SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
/ / For the Quarterly period ended September 27, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
----- -----
Commission File Number 0-24918
SHIVA CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2889151
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
28 Crosby Drive, Bedford, MA 01730
(Address of principal executive offices, including Zip Code)
(781) 687-1000
(Registrant's telephone number, including area code)
--------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /x/ NO
The number of shares outstanding of the registrant's Common Stock
as of September 27, 1997 was 29,536,942.
1
<PAGE>
SHIVA CORPORATION
INDEX
Part I Financial Information Page
Item 1 Consolidated Financial Statements
Consolidated Balance Sheet
September 27, 1997 and December 28, 1996
Consolidated Statement of Operations
Three and nine months ended September 27,
1997 and September 28, 1996
Consolidated Statement of Cash Flows
Nine months ended September 27, 1997
and September 28, 1996
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis
of Financial Condition and Results of
Operations
Part II Other Information
Item 1 Legal Proceedings
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signature
2
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Balance Sheet
(in thousands, except share related data)
<CAPTION>
September 27, December 28,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash, and cash equivalents $ 56,935 $ 72,067
Short-term investments 41,830 35,035
Accounts receivable, net of
allowances of $9,992 at
September 27, 1997 and
$10,347 at December 28, 1996 24,641 39,904
Inventories 17,125 17,958
Deferred income taxes 10,176 4,420
Prepaid expenses and other
current assets 1,712 1,602
----------- ----------
Total current assets 152,419 170,986
Property, plant and equipment, net 25,867 23,855
Deferred income taxes 4,055 1,372
Other assets 3,596 1,837
----------- ----------
Total assets $ 185,937 $ 198,050
=========== ==========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term
debt and capital lease
obligations $ 129 $ 367
Accounts payable 13,574 17,130
Accrued compensation and
benefits 4,319 5,871
Accrued expenses 15,218 13,748
Deferred revenue 4,445 3,406
----------- ----------
Total current liabilities 37,685 40,522
Long-term debt and capital lease - 122
obligations
Deferred income taxes 543 572
----------- ----------
Total liabilities 38,228 41,216
----------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value
value; 1,000,000 shares
authorized at September 27,
1997 and December 28, 1996,
none issued - -
Common stock, $.01 par value;
100,000,000 shares authorized,
29,536,942 and 28,891,216
shares issued and outstanding
at September 27, 1997 and
December 28, 1996, respectively 295 289
Additional paid-in capital 152,513 149,564
Unrealized gain on investments 161 175
Cumulative translation adjustment (221) 349
Retained earnings (accumulated
deficit) (5,039) 6,457
----------- ----------
Total stockholders' equity 147,709 156,834
----------- ----------
Total liabilities and
stockholders' equity $ 185,937 $ 198,050
=========== ==========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Statement of Operations
(in thousands except per share data)
(unaudited)
<CAPTION>
Three months ended Nine months ended
---------------------------- ---------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Product and other
revenues $ 31,082 $ 57,109 $ 93,217 $ 151,903
Royalty revenues 4,499 - 13,261 -
--------- --------- --------- ---------
Total revenues 35,581 57,109 106,478 151,903
Cost of product and
other revenues 15,319 23,761 52,907 62,543
--------- --------- --------- ---------
Gross profit 20,262 33,348 53,571 89,360
--------- --------- --------- ---------
Operating expenses:
Research and
development 6,937 5,974 18,676 16,630
Selling, general and
administrative 17,622 18,338 55,929 49,844
Merger expenses - - - 1,987
--------- --------- --------- --------
Total operating
expenses 24,559 24,312 74,605 68,461
--------- --------- --------- ---------
Income (loss) from (4,297) 9,036 (21,034) 20,899
operations
Interest income 887 836 2,787 3,167
Interest and other
expense (26) (85) (294) (383)
--------- --------- --------- ---------
Income (loss) before
income taxes (3,436) 9,787 (18,541) 23,683
Income tax provision
(benefit) (1,306) 3,760 (7,045) 8,342
--------- ---------- ---------- ----------
Net income (loss) $ (2,130) $ 6,027 $ (11,496) $ 15,341
========= ========== ========= ==========
Net income (loss)
per share $ (0.07) $ 0.19 $ (0.39) $ 0.49
========= ========== ========= ==========
Shares used in
computing net income
(loss) per share 29,387 31,906 29,165 31,499
========= ========== ========= ==========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
<CAPTION>
Nine Months Ended
----------------------------
September 27, September 28,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (11,496) $ 15,341
Adjustments to reconcile net income
(loss) to net cash
provided by operating activities:
Depreciation and amortization 7,430 4,553
Deferred income taxes (8,123) (1,511)
Changes in assets and liabilities:
Accounts receivable 14,633 (25,940)
Inventories 658 (6,277)
Prepaid expenses and other (89) (472)
current assets
Accounts payable (3,285) 5,999
Accrued compensation and
benefits (1,400) 339
Accrued expenses 2,251 12,000
Deferred revenue 1,061 (854)
Other long term liabilities (17) (15)
--------- ---------
Net cash provided by operating
activities 1,623 3,163
--------- ---------
Cash flows from investing activities
Purchases of property, plant and
equipment (8,788) (10,851)
Capitalized software development costs (889) (843)
Purchases of short-term investments (23,104) (24,502)
Proceeds from maturity and sales of
short-term investments 16,309 7,858
Change in other assets (2,176) (279)
--------- ---------
Net cash used by investing
activities (18,648) (28,617)
--------- ---------
Cash flows from financing activities
Principal payments on long-term debt
and capital lease obligations (344) (590)
Proceeds from exercise of stock
options and stock purchase plans 2,014 2,732
--------- ---------
Net cash provided by financing
activities 1,670 2,142
--------- ---------
Effects of exchange rate changes on
cash and cash equivalents 223 (141)
--------- ---------
Net decrease in cash and cash
equivalents (15,132) (23,453)
Cash and cash equivalents, beginning
of period 72,067 93,203
--------- ---------
Cash and cash equivalents, end of
period $ 56,935 $ 69,750
========= =========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
5
<PAGE>
SHIVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries, and have been prepared by the Company in accordance
with generally accepted accounting principles. In the opinion of
management, these unaudited consolidated financial statements
contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash
flows at the dates and for the periods indicated. While the
Company believes that the disclosures presented are adequate to
make the information not misleading, these consolidated financial
statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 28,
1996.
