain anti-takeover effects, in that they would cause substantial
dilution to a person or group that attempts to acquire a significant interest
in the Company on terms not approved by the Board of Directors.
Common Stock
On October 21, 1994, the stockholders approved a 1-for-1.5 reverse split
(effective upon the closing of the Company's initial public offering) of the
Company's common stock. On April 2, 1996, the Company's Board of Directors
declared a two-for-one split of the Company's common stock which was effective
on April 22, 1996. All shares and per share amounts included in the
accompanying consolidated financial statements have been adjusted to give
retroactive effect to such stock splits for all periods presented. On
November 30, 1995, the stockholders approved an increase in the authorized
shares of common stock from 25,000,000 shares to 50,000,000 shares. On May
15, 1996, the stockholders approved an increase in the authorized shares of
common stock from 50,000,000 to 100,000,000 shares.
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are
entitled to receive dividends, if any, as may be declared by the Board of
Directors, subject to any preferential dividend rights of any preferred
stockholders.
38
<PAGE>
10. Stock Plans
1988 Stock Plan
The 1988 Stock Plan (the "1988 Plan") provides for the grant of incentive
stock options, stock awards, and stock purchase rights for the purchase of up
to an aggregate of 8,200,000 shares of the Company's common stock by officers,
employees, consultants and directors of the Company. In May 1996, the
stockholders approved an increase in the number of shares issuable under the
1988 Plan from 8,200,000 to 9,700,000 and extended the expiration date of the
1998 Plan from December 31, 1997 to December 31, 2000. The Compensation
Committee of the Board of Directors is responsible for administration of the
1988 Plan. The Compensation Committee determines the term of each option, the
option exercise price, the number of shares for which each option is granted
and the rate at which each option is exercisable. Options generally vest
ratably over four years. The Company may not grant an employee incentive
stock options with fair value in excess of $100,000 that are first exercisable
during any one calendar year.
Incentive stock options may be granted to any officer or employee at an
exercise price per share of not less than the fair value per common share on
the date of the grant (not less than 110% of the fair value in the case of
holders of more than 10% of the Company's voting stock). Nonqualified stock
options may be granted to an officer, employee, consultant, or director at an
exercise price per share of not less than either the book value per common
share or 50% of the fair value per common share on the date of grant.
Options granted under the 1988 Plan generally expire ten years from the date
of the grant (five years for incentive stock options granted to holders of
more than 10% of the Company's voting stock). The Compensation Committee, at
the request of any optionee, may convert incentive stock options that have not
been exercised at the date of conversion into nonqualified stock options.
In connection with the AirSoft Acquisition, the Company assumed 119,076
options in June 1996. These assumed options were granted at prices equal to
the fair market value at the date of grant, become exercisable in installments
(generally ratably over four years), and expire ten years from the date of
grant. The Company does not intend to issue any additional options under the
AirSoft stock option plan.
1994 Director Stock Option Plan
On October 21, 1994, stockholders approved the 1994 Director Stock Option Plan
(the "1994 Director Option Plan") under which options to purchase up to an
aggregate of 550,000 shares of the Company's common stock may be granted to
nonemployee directors at an exercise price per share equal to the fair value
per common share on the date of grant. Under the 1994 Director Option Plan,
each nonemployee director was granted an option to purchase 33,000 common
shares (the "initial shares") on July 17, 1995, and an option to purchase an
additional 7,000 common shares on the third Monday in July of each year
thereafter, through December 31, 1999. Eligible directors who were previously
granted stock options under the 1988 Plan were not granted an option to
purchase the initial shares. Twenty-five percent of the options granted under
the 1994 Director Option Plan are exercisable one year from the date of grant
and every year thereafter, provided that the optionee remains a director.
Options generally expire ten years from the date of grant.
