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 October 3, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Commission File Number 000-24918
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SHIVA CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 0004-2889151
- - ------------------------------ --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
28 Crosby Drive, Bedford, MA 01730
(Address of principal executive offices, including Zip Code)
(781) 687-1000
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES /x/ NO
--- ---
The number of shares outstanding of the registrant's Common Stock as
of November 4, 1998 was 30,422,850.
<PAGE>
SHIVA CORPORATION
INDEX
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Page
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Part I Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheet
October 3, 1998 and January 3, 1998 3
Consolidated Statement of Operations
Three and nine months ended October 3, 1998
and September 27, 1997 4
Consolidated Statement of Cash Flows
Nine months ended October 3, 1998 and September 27,
1997 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market
Risk 19
Part II Other Information
Item 1 Legal Proceedings 20
Item 6 Exhibits and Reports on Form 8-K 20
Signature 21
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Balance Sheet
(in thousands, except share related data)
<CAPTION>
October 3, January 3,
1998 1998
------------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 28,662 $ 58,915
Short-term investments 39,353 36,868
Accounts receivable, net of allowances
of $8,718 at October 3, 1998 and
$8,037 at January 3, 1998 15,978 23,169
Inventories 12,694 14,058
Deferred income taxes 8,684 8,683
Prepaid expenses and other current assets 1,667 2,369
-------- --------
Total current assets 107,038 144,062
Property, plant and equipment, net 19,703 26,093
Deferred income taxes 23,686 8,840
Other assets 6,881 3,251
-------- --------
Total assets $157,308 $182,246
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 6,017 $ 9,376
Accrued expenses 29,300 22,304
Deferred revenue 4,969 4,068
-------- --------
Total current liabilities 40,286 35,748
-------- --------
Deferred income taxes 575 554
-------- --------
Total liabilities 40,861 36,302
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized,
none issued - -
Common stock. $.01 par value;
100,000,000 shares authorized,
30,527,765 and 29,605,848 shares
issued at October 3, 1998 and
January 3, 1998, respectively 305 296
Additional paid-in capital 155,076 153,036
Treasury stock at cost, 106,115 shares
at October 3, 1998 (1,307) -
Unrealized gain on investments 227 110
Cumulative translation adjustment (200) (308)
Accumulated deficit (37,654) (7,190)
--------- ---------
Total stockholders' equity 116,447 145,944
--------- ---------
Total liabilities and stockholders'
equity $157,308 $182,246
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Statement of Operations
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three months ended Nine months ended
-------------------------- --------------------------
October 3, September 27, October 3, September 27,
1998 1997 1998 1997
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product $ 22,594 $ 29,117 $ 80,089 $ 88,083
Service 2,578 1,965 19,211 5,134
Licenses, royalties
and other 6,520 4,499 8,717 13,261
-------- -------- -------- --------
Total revenues 31,692 35,581 108,017 106,478
Cost of revenues:
Product 10,746 13,609 36,625 47,952
Service 1,343 1,710 11,575 4,955
-------- -------- -------- --------
Total cost of
revenues 12,089 15,319 48,200 52,907
-------- -------- -------- --------
Gross profit 19,603 20,262 59,817 53,571
-------- -------- -------- --------
Operating expenses:
Research and
development 6,402 6,937 15,623 18,676
Selling, general and
administrative 15,138 17,622 45,148 55,929
In-process research
and development - - 34,500 -
Restructuring expenses 2,235 - 13,300 -
-------- -------- -------- --------
Total operating
expenses 23,775 24,559 108,571 74,605
-------- -------- -------- --------
Loss from operations (4,172) (4,297) (48,754) (21,034)
Interest income 810 887 2,824 2,787
Interest and other income
(expense), net 715 (26) 1,130 (294)
-------- --------- --------- ---------
Loss before income taxes (2,647) (3,436) (44,800) (18,541)
Income tax benefit (847) (1,306) (14,336) (7,045)
--------- --------- --------- ---------
Net loss $ (1,800) $ (2,130) $(30,464) $(11,496)
========= ========= ========= =========
Net loss per share -
basic and diluted $ (0.06) $ (0.07) $ (1.01) $ (0.39)