The results of operations for the three-month and nine-month
periods ended September 27, 1997 are not necessarily indicative
of the results expected for the full fiscal year.
2. NET INCOME (LOSS) PER SHARE:
Net income per share is calculated based on the weighted average
number of common shares and common equivalent shares assumed
outstanding during the period. Net loss per share excludes
common equivalent shares because their effect is antidilutive.
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents, and those with maturities of greater than three
months to be short-term investments. At September 27, 1997, the
Company had cash and cash equivalents of $56,935,000 and short-
term investments of $41,830,000, including an unrealized gain of
$161,000 recorded as a separate component of stockholders' equity
in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's short-term investments at September
27, 1997, classified as available-for-sale, consist of municipal
securities with various maturity dates through June 1999.
Realized gains or losses on the sale of securities are calculated
using the specific identification method. Realized gains and
losses on its securities in the three-month and nine-month
periods ended September 27, 1997 were not material.
4. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 27, December 28,
(in thousands) 1997 1996
<S> <C> <C>
Raw materials $ 7,903 $ 6,218
Work-in-process 433 1,506
Finished goods 8,789 10,234
------- -------
$17,125 $17,958
======= =======
</TABLE>
6
<PAGE>
5. RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share", which replaces primary and fully diluted
earnings per share with basic and diluted earnings per share.
SFAS No. 128 is effective for the Company beginning in the fourth
quarter of fiscal 1997 and requires restatement of all previously
reported interim and annual earnings per share data. Under SFAS
No. 128, the primary earnings per share calculation will be
modified to exclude the dilutive effect of common stock
equivalents in determining basic earnings per share. The Company
expects that basic earnings per share would not be materially
different compared to primary earnings per share in the three-
month and nine-month periods ended September 27, 1997 due to the
net loss, and would result in an increase of $.02 and $.05 per
share in the three-month and nine-month periods ended September
28, 1996, respectively. The impact of the adoption of SFAS No.
128 on the calculation of fully diluted earnings per share is not
expected to be material for the three-month and nine-month
periods ended September 28, 1996, respectively.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." The Company will implement SFAS No. 130 and SFAS
No. 131 as required in fiscal 1998. These standards will require
the Company to report and display certain information related to
comprehensive income and operating segments.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues. Revenues in the three-month and nine-month periods ended
September 27, 1997 were $35,581,000 and $106,478,000, respectively.