39
<PAGE>
Transactions under the 1988 Plan and the 1994 Director Option Plan during
fiscal 1996 and 1995 are summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
-------------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period 4,056,159 $11.06 3,709,354 $ 1.88
Granted 2,325,422 38.98 1,581,848 27.32
Exercised 899,048 3.94 1,100,059 1.35
Canceled 396,350 25.08 134,984 14.42
-------------------- ----------------
Outstanding at end of period 5,086,183 $24.86 4,056,159 $11.06
Options exercisable at end
of period 1,258,216 683,814
========= ======= ========= =======
Weighted average fair value
of options granted during
the period 24.73 16.25
Options available for future
grant 2,148,746 2,583,793
</TABLE>
The following table summarizes information about options outstanding at
December 28, 1996 for both the 1988 Plan and the 1994 Director Option Plan:
<TABLE>
<CAPTION>
Options Outstanding Option Exerciseable
-------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/28/96 Life (in years) Price at 12/28/96 Price
- ---------- ----------- --------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ .75- 1.88 1,208,012 6.7 $ 1.00 604,469 $ .89
3.00- 6.80 544,316 7.5 4.38 215,926 4.12
16.75-31.25 1,051,412 8.6 27.69 202,296 28.62
31.63-40.50 1,384,693 9.0 33.38 235,525 32.53
41.00-51.75 606,650 9.5 45.71 - -
$57.38-80.00 291,100 9.5 67.94 - -
--------- --- ------- --------- ------
5,086,183 8.3 $ 24.86 1,258,216 $11.65
</TABLE>
The fair value of each option grant under the 1998 Plan and the 1994 Director
Option Plan is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Expected life (years) 5 5
Risk-free interest rate 6.19% 6.02%
Volatility 64.00% 61.00%
Dividend yield 0.00% 0.00%
</TABLE>
40
<PAGE>
Employee Stock Purchase Plan
On October 21, 1994, the stockholders approved the 1994 Employee Stock
Purchase Plan (the "1994 Stock Purchase Plan") which enables eligible
employees to purchase shares of common stock. Under the 1994 Stock Purchase
Plan, eligible employees may purchase up to an aggregate of 700,000 shares of
common stock during six-month plan periods commencing on February 1 and August
1 of each year at a price per share of 85% of the lower of the market price
per share on the first or last business day of the six-month plan period. An
employee's rights terminate upon voluntary withdrawal from the 1994 Stock
Purchase Plan or upon termination of employment. At December 28, 1996 and
December 30, 1995, 646,830 and 678,418 shares were available for issuance. In
fiscal 1996 and 1995, employees purchased 31,588 and 21,582 shares of stock,
respectively. The weighted average fair value of shares granted during 1996
and 1995 were $24.73 and $16.25 per share, respectively.
The fair value of shares issued under the 1994 Stock Purchase Plan is
estimated using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Expected life (years) 5 5
Risk-free interest rate 6.19% 6.02%
Volatility 64.00% 61.00%
Dividend yield 0.00% 0.00%
</TABLE>
Fair Value Disclosures
Had compensation cost for the Company's Stock Plans been determined based on
the fair value at the grant dates, as prescribed in SFAS 123, the Company's
net income (loss) and net income (loss) per share would have been as follows
<TABLE>
(In thousands, except per share information):
<CAPTION>
Fiscal 1996 Fiscal 1995
----------- -----------
<S> <C> <C>
Pro forma net income (loss): $4,814 $(6,277)
Pro forma net income (loss) per share $ .15 $ (.23)
</TABLE>
11. Retirement Plans
The Company sponsors a 401(k) retirement savings plan covering all domestic
employees of the Company who meet minimum age and service requirements. The
plan allows participants to defer a portion of their annual compensation on a
pre-tax basis. The Company matches 50% of the first 3% of each participating
employee's contributions, subject to certain limitations and may, at its
discretion, make additional contributions to the plan. The Company made
matching contributions of $230,000, $150,000 and $119,000, to the plan in
fiscal 1996, 1995 and 1994, respectively.
The Company also sponsors a defined contribution plan for all eligible
European employees of the Company. Participation in the plan is available to
substantially all salaried employees and to certain groups of hourly paid
employees. Company contributions are based on a percentage of the employees'
base salaries. The Company made contributions of $437,000, $318,000 and
$267,000 to the plan in fiscal 1996, 1995 and 1994, respectively.