========= ========= ========= =========
Shares used in computing
net loss per share -
basic and diluted 30,394 29,387 30,175 29,165
========= ========= ========= =========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
-------------------------------
October 3, September 27,
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (30,464) $ (11,496)
Adjustments to reconcile net loss
to net cash provided (used) by
operating activities:
In-process research and development 34,500 -
Depreciation and amortization 9,024 7,430
Non-cash restructuring charge 3,570 -
Deferred income taxes (14,399) (8,123)
Changes in assets and liabilities,
net of effects of acquisition:
Accounts receivable 8,066 14,633
Inventories 1,467 658
Prepaid expenses and other current
assets 768 (89)
Accounts payable (3,947) (3,285)
Accrued expenses 6,627 851
Deferred revenue 881 1,061
Other long term liabilities - (17)
--------- ----------
Net cash provided by operating
activities 16,093 1,623
--------- ----------
Cash flows from investing activities
Purchases of property, plant and
equipment (3,529) (8,788)
Payments for acquisition (39,925) -
Capitalized software development costs (320) (889)
Purchases of short-term investments (32,367) (23,104)
Proceeds from maturity and sales of
short-term investments 29,999 16,309
Change in other assets (556) (2,176)
---------- ----------
Net cash used by investing activities (46,698) (18,648)
---------- ----------
Cash flows from financing activities
Principal payments on long-term debt
and capital lease obligations (119) (344)
Purchases of treasury stock (1,307) -
Proceeds from exercise of stock options 1,601 2,014
---------- ----------
Net cash provided by financing
activities 175 1,670
---------- ----------
Effects of exchange rate changes on
cash and cash equivalents 177 223
---------- ----------
Net decrease in cash and cash
equivalents (30,253) (15,132)
Cash and cash equivalents, beginning
of period 58,915 72,067
---------- ----------
Cash and cash equivalents, end of
period $ 28,662 $ 56,935
========== ==========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<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
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows at the dates and for the periods
indicated. Such adjustments are of a normal recurring nature, except
for the restructuring charges incurred during the three-month and nine-
month periods ended October 3, 1998 and the in-process research and
development charges incurred during the nine-month period ended
October 3, 1998. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes included in
the Company's Annual Report on Form 10-K for the fiscal year ended
January 3, 1998.
The results of operations for the three-month and nine-month periods
ended October 3, 1998 are not necessarily indicative of the results
expected for the full fiscal year.
2. EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share," and has restated earnings per
share amounts for all periods presented herein.
<TABLE>
<CAPTION>
Three months ended Three months ended
October 3, 1998 September 27, 1997
------------------ ------------------
<S> <C> <C>
Net loss ($1,800,000) ($2,130,000)
============ ============
Weighted average shares outstanding 30,394,028 29,387,230
Common-equivalent shares outstanding - -
------------ ------------
Weighted average and common
equivalent shares outstanding 30,394,028 29,387,230
------------ ------------
Basic and diluted net loss per share ($0.06) ($0.07)
============= ============
Nine months ended Nine months ended
October 3, 1998 September 27, 1997
------------------ ------------------
<S> <C> <C>
Net loss ($30,464,000) ($11,496,000)
============= =============
Weighted average shares outstanding 30,174,813 29,165,388
Common-equivalent shares outstanding - -
------------- -------------
Weighted average and common
equivalent shares outstanding 30,174,813 29,165,388
------------- -------------
Basic and diluted net loss per share ($1.01) ($0.39)
============= =============
</TABLE>
<PAGE>
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
At October 3, 1998, the Company had cash and cash equivalents of
$28,662,000 and short-term investments of $39,353,000, including an
unrealized gain of $227,000 recorded as a separate component of
stockholders' equity. The Company's short-term investments at October
3, 1998, classified as available-for-sale, consist of municipal
securities, corporate debt securities and U.S. Treasury securities,
with various maturity dates through August 2000.