These amounts represent decreases of 38% and 30% from the
corresponding periods in fiscal 1996. The decline in revenues in the
three-month period ended September 27, 1997 compared to the same
period in fiscal 1996 was primarily due to lower revenues from the
Company's LanRover and LanRover Access Switch product lines. The
decline in revenues in the nine-month period ended September 27, 1997
compared to the same period in fiscal 1996 was due to lower revenues
from the Company's LanRover product line and other communications
products. Revenues from LanRover products were $13,475,000 and
$39,238,000 in the three-month and nine-month periods ended September
27, 1997, respectively, compared to $22,916,000 and $70,008,000 in the
corresponding periods in fiscal 1996. These declines in LanRover
revenues were primarily due to price decreases which became effective
in the second quarter of fiscal 1997 and lower volume shipments in the
three-month and nine-month periods ended September 27, 1997. LanRover
revenues for the nine-month period ended September 27, 1997 were also
impacted by increased return provisions and price protection
provisions of $3,900,000 recorded in the first quarter. The price
protection provisions related to the LanRover were recorded to account
for first quarter pricing actions, which became effective in the
second quarter of fiscal 1997, taken in response to increased price
competition. Revenues from the LanRover Access Switch, which began
volume shipments in the second quarter of fiscal 1996, were
$14,700,000 and $45,947,000 in the three-month and nine-month periods
ended September 27, 1997, respectively, compared to $22,366,000 and
$41,267,000 in the corresponding periods in fiscal 1996. Revenues from
the LanRover Access Switch in the three-month and nine-month periods
ended September 27, 1997 include royalty revenues attributable to an
agreement with Northern Telecom Limited (the "Nortel Agreement"),
under which the Company earns royalties, subject to quarterly minimums
in fiscal 1997, based on sales of the Nortel Rapport 112, an OEM
version of the LanRover Access Switch. The decline in revenues from
the LanRover Access Switch in the three-month period ended September
27, 1997 compared to the same period in fiscal 1996 is due to the
transition of the Nortel relationship from an OEM relationship where
Nortel purchased certain products from the Company for resale, to a
royalty arrangement, which results in lower, but 100 percent margin,
revenues, and a decline in sales through the premium value-added
reseller ("PVAR") channel due in part to weakness in the mid-tier
Internet Service Provider ("ISP") market in North America. Revenues
from the LanRover Access Switch in the nine-month period ended
September 27, 1997 were negatively impacted by price protection
provisions of $2,800,000 recorded in the first quarter of fiscal 1997
to account for first quarter price reductions that became effective in
the second quarter of fiscal 1997. The price reductions were in
response to increased price competition and price reductions on V.34
modem cards due in part to the availability of 56K modem technology in
the access concentrator market. Revenues from other communications
products decreased 46% and 60% in the three-month and nine-month
periods ended September 27, 1997, respectively, compared to the
corresponding periods in fiscal 1996, primarily due to lower volume
shipments. The Company anticipates that revenues from other
communications products will continue to decline and will account for
a decreasing percentage of revenue in future periods.
8
<PAGE>
International revenues accounted for 43% and 50% of revenues in the
three-month and nine-month periods ended September 27, 1997,
respectively. International revenues accounted for 30% and 36% of
revenues in the corresponding periods in fiscal 1996. International
revenues represented a higher proportion of total revenues in fiscal
1997 due to decreased revenues in North America. Revenues in North
America decreased due to several factors discussed above, including
lower Access Switch revenues from Nortel, the decline in sales through
the PVAR channel and the price protection reserves recorded in the
first quarter of fiscal 1997. Sales to OEM customers accounted for
26% and 25% of revenues in the three-month and nine-month periods
ended September 27, 1997, respectively, compared to 28% and 23% in the
corresponding periods in fiscal 1996. The absolute decline in OEM
revenues in the three-month and nine-month periods ended September 27,
1997 compared to the corresponding periods in fiscal 1996 is primarily
due to lower revenues from IBM and the transition of the Nortel
relationship as previously mentioned. Sales to Nortel accounted for
23% and 16% of revenues in the three-month and nine-month periods in
fiscal 1997, respectively, compared to 18% and 12% of revenues in each
of the corresponding periods in fiscal 1996.
The Company provides its distributors and resellers with product
return rights for stock balancing and product evaluation. Revenues
were reduced by provisions for product returns of $2,439,000, or 6% of
gross revenues, and $13,784,000, or 11% of gross revenues, in the
three-month and nine-month periods ended September 27, 1997,
respectively. Provisions for product returns in the corresponding
periods in fiscal 1996 were $3,326,000 and $7,304,000, respectively,
and represented 6% and 5% of gross revenues in each period,
respectively. The increase in the provision for product returns in the
nine-month period ended September 27, 1997 compared to the same period
in fiscal 1996 was primarily a result of provisions recorded in the
first quarter of fiscal 1997 to account for slow-moving and
discontinued products in the Company's North American distribution
channels.
Gross Profit. Gross profit as a percentage of revenues was 57% and
50% in the three-month and nine-month periods ended September 27,
1997, respectively, compared to 58% and 59% in the corresponding
periods in fiscal 1996. Gross profit as a percentage of revenue
decreased in the three-month period ended September 27, 1997 over the
same period in fiscal 1996 primarily due to an increase in
manufacturing overhead costs as a percentage of revenue due to the
lower revenue base, partially offset by the 100 percent margin royalty
revenues from Nortel. In addition, gross profit in the three-month
period ended September 27, 1997 was negatively impacted by the
unbundling of several high margin software components formerly
incorporated in the LanRover from the base hardware and software (the
"LanRover Power Base"). The Company now sells the LanRover Power Base
separately from three value-added feature software modules, known as
the LanRover Power Series, which are designed to enhance the
connectivity, security and performance of the LanRover Power Base,
depending upon the module. Since sales of the LanRover Power Base
carry lower gross margins than the LanRover Power Series software
modules, the gross margins from the LanRover product line may continue
to decline depending upon the number of LanRover Power Series software
modules sold. Gross profit as a percentage of revenues decreased in
the nine-month period ended September 27, 1997 from the corresponding
period in fiscal 1996 primarily due to reserves recorded in the first
quarter of fiscal 1997, consisting of the previously mentioned price
protection reserves totaling $6,700,000, and provisions for slow-
moving inventories of $6,463,000, partially offset by pure margin
royalty revenues from Nortel. The provisions for slow-moving
inventories increased cost of revenues and related primarily to V.34
modem cards, for which demand has slowed due to the availability of
56K modem technology, and certain other products. In the future,
gross margins are likely to decrease due to continued price
competition. The Company's gross margins may also be affected by
several factors, including, but not limited to the level of royalty
revenues from Nortel, product mix, the distribution channels used,
changes in component costs and the introduction of new products.