12. Industry Segment and Geographic Information
The Company operates in a single industry segment: the development,
manufacture, sale and support of network communications products and services.
In fiscal 1996, one OEM customer accounted for $27,905,000 (14%) of revenues.
Intercompany sales and transfers between geographic areas are accounted for at
prices which are designed to be representative of unaffiliated party
transactions.
41
<PAGE>
<TABLE>
<CAPTION>
North
America Europe Eliminations Total
-------- ------ ------------ -----
<S> <C> <C> <C> <C>
1996
Revenues to unaffiliated customers $145,506 $54,613 $ -- $200,119
Intercompany revenue 10,269 4,443 (14,712) --
-------- ------ ------------ ------
Total revenues 155,775 59,056 (14,712) 200,119
-------- ------ ------------ ------
Income from operations 19,604 3,745 (667) 22,682
Identifiable assets 163,050 35,749 $ (749) 198,050
1995
Revenues to unaffiliated customers $ 70,083 $48,498 -- $118,581
Intercompany revenue -- 607 (607) --
-------- ------ ------------ ------
Total revenues 70,083 49,105 (607) 118,581
-------- ------ ------------ ------
Loss from operations (797) (3,243) -- (4,040)
Identifiable assets 140,006 24,581 (14,464) 150,123
1994
Revenues to unaffiliated customers $ 41,646 $39,412 $ -- $ 81,058
Intercompany revenue -- -- -- --
-------- ------ ------------ ------
Total revenues 41,646 39,412 -- 81,058
-------- ------ ------------ ------
Income from operations 1,285 2,574 -- 3,859
Identifiable assets 51,048 23,611 (2,099) 72,560
</TABLE>
13. Commitments
Lease Commitments
The Company leases office and operating facilities and certain equipment under
operating and capital leases (See Notes 5 and 7) that expire through February,
2006. Future minimum lease payments under operating and capital leases with
initial or remaining noncancellable terms of one or more years are as follows
as of December 28, 1996:
<TABLE>
<CAPTION>
(In thousands)
Operating Capital
Fiscal Leases Leases
- ------------- ---------- ----------
<S> <C> <C>
1997 $ 3,348 $54
1998 3,123 16
1999 2,793 --
2000 2,645 --
2001 2,650 --
Thereafter 8,973 --
--------- ----------
Total minimum lease payments $23,532 70
======= =====
Less - Amount representing interest 5
----------- ----------
Net present value of minimum lease payments $65
==========
</TABLE>
Rental expenses under operating leases was $3,244,000, $1,934,000 and
$1,877,000 in fiscal 1996, 1995, and 1994, respectively.
14 Contingencies
On January 17, 1997, a complaint, Abraham Schwartz and Norman Marcus v. Shiva
Corporation, was filed against the Company in the Superior Court of the State
of California for the County of Los Angeles. The plaintiffs purport to bring
this action on behalf of a class of purchasers of the Company's common stock
between September 17, 1996 and January 7, 1997. The Complaint asserts that
the Company made false or misleading statements in violation of state and
federal law, including: state law negligent misrepresentation, fraud, and
deceit, California Corporation Code Chapters 1507, 25400, and 25500,
California Civil Code Chapters 1709-10, and Section 12(2) of the Securities
Act of 1933, 15 U.S.C. Chapter 771(2). On behalf of the purported class, the
plaintiffs seek compensatory damages, treble damages under California law,
punitive damages under California law, punitive damages, attorneys' fees,
costs and interest. On February 24, 1997, the Company filed a demurrer to the
complaint. The Company believes the claim to be without merit 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.