4. INVENTORIES:
<TABLE>
<CAPTION>
Inventories consist of the following:
October 3, January 3,
(in thousands) 1998 1998
---------- ----------
<S> <C> <C>
Raw materials $ 6,424 $ 7,199
Work-in-process 61 57
Finished goods 6,209 6,802
-------- --------
$ 12,694 $ 14,058
======== ========
</TABLE>
5. COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"),
"Reporting Comprehensive Income." The Company adopted FAS 130 on
January 4, 1998, which establishes standards for reporting
comprehensive income and its components in the consolidated financial
statements. Comprehensive loss for the three-month and nine-month
periods ended October 3, 1998 was $1,638,000 and $30,311,000,
respectively, and includes the after-tax effect of foreign currency
translation adjustments and unrealized holding gains on its cash and
short-term investments arising during the periods.
6. ACQUISITION:
On March 26, 1998, the Company acquired Isolation Systems, Limited, a
leading developer of virtual private networking ("VPN") hardware and
software solutions based in Toronto, Ontario in exchange for cash paid
by the Company from its existing cash and short-term investment
balances. The acquisition was accounted for as a purchase.
Accordingly, the purchase price of approximately $39,925,000 was
allocated to the underlying assets and liabilities based on their
respective fair values at the date of closing. The fair value of the
net assets acquired was $617,000, and $34,500,000 of the purchase
price was allocated to in-process research and development. The amount
allocated to in-process research and development was determined
through established valuation techniques in the high-technology
communications industry and was expensed upon acquisition, as it was
determined that technological feasibility had not been established and
no alternative uses existed. The excess of the purchase price over
the net assets acquired, excluding the in-process research and
development charge recorded in the first quarter of 1998, will be
amortized on a straight-line basis over three years. This excess
approximated $4,808,000, and consisted of developed technology of
$2,000,000, an assembled workforce of $300,000 and $2,508,000 in other
intangible assets. Pursuant to an indemnification agreement, upon
the occurrence of certain events, the Company may also pay an amount
not to exceed $6,500,000, which would be recorded as additional
goodwill and amortized over the remaining useful life of the asset.
The following summary, prepared on an unaudited pro forma basis,
combines the results of operations as if Isolation Systems, Limited
had been acquired as of December 29, 1996; however the one-time charge
of $34,500,000 as a result of the purchase price allocated to in-
process research and development has been excluded due to its non-
recurring nature. The pro forma results have been adjusted in each of
the periods presented below to reflect the loss of interest income as
a result of the cash used in the acquisition as well as the
amortization of goodwill resulting from the transaction.
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------- -------------------------
October 3, September 27, October 3, September 27,
(in thousands) 1998 1997 1998 1997
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
Total revenues $31,692 $36,120 $109,275 $107,396
Operating loss (4,172) (4,969) (14,273) (23,210)
Net loss (1,800) (3,036) (7,501) (14,277)
======== ======== ========= =========
Net loss per share -
basic and diluted ($0.06) ($0.10) ($0.25) ($0.49)
======== ======== ========= =========
</TABLE>
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisition had been in effect for
the entire periods presented. In addition, they are not intended to
be a projection of future results and do not reflect any synergies
that might be achieved from combined operations.
7. RESTRUCTURING EXPENSES:
During the second quarter of fiscal 1998, the Company approved and
implemented a restructuring program to align its financial model with
its strategic focus on providing remote access solutions for business.
The plan included a reduction of the Company's worldwide workforce by
approximately 130 employees, most of whom were based in Europe, with
the remainder in the United States. A majority of these employees
identified were terminated on July 13, 1998 and the remaining
terminations were completed on October 15, 1998. The Company recorded
restructuring expenses of $2,235,000 in the three-month period ended
October 3, 1998, which included $1,176,000 for severance, benefits and
other personnel-related expenses and $1,059,000 in professional fees,
facilities and other costs. As of October 3, 1998, $40,000 of
severance, benefits and other personnel-related costs and $121,000 of
professional fees, facilities and other costs had been paid.
The Company also recorded restructuring expenses of $9,435,000 in the
three-month period ended July 4, 1998, which included $4,585,000 for
severance, benefits and other personnel-related expenses, $3,570,000
in non-cash expenses for fixed asset write-downs, and $1,280,000 in
professional fees, facilities and other costs. As of October 3, 1998
$3,196,000 of severance, benefits and other personnel-related costs
and $645,000 of professional fees, facilities and other costs have
been paid.