Research and Development. Research and development expenses increased
to $6,937,000 and $18,676,000 in the three-month and nine-month
periods ended September 27, 1997, respectively, from $5,974,000 and
$16,630,000 in the corresponding periods in fiscal 1996. These
expenses represented 19% and 18% of revenues in the three-month and
nine-month periods ended September 27, 1997, respectively, compared to
11% in each of the corresponding periods in fiscal 1996. Research and
development expenditures in the three-month and nine-month periods
ended September 27, 1997 related to the development of new and
existing remote access products, including the LanRover D/56, 56K
modules for the LanRover Access Switch and the VantagePath family of
products which incorporate technology to support virtual private
networking. The increase in these expenses was primarily due to
increased costs of prototype materials, increased personnel and
associated overhead costs, and temporary help. Customer-funded
development fees reimbursed to the Company, which are reflected as an
offset to research and development expenses, increased to $1,500,000
and $4,954,000 in the three-month and nine-month periods ended
September 27, 1997, respectively, from $536,000 and $1,387,000 in the
corresponding periods of fiscal 1996. The increase in customer-funded
development fees in fiscal 1997 was primarily due to cost sharing
arrangements with Nortel, where Nortel funds certain costs associated
with development of products and product features specific to the
carrier and service provider markets. Capitalized software costs were
$488,000 and $888,000 in the three-month and nine-month periods ended
September 27, 1997, respectively, compared to $251,000 and $844,000 in
the corresponding periods in fiscal 1996. The Company anticipates
continued significant investment in research and development.
9
<PAGE>
Selling, General and Administrative. Selling, general and
administrative expenses decreased to $17,622,000 in the three-month
period ended September 27, 1997 from $18,338,000 in the corresponding
period in fiscal 1996. Selling, general and administrative expenses
increased to $55,929,000 in nine-month period ended September 27, 1997
from $49,844,000 in the comparable period in fiscal 1996. These
expenses represented 50% and 53% of revenues in the three-month and
nine-month periods ended September 27, 1997, respectively, compared to
32% and 33% of revenues in the corresponding periods in fiscal 1996,
respectively. The decrease in gross expenses in the three-month period
ended September 27, 1997 was primarily due to lower channel program
spending associated with the Company's PVAR channel. The increase in
gross expenses in the nine-month period ended September 27, 1997 was
primarily due to increased costs incurred for advertising, trade
shows, travel, sales incentives, various professional fees and
facilities. Selling, general and administrative expenses in the three-
month and nine-month periods ended September 27, 1997 are net of
expenses reimbursed by Nortel related to Shiva's Service Provider
Group (SPG), a worldwide business unit comprised of technical sales
and support personnel which markets Nortel's remote access equipment
to carriers and service providers.
Interest Income and Expense. Interest income increased in the three-
month period ended September 27, 1997 over the corresponding period in
fiscal 1996 due to higher overall yields on its investment balances.
Interest income declined in the nine-month period ended September 27,
1997 compared to the corresponding period in fiscal 1996 primarily due
to the Company's shift to federal tax-exempt securities during the
second quarter of fiscal 1996, which resulted in a lower yield on its
investment balances.
Income Tax Provision (Benefit). The Company's effective income tax
rate in each of the three-month and nine-month periods ended September
27, 1997 was 38%, compared to 38% and 35% in the three-month and nine-
month periods ended September 28, 1996, respectively. The effective
income tax rate in the nine-month period in fiscal 1996 reflects a
reduction in the net deferred tax asset valuation allowance as a
result of certain net operating losses that were realized in the
second quarter, partially offset by non-deductible merger expenses.
Foreign Currency Fluctuations
A portion of the Company's international revenues is denominated in
currencies other than the U.S. dollar and is consequently subject to
foreign exchange fluctuations. The impact of such fluctuations is
offset to the extent that expenses of the Company in international
operations are incurred in the same currencies as its revenues.
Foreign currency fluctuations did not have a significant impact on the
comparison of results of operations in the three-month and nine-month
periods ended September 27, 1997 with those of the comparable periods
in fiscal 1996. However, the Company's international operations and
non-dollar denominated sales will continue to be exposed to adverse
movements in foreign currency exchange rates which may have a material
adverse impact on the Company's financial results. The Company enters
into forward exchange contracts to hedge those currency exposures
related to certain assets and liabilities denominated in non-
functional currencies and does not generally hedge anticipated foreign
currency cash flows.
Year 2000
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software
failures (the "Year 2000 issue") which can arise in time-sensitive
software applications which utilize a field of two digits to define
the applicable year. In such applications, a date using "00" as the
year may be recognized as the year 1900 rather than the year 2000.
All of the Company's products are currently Year 2000 compliant, and
therefore, the Company will not have to undertake additional research
and development efforts in this regard. In addition, the Company is
in the process of replacing many of its business and operating
computer systems with software which, when upgraded, will be Year 2000
compatible. The Company is planning to complete all necessary Year
2000 upgrades of its major systems in 1998, and is currently
identifying and developing conversion strategies for its remaining
systems that may be impacted by the Year 2000 issue.