42
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Shiva Corporation
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and related consolidated statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Shiva Corporation
and its subsidiaries at December 28, 1996 and December 30, 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 28, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of AirSoft, Inc., a wholly-owned subsidiary, which statements
reflect total assets of $3,285,000 at December 31, 1995, and total revenues
of $860,000 and $87,000 for the years ended December 31, 1995, and 1994
respectively. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for AirSoft, Inc. as of and for the
periods described above, is based solely on the reports of the other auditors.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
January 23, 1997
43
<PAGE>
<TABLE>
Quarterly Financial Information (unaudited)
<CAPTION>
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Fiscal 1996
Revenues $43,309 $51,485 $57,109 $48,216
Gross profit 25,924 30,088 33,348 27,582
Merger expenses -- 1,987 -- --
Net income 4,339 4,975 6,027 1,500
Net income per share $ 0.14 $ 0.16 $ 0.19 $ 0.05
Common Stock Prices ----- High $ 48.13 $ 87.25 $ 85.88 $ 58.50
Low $ 25.13 $ 44.38 $ 41.25 $ 33.25
------- ------- ------- -------
Fiscal 1995
Revenues $25,737 $26,376 $30,033 $36,435
Gross profit 14,659 15,197 17,663 21,876
Merger Expenses -- -- 13,986 --
Net income (loss) 1,382 973 (11,552) 4,345
Net income (loss) per share $ 0.05 $ 0.04 $( 0.46) $ 0.15
Common Stock Prices ----- High $ 21.00 $ 22.25 $ 31.63 $ 38.75
Low $ 13.50 $ 14.13 $ 19.38 $ 21.13
------- ------- ------- -------
</TABLE>
As of January 31, 1997 the closing price was $18.06 per share and as of that
same date there were 726 record holders of the Company's common stock. This
does not reflect persons or entities who hold their stock in nominee or
"street" name through various brokerage firms. The Company has never paid any
cash dividends on its common stock and does not anticipate paying any cash
dividends in the foreseeable future. The Company currently intends to retain
future earnings to fund the development and growth of its business.
44
<PAGE>
Exhibit 21.1
SHIVA CORPORATION
LIST OF SUBSIDIARIES
as of January 17, 1997
<TABLE>
<CAPTION>
State or
Jurisdiction of
Name Incorporation
<S> <C>
Shiva Credit Corporation Massachusetts
Shiva Securities Corporation Massachusetts
Shiva Foreign Sales Corporation St. Thomas, U.S. Virgin Islands
Shiva Europe Limited United Kingdom
Spider Shiva International Systems France
Shiva Asia Pacific Limited Delaware
Shiva Australia Pty Ltd Australia
Shiva Europe Holdings I B.V. Netherlands
Shiva Communications Singapore Pte Ltd Singapore
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (File Nos 333-
10663 and 333-10951) and Registration Statements on Form S-8 (File Nos 33-
86514, 333-04231, 333-08561 and 333-12895) of Shiva Corporation and its
subsidiaries of our report dated January 23, 1997, appearing in this Form
10-K. We also consent to the incorporation by reference of our report
on the Financial Statement Schedule, which appears in this Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, Massachusetts
March 27, 1997
<PAGE>
Exhibit 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in the Registration Statements
Nos. 333-10663 and 333-10951 of Shiva Corporation on Form S-3 and Registration
Statement Nos. 33-86514, 333-04231, 333-08561 and 333-12895 of Shiva
Corporation on Form S-8 of our report dated March 28, 1996 (June 16, 1996 as
to Note 8)(relating to the financial statements of AirSoft, Inc. not
presented separately herein), appearing in Amendment No. 2 to the Current
Report on Form 8-K/A of Shiva Corporation dated August 13, 1996.
/s/ Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
San Jose, California
March 25, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 72,067
<SECURITIES> 35,035
<RECEIVABLES> 50,251
<ALLOWANCES> 10,347
<INVENTORY> 17,958
<CURRENT-ASSETS> 170,986
<PP&E> 35,978
<DEPRECIATION> 12,123
<TOTAL-ASSETS> 198,050
<CURRENT-LIABILITIES> 40,522
<BONDS> 122
0
0
<COMMON> 289
<OTHER-SE> 156,545
<TOTAL-LIABILITY-AND-EQUITY> 198,050
<SALES> 200,119
<TOTAL-REVENUES> 200,119
<CGS> 83,177
<TOTAL-COSTS> 83,177
<OTHER-EXPENSES> 94,260
<LOSS-PROVISION> 1,046
<INTEREST-EXPENSE> 795
<INCOME-PRETAX> 26,026
<INCOME-TAX> 9,185
<INCOME-CONTINUING> 16,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,841
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