In addition, the Company recorded $1,630,000 of restructuring expenses
during the first quarter of fiscal 1998. These expenses, comprised
primarily of severance-related costs, were the result of the
restructuring of the Company's sales and marketing operations.
Substantially all of these costs have been paid.
8. RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of
hedge transaction. For fair-value hedge transactions in which the
Company is hedging changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative
instrument will generally be offset in the income statement by changes
in the hedged item's fair value. For cash-flow hedge transactions, in
which the Company is hedging the variability of cash flows related
to a variable-rate asset, liability, or a forecasted transaction,
changes in the fair value of the derivative instrument will be
reported in other comprehensive income. The gains and losses on the
derivative instrument that are reported in other comprehensive income
will be reclassified as earnings in the periods in which earnings are
impacted by the variability of the cash flows of the hedged item. The
ineffective portion of all hedges will be recognized in current-period
earnings.
The Company has not yet determined the impact that the adoption of FAS
133 will have on its earnings or statement of financial position.
9. SUBSEQUENT EVENT
On October 19, 1998, Shiva Corporation and Intel Corporation ("Intel")
entered into a definitive merger agreement. Under the merger
agreement, if the proposed merger is consummated, Shiva will become a
wholly-owned subsidiary of Intel. In the merger, each share of Shiva
stock, other than shares held by stockholders who exercise statutory
appraisal rights, would be converted into the right to receive $6 per
share in cash. The transaction is subject to approval by Shiva
stockholders, regulatory approval and other conditions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nortel Agreements. The Company has been party to a strategic
relationship with Northern Telecom, Inc. ("Nortel") since 1995 which
has evolved over time. On September 28, 1998, the Company signed an
amended agreement with Nortel (the "1998 Amendment") under which the
Company will receive a revenue stream of $20,000,000, with little or
no direct cost, over the contract term which began in the three-month
period ended October 3, 1998 and expires in the fourth quarter of fiscal
1999. The financial terms of the 1998 Amendment provide the Company
with a comparable level of gross profit, and supersedes the terms of,
the OEM agreement (the "1998 Agreement") signed on February 28, 1998,
under which Nortel was to issue purchase orders for a minimum of
$5,000,000 per quarter to purchase the Company's products with a
minimum aggregate amount of $40,000,000 over the term of the contract,
which began in the three-month period ended April 4, 1998. These OEM
purchases from Nortel had replaced the minimum royalty arrangement
with the Company that was in effect during fiscal 1997. In the first
two quarters of fiscal 1998, the Company also received total
professional services revenue of $12,000,000 from Nortel related to
the development of carrier class remote access technology. The OEM
purchases and professional services in the first two quarters of 1998
had resulted in higher revenues from Nortel through such period,
which carried lower gross margins than those achieved in 1997.
Beginning in the three-month period ended October 3, 1998, however,
gross margins as a percentage of revenues from Nortel are expected to
increase, as a significant portion of the revenues from Nortel will
consist of the revenue stream provided under the terms of the 1998
Amendment, which carry little or no direct cost.
On April 23, 1998, Nortel exercised its option under the 1998
Agreement to license certain Shiva technology. Pursuant to the terms
of the agreement, Shiva will record a total of $26,000,000 ratably
over ten quarters, or $2,600,000 per quarter, which began in the
second quarter of fiscal 1998, for the license and other items related
to intellectual property. Proceeds from this license agreement are
being accounted for as $2,000,000 in LanRover Access Switch revenue
and $600,000 in other income per quarter over the license term.