10
<PAGE>
Liquidity and Capital Resources
As of September 27, 1997, the Company had $56,935,000 of cash and cash
equivalents and $41,830,000 of short-term investments. Working
capital decreased to $114,734,000 at September 27, 1997 from
$130,464,000 at December 28, 1996.
Net cash provided by operations totaled $1,623,000 for the nine-month
period ended September 27, 1997 compared to $3,163,000 in the
comparable period in fiscal 1996. Net cash provided by operations in
the nine-month period ended September 27, 1997 resulted primarily from
the decrease in accounts receivable partially offset by the net loss
adjusted for non-cash expenses and the increase in deferred income
taxes. The decrease in accounts receivable was primarily due to
decreased revenue levels. Net cash provided by operations in the nine-
month period ended September 28, 1996 consisted primarily of net
income adjusted for non-cash expenses including depreciation and
amortization, and increased current liabilities, partially offset by
increased accounts receivable and inventories. The increase in
accounts receivable was due to increased revenue levels. The increase
in inventories was necessary to support the Company's revenue growth
and the introduction of the LanRover Access Switch product.
Net cash used by investing activities totaled $18,648,000 for the nine-
month period ended September 27, 1997, compared to $28,617,000 during
the comparable period in fiscal 1996. Investment activity in each of
the nine-month periods ended September 27, 1997 and September 28, 1996
consisted primarily of purchases of fixed assets and short-term
investments, partially offset by proceeds from short-term investments
upon maturity or sale. Net cash provided by financing activities
totaled $1,670,000 in the nine-month period ended September 27, 1997,
compared to $2,142,000 in the comparable period in fiscal 1996. Net
cash provided by financing activities in each of the nine-month
periods ended September 27, 1997 and September 28, 1996 consisted of
proceeds from stock option exercises and purchases of stock under the
Company's stock purchase plans, partially offset by principal payments
on long-term debt and capital lease obligations.
The Company has a $5,000,000 unsecured revolving credit facility with
a bank that expires in September 1998. The terms of the credit
facility require the Company to comply with certain restrictive
financial covenants. Borrowings under this facility bear interest
at the bank's prime rate. At September 27, 1997, available borrowings
were reduced by outstanding letters of credit of $836,000 related to
certain office leases. The Company had no borrowings outstanding
under this facility at September 27, 1997.
The Company enters into forward exchange contracts to hedge those
currency exposures related to certain assets and liabilities
denominated in non-functional currencies and does not generally hedge
anticipated foreign currency cash flows. The hedging activity is
intended to offset the impact of currency fluctuations on certain non-
functional currency assets and liabilities. The forward exchange
contracts have maturities that do not exceed one year. At September
27, 1997, the Company had outstanding forward exchange contracts to
sell approximately $458,000 and purchase $320,000 in various
currencies. The fair value of outstanding forward exchange contracts
approximates the original value due to the relatively short terms,
generally less than three months.
The Company believes that its existing cash and short-term investment
balances, together with borrowings available under the Company's bank
lines of credit, will be sufficient to meet the Company's cash
requirements for at least the next twelve months.
Factors That May Affect Future Results
From time to time, information provided by the Company or statements
made by its employees may contain "forward-looking" information which
involve risks and uncertainties. In particular, statements contained
in the Management's Discussion and Analysis of Financial Condition and
Results of Operations which are not historical facts may be "forward-
looking" statements. The Company's actual future results may differ
significantly from those stated in any forward-looking statements.
Factors that may cause such differences include, but are not limited
to, the factors discussed below and the accuracy of the Company's
internal estimates of revenue and operating expense levels.
11
<PAGE>
The Company is in the process of renegotiating certain of the terms
and conditions of its agreement with Nortel, including future
distribution rights for the carrier and service provider market,
quarterly minimum royalty payments and other cost sharing payments.
Absent negotiation of new quarterly minimum payments, commencing in the
first quarter of 1998, royalties shall not be payable by Nortel
unless and until royalties, determined based on the resale of products
by Nortel, exceed certain predetermined levels. Royalty payments from
Nortel accounted for greater than 10% of total revenues in the
three-month and nine-month periods ended September 27, 1997.
There can be no assurance that Shiva will receive continued royalty
and cost sharing payments from Nortel and any reductions in such
payments could have a significant impact on the Company's future
operating results.
The Company's quarterly operating results may vary significantly from
quarter to quarter depending on factors such as the timing of
significant orders and shipments of its products, changes and delays
in product development, new product introductions by the Company and
its competitors, the mix of distribution channels through which the
Company's products are sold and seasonal customer buying patterns.
There can be no assurance that the Company will be able to achieve
future revenue growth and profitability on a quarterly or annual
basis. Revenues can be difficult to forecast due to the fact that the
Company's sales cycle varies substantially depending upon market,
distribution mechanism and end user customer. The Company's expense
levels are based, in part, on its expectations as to future revenues.
If revenue levels are below expectations, operating results may be
adversely affected. In addition, the Company's distribution partners
typically stock significant levels of inventory, and the Company's
revenues may fluctuate based on the level of partner inventories in
any particular quarter.
The Company's LanRover and LanRover Access Switch products are
experiencing increased market competition which has caused the Company
to take pricing actions and may require the Company to take future
pricing actions. The Company provides most of its distribution
partners with product return rights for stock balancing or product
evaluation and price protection rights. Stock balancing rights permit
a return of products to the Company for credit against future product
purchases, within specified limits. Product evaluation rights permit
end-users to return products to the Company through the distribution
partner from whom such products were purchased, within 30 days of
purchase if such end-user is not fully satisfied. Price protection
rights require the Company to grant retroactive price adjustments for
inventories of the Company's products held by distribution partners if
the Company lowers its prices for such products. These price
protection provisions have adversely affected and may continue to
adversely affect revenues and profitability in the future. There can
be no assurance that the Company will not experience significant
returns or price protection adjustments in the future or that the
Company's reserves will be adequate to cover such returns and price
reductions.
The Company increasingly relies on sales of the LanRover Access Switch
to achieve its revenue and profitability objectives. Sales of other
communications products and other remote access products, including
the LanRover product, decreased in the first nine months of 1997, due
in part to increased competition. There can be no assurance that the
Company will be successful in modifying current product offerings to
increase sales of its products.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. The Company's future success will depend on
its ability to enhance its existing products and to introduce new
products and services to meet and adapt to changing customer
requirements and emerging technologies, such as 56K and other modem
technologies. The Company's success in accomplishing development
objectives depends in large part upon its ability to attract and
retain highly skilled technical personnel including, in particular,
management personnel in the areas of research and development and
technical support. Competition for such personnel is intense. There
can be no assurance that the Company will be successful in attracting
and retaining the personnel it requires to accomplish its objectives.
Delays in new product development or the failure of new products to
achieve market acceptance, could have a material adverse effect on the
Company's operating results. In addition, there can be no assurance
that the Company will be successful in identifying, developing,
manufacturing or marketing new product or service offerings or
enhancing its existing offerings.
12
<PAGE>
The Company operates in a highly competitive market that is
characterized by an increasing number of well-funded competitors from
diverse industry sectors, including but not limited to suppliers of
software, modems, terminal servers, routers, hubs, data communications
products and companies offering remote access solutions based on
emerging technologies, such as switched digital telephone services,
remote access service offerings by telephony providers via telephone
networks and other providers through public networks such as the
Internet. Increased competition could result in price reductions and
loss of market share which would adversely affect the Company's
revenues and profitability. There can be no assurance that the
Company will be able to continue to compete successfully with new or
existing competitors.
The Company does business worldwide, both directly and via sales to
United States-based original equipment manufacturers, who sell such
products internationally. Global and/or regional economic factors and
potential changes in laws and regulations affecting the Company's
business, including without limitation, communications regulatory
standards, safety and emissions control standards, currency exchange
rate fluctuations, changes in monetary policy and tariffs,
difficulties in enforcement of intellectual property rights and
political uncertainties, could have an adverse impact on the Company's
financial condition or future results of operations.
The market price of the Company's securities could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating
results, changes in earnings estimates by analysts, and market
conditions in the industry, as well as general economic conditions and
other factors external to the Company.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 21, 1997, a purported class action complaint was
filed against the Company, Frank Ingari, Cynthia Deysher and
David Cole, in the United States District Court for the District
of Massachusetts, Lirette, et al. v. Shiva Corporation, et al.,
Civil Action No. 97-11159-WGY. On June 11, 1997, a similar
complaint was filed against the same named defendants, Prozan, et
al. v. Shiva Corporation, et al., Civil Action No. 97-11320-WGY.
The cases have been consolidated, and an amended complaint
applicable to all related actions will soon be filed. The
initial complaints, to which no response will be made, were
brought pursuant to Ch. 10 and 20 of the Securities Exchange Act
of 1934 and S.E.C. Rule 10b-5. On behalf of a class of
purchasers of the Company's stock between September 10, 1996
through March 31, 1997, the complaints seek damages, interest,
fees and expenses. The Company believes it has meritorious
defenses to the claims asserted and intends to defend these cases
vigorously. The actions are in their earliest stages, and the
Company is unable to determine at this time the potential
liability, if any.
On January 17, 1997, a purported class action complaint
against the Company was filed in the Superior Court of the State
of California for the County of Los Angeles, Abraham Schwartz and
Norman Marcus v. Shiva Corporation, Case No. BC164278. The
Company filed a demurrer seeking to dismiss all claims in the
Complaint. In response to the demurrer, the plaintiffs filed an
Amended Complaint, also purportedly on behalf of a class, which
asserted violations of California Corporations Codes 25400,
25500, 25401, 25504, 25501 and 25504.1, California Civil Code Ch.