Revenues. Revenues in the three-month and nine-month periods ended
October 3, 1998 were $31,692,000 and $108,017,000, respectively,
compared to $35,581,000 and $106,478,000 in the comparable periods in
fiscal 1997, respectively. The 11% decrease in revenues in the three-
month period ended October 3, 1998 was primarily due to lower revenues
from the Company's LanRover and LanRover Access Switch products,
partially offset by increased revenues from other remote access
products. Revenues increased slightly in the nine-month period ended
October 3, 1998 compared to the corresponding period in fiscal 1997
principally due to higher service revenues, which increased to
$19,211,000 in the nine-month period ended October 3, 1998 from
$5,134,000 during the comparable period in fiscal 1997. This increase
was primarily due to $12,000,000 in professional services revenue from
Nortel related to the development of carrier class remote access
technology pursuant to the 1998 Agreement. This increase in service
revenues was partially offset by lower revenues from the Company's
LanRover product line due to lower volume shipments, as well as
decreased license, royalty and other revenues, primarily related to
the LanRover Access Switch products as discussed below. Revenues in
the nine-month period ended September 27, 1997 were negatively
impacted by price protection provisions of $6,700,000, of which
$3,900,000 related to the LanRover and $2,800,000 related to the
LanRover Access Switch, due to increased price competition and price
reductions on the V.34 modem card due to the availability of 56K
modem technology in the access concentrator market. Price protection
rights require the Company to grant retroactive price adjustments for
inventories of the Company's products held by distribution partners if
the Company lowers its prices for such products.
Revenues from the LanRover Access Switch in the three-month and nine-
month periods ended October 3, 1998 decreased to $11,413,000 and
$40,930,000, respectively, from $14,700,000 and $45,947,000 in the
comparable periods in fiscal 1997, primarily due to lower license and
royalty revenues from Nortel, and lower volume shipments. Revenues
from the LanRover Access Switch in fiscal 1997 included minimum
royalty revenues from Nortel, which will not recur in fiscal 1998 (as
described above) that were based on sales of the Nortel Rapport 112,
an OEM version of the LanRover Access Switch. The loss of these
royalty revenues was partially offset by license revenues from Nortel
as part of the 1998 Agreement recorded in the second and third
quarters of fiscal 1998, and by the price protection provisions of
$2,800,000 recorded in the first quarter of fiscal 1997 as described
above.
Revenues from the LanRover product line in the three-month and nine-
month periods ended October 3, 1998 decreased to $7,396,000 and
$25,534,000, respectively, from $13,475,000 and $39,238,000 in the
comparable periods in fiscal 1997, primarily due to lower volume
shipments. LanRover revenues in the nine-month period ended September
27, 1997 were negatively impacted by price protection provisions of
$3,900,000.
Revenues from the Company's other remote access products increased to
$9,517,000 and $18,696,000, respectively, in the three-month and nine-
month periods ended October 3, 1998 from $3,984,000 and $11,016,000 in
the comparable periods in fiscal 1997. The increase in the three-
month and nine-month periods ended October 3, 1998 was primarily
related to revenues recorded in accordance with the 1998 Amendment
with Nortel, increased revenues from the Company's AccessPort product,
and the introduction of the LanRover VPN Gateway product as a result
of the acquisition of Isolation Systems, Limited on March 26, 1998,
partially offset by decreased revenues from certain other products.
The Company provides its distributors and resellers with product
return rights for stock balancing and product evaluation. Revenues
were reduced by provisions for product returns of $2,125,000 and
$7,441,000, or 6% of gross revenues, in the three-month and nine-month
periods ended October 3, 1998, respectively. Provisions for product
returns were $2,439,000, or 6% of gross revenues, and $13,784,000, or
11% of gross revenues in the corresponding periods in fiscal 1997.
Provisions for product returns were higher in the nine-month period
ended September 27, 1997 compared to the nine-month period ended
October 3, 1998 primarily a result of provisions recorded in the first
quarter of fiscal 1997 to account for slow-moving and discontinued
products in the Company's North American distribution channels.
Revenues from OEM customers represented 21% and 29% of revenues in the
three-month and nine-month periods ended October 3, 1998, respectively,
compared to 26% and 25% in the comparable periods in fiscal 1997. The
decrease in the three-month period ended October 3, 1998 was primarily
due to decreased OEM purchases from Nortel and IBM, partially offset
by increased revenues from Nortel related to the 1998 Amendment.
The increase in the nine-month period ended October 3, 1998 was
primarily due to the $12,000,000 in professional services revenue
received from Nortel in the first two quarters of 1998. The Company
anticipates that OEM revenues will decline in future periods.
International revenues accounted for 41% and 37% of revenues in the
three-month and nine-month periods ended October 3, 1998, respectively,
compared with 43% and 50% in the corresponding periods in fiscal 1997.