1709-10, and common law fraud and negligent misrepresentation,
against the Company and three individuals: Frank Ingari, Cynthia
Deysher and Woody Benson. The Company filed a demurrer seeking
to dismiss these claims; and the individuals sought to dismiss
the claims for lack of personal jurisdiction. The Court, without
prejudice, granted the individuals' motions. The Court dismissed
with prejudice all of the claims against the Company brought
under the California Corporations Code, but allowed leave to
replead certain of the remaining claims. In response, plaintiffs
filed a Second Amended Complaint, which seeks damages on behalf
of the purported class, including punitive damages, treble
damages, attorneys' fees and costs, based on alleged fraud and
negligent misrepresentation in violation of California Civil Code
Ch. 1709-10 and the common law. The Company has filed a demurrer
seeking to have the Second Amended Complaint dismissed, a motion
to strike seeking to limit any claims not dismissed to a narrower
time frame, and a motion to stay the case on the ground of forum
non conveniens. The Court granted the demurrer, and denied the
motions to strike and stay. Plaintiffs were granted leave to
amend the Complaint, and have stated that they can allege facts
sufficient to address the deficiencies of the most recent
Complaint identified by the Court. The Company believes it has
meritorious defenses to the claims asserted and intends to
vigorously defend against the action. The action is in its
earliest stages, and the Company is unable to determine at this
time the potential liability, if any.
13
<PAGE>
Item 5. Other Information
Effective October 3, 1997, Mr. Richard J. Egan was appointed by
the Board of Directors of the Company to serve as a seventh
member of the Board of Directors of the Company.
Effective October 27, 1997, James L. Zucco, Jr. replaced Frank A.
Ingari as Chief Executive Officer. Mr. Ingari will continue in
his role of Chairman of the Board. Mr. Ingari will remain as an
employee of the Company until sometime in 1998, at which time
all unvested stock options will be cancelled and returned to the
pool of available stock options for grant, pursuant to the
Company's Stock Option Plans.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
10.1 Letter agreement dated July 9, 1997 between Shiva
Corporation and James F. Finucane regarding offer of
employment and compensation as Senior Vice President,
Engineering.
10.2 Letter agreement dated August 27, 1997 Between Shiva
Corporation and Michael J. Duffy regarding offer of
employment and compensation as Senior Vice President,
Worldwide Sales.
10.3 Promissory Note dated September 8, 1997 between Shiva
Corporation and James L. Zucco, Jr.
11.0 Statement of Computation of Earnings per share included
herein on page 16.
27.0 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K: The Company filed no reports on Form 8-
K during the three month period ended September 27, 1997.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SHIVA CORPORATION
Date: November 11, 1997 by: /s/ Larry D. Whitman
----------------------------
Vice President and Corporate
Controller
(Principal Financial and
Accounting Officer)
15
<PAGE>
SHIVA CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
10.1 Letter agreement dated July 9, 1997 between Shiva
Corporation and James F. Finucane regarding offer of
employment and compensation as Senior Vice President,
Engineering.
10.2 Letter agreement dated August 27, 1997 Between Shiva
Corporation and Michael J. Duffy regarding offer of
employment and compensation as Senior Vice President,
Worldwide Sales.
10.3 Promissory Note dated September 8, 1997 between Shiva
Corporation and James L. Zucco, Jr.
11.0 Statement of Computation of Earnings per share included
herein on page 16.
27.0 Financial Data Schedule.
</TABLE>
16
Exhibit 10.1
July 9, 1997
Mr. James F. Finucane
78 Seney Drive
Bernardsville, NJ 07924
Dear Jim,
On behalf of Shiva Corporation, I am pleased to offer you the
position of Senior Vice President, Engineering reporting
directly to me.
Your initial base compensation will be $7884.62 bi-weekly, which
is $205,000 annualized. You will be eligible for a 50% bonus
based on the Shiva Bonus Plan guidelines. Your recurring
compensation will include a base salary and an annual bonus based
on the company meeting its operating plan and other objectives
set between us and with the Board of Directors.
Under the terms of the Shiva Corporation 1988 Stock Option Plan,
stock option grants are subject to approval and grant by the
Compensation Committee of the Board of Directors. Shiva
Corporation management will recommend to the Compensation
Committee that you be granted an initial stock grant in the
amount of 275,000 shares at the time of the next Compensation
Committee meeting after your start date or written consent in
lieu of such meeting, according to the then current standard
stock option terms and conditions. Your initial vesting schedule
is as follows:
68,750 (25%) will vest immediately upon date of grant
17,187.5 (6.25%) will vest 1 year after date of grant and
17,187.5 (6.25%) will continue to vest quarterly for the
remaining eleven quarters thereafter.
In the event of a change of control of Shiva within one year of
your start date, 50% of your outstanding options will vest
immediately. In the event of a change of control of Shiva after
one year of your You are entitled to participate immediately upon
your start date in our benefit programs. Shiva expects that you
will be pleased with the company's medical and disability
programs. Reasonable relocation and family visit expenses will
be provided.
After the completion of 60 days of employment you will receive a
hiring bonus of $40,000.
In the event of your termination other than for cause, you will
be eligible to receive severance pay for one year or until you
find other suitable employment.
This offer is contingent upon your compliance with the
Immigration Reform and Control Act. In addition, enclosed is a
Non-Disclosure Agreement and I-9 Form for your review that all
Shiva employees are required to sign.
We look forward to your joining Shiva. If you have any
questions, please do not hesitate to call me at 617-270-8890.
Sincerely,
James L. Zucco, Jr.
President & COO
Shiva Corporation
Acceptance:
------------------------------
Exhibit 10.2
August 27, 1997
Michael Duffy
34 Elderberry Lane
Duxbury, MA 02332
Dear Michael:
On behalf of Shiva Corporation, I am pleased to offer you the
position of Senior Vice President, Worldwide Sales, reporting
directly to me.
Your initial base compensation will be $8,653.85 bi-weekly,
which is $225,000 annualized. Your 1997 bonus will be guaranteed
at $175,000 prorated, pursuant to the Shiva Bonus Plan
guidelines. Your 1998 bonus will be guaranteed at $87,500 with
eligibility for a total bonus of $175,000 for the year. Your
recurring compensation will include a base salary and an annual
bonus based on the company meeting its operating plan and other
objectives set between us and with the Board of Directors.
After the completion of 30 days of employment, you will receive a
$50,000 hiring bonus.
Under the terms of the Shiva Corporation 1988 or 1997 Stock
Option Plans, stock option grants are subject to approval and
grant by the Compensation Committee of the Board of Directors.
Shiva Corporation management will recommend to the Compensation
Committee that you be granted an initial stock grant in the
amount of 275,000 shares at the time of the next Compensation
Committee meeting after your start date or via written consent in
lieu of such meeting, according to the then current standard
stock option terms and conditions. Your initial vesting schedule
is as follows:
68,750 (25%) will vest immediately upon date of grant
17,187.5 (6.25%) will vest 15 months after date of grant, and
17,187.5 (6.25%) will continue to vest quarterly for the
remaining eleven quarters thereafter.
In the event of a change of control of Shiva within one year of
your start date, 50% of your outstanding options will vest
immediately. In the event of a change of control of Shiva
after one year of your start date, 100% of your outstanding stock
options will vest immediately.
You are entitled to participate immediately upon your start date
in our benefits programs. Shiva expects that you will be pleased
with the company's medical and disability programs.
In the event of your involuntary termination other than for
cause, you will be eligible to receive severance pay of $350,000.
This offer is contingent upon your compliance with the
Immigration Reform and Control Act. In addition, enclosed is
a Non-Disclosure Agreement and I-9 Form for your review that
all Shiva employees are required to sign.
We look forward to your joining Shiva. If you have any questions,
please do not hesitate to call me at (617) 270-8890.
Sincerely,
James Zucco
President & COO
Acceptance: Date:
---------------------------------- ------------
Exhibit 10.3
Promissory Note
On September 8, 1997, for value received, the undersigned
promises to pay to the order of Shiva Corporation the total
amount of $700,000.00. This note is payable five years from
the date of this Promissory Note (September 8, 2002).
In the event that your employment with Shiva Corporation is
terminated, either voluntarily or involuntarily, during the
five year term of this note, then the balance due on this
note shall be payable on demand, and, if no demand is made,
then ninety (90) days after the undersigned ceases to be
employed by Shiva Corporation.
By: /s/ James L. Zucco, Jr.
Name
Address
Exhibit 11
<TABLE>
SHIVA CORPORATION
Computation of Net Income (Loss) Per Share(1)
<CAPTION>
Three months ended Nine months ended
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Weighted Average
Common and Common
Equivalent Shares:
<S> <C> <C> <C> <C>
Weighted Average
Common Shares
Outstanding During
the Period 29,387,230 28,581,648 29,165,388 28,317,851
Weighted Average
Common Equivalent
Shares - 3,324,775 - 3,181,488
---------- ---------- ---------- ----------
29,387,230 31,906,423 29,165,388 31,499,339
========== ========== ========== ==========
Net Income (Loss) ($2,130,000) $6,027,000 ($11,496,000) $15,341,000
Primary Net Income
(Loss) Per Share ($0.07) $0.19 ($0.39) $0.49
<FN>
(1) Fully diluted net income per share has not been separately presented, as
the amounts would not be materially different from primary net income per
share. Net loss per share excludes common equivalent shares because
their effect is antidilutive.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 56,935
<SECURITIES> 41,830
<RECEIVABLES> 34,633
<ALLOWANCES> 9,992
<INVENTORY> 17,125
<CURRENT-ASSETS> 152,419
<PP&E> 43,854
<DEPRECIATION> 17,987
<TOTAL-ASSETS> 185,937
<CURRENT-LIABILITIES> 37,685
<BONDS> 0
0
0
<COMMON> 295
<OTHER-SE> 147,414
<TOTAL-LIABILITY-AND-EQUITY> 185,937
<SALES> 93,217
<TOTAL-REVENUES> 106,478
<CGS> 52,907
<TOTAL-COSTS> 52,907
<OTHER-EXPENSES> 74,605
<LOSS-PROVISION> 469
<INTEREST-EXPENSE> 294
<INCOME-PRETAX> (18,541)
<INCOME-TAX> (7,045)
<INCOME-CONTINUING> (11,496)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,496)
<EPS-PRIMARY> (.39)
<EPS-DILUTED> (.39)
</TABLE>