International revenues were lower in the three-month and nine-month
periods ended October 3, 1998 due to decreased sales in the Pacific
Rim and Europe. In addition, international revenues represented a
significantly higher proportion of total revenues in the nine-month
period ended September 27, 1997 due to the impact of the return
provisions and price protection provisions that significantly reduced
revenues from the Company's North American distribution channels in
1997.
Gross Profit. Gross profit was $19,603,000 and $59,817,000, for the
three-month and nine-month periods ended October 3, 1998, respectively,
compared to $20,262,000 and $53,571,000 for the comparable periods in
fiscal 1997. This represented 62% and 55% of revenues in the three-
month and nine-month periods ended October 3, 1998, respectively,
compared to 57% and 50% in the corresponding periods in 1997. Gross
profit as a percentage of revenues increased in the three-month period
ended October 3, 1998 due to the increase in license, royalty and
other revenues, which carry little or no direct cost. Gross profit
in the nine-month period ended September 27, 1997 included the
negative impact of price protection provisions of $6,700,000, as
previously described, and provisions for slow-moving inventories.
The provisions for slow-moving inventories increased cost of revenues
by $6,463,000, and related to V.34 modem cards, for which demand had
decreased due to the availability of 56K modem technology, and certain
other products. Excluding the impact of these provisions, gross profit
as a percentage of revenues would have been 59% in the nine-month
period ended September 27, 1997. Gross profit as a percentage of
revenues was negatively impacted in the nine-month periods ended
October 3, 1998 due to the professional services revenue and OEM
product (non-license and royalty) revenues from Nortel. Each of these
revenue streams from Nortel carried lower gross profit percentages
than the Company's non-Nortel product revenues, and significantly
lower gross profit percentages than the Nortel royalty revenues
recorded in the year earlier period. In the future, the Company's
gross margins may be affected by several factors, including but not
limited to the competitive pricing environment, product mix, the level
of license and royalty revenue as a percentage of total revenue, the
distribution channels used, changes in component costs and the
introduction of new products.
Research and Development. Research and development expenses during the
nine-month period ended October 3, 1998 primarily related to the
development of new and existing remote access products, including
products which incorporate technology to support virtual private
networking. Research and development expenses decreased to $6,402,000
and $15,623,000 in the three-month and nine-month periods ended
October 3, 1998 from $6,937,000 and $18,676,000 during the comparable
periods in fiscal 1997. The decrease in research and development
expenses for the three-month period ended October 3, 1998 compared to
the three-month period ended September 27, 1997 was primarily due to
restructuring actions as the Company discontinued operations at the
Edinburgh, Scotland, facility. The Edinburgh facility was primarily
focused on jointly funded engineering activities with Nortel. The
decrease in these expenses for the nine-month period ended October 3,
1998 compared to the nine-month period ended September 27, 1997 was
primarily due to the restructuring of the Company's relationship with
Nortel in fiscal 1998 under which Nortel had previously contracted
with the Company for the development of carrier class remote access
technology. Under the terms of the 1998 Agreement, the Company
recognized a total of $12,000,000 in professional services revenue in
the nine-month period ended October 3, 1998 as work was performed.
Accordingly, expenses related to these development efforts of
$7,422,000 in the nine-month period ended October 3, 1998, have been
included in cost of service revenues in the accompanying statement of
operations. This decrease in research and development expenses
associated with the 1998 Agreement was partially offset by a reduction
in capitalized software development costs, as well as a decrease
in customer funded development fees, which are recorded as an offset
to research and development expenses. There were no such fees
recorded in the three-month and nine-month periods ended October 3,
1998, compared to $1,500,000 and $4,954,000 in the three-month and
nine-month periods ended September 27, 1997. Capitalized software
development costs were $233,000 and $320,000 for the three-month and
nine-month periods ended October 3, 1998, compared with $488,000 and
$888,000 in the comparable periods in fiscal 1997. Gross research and
development expenses decreased to $6,635,000 and $23,365,000,
respectively, in the three-month and nine-month periods ended October
3, 1998 from $8,925,000 and $24,518,000 in the comparable periods in
fiscal 1997. The Company anticipates continued significant investment
in research and development primarily focused on providing remote
access solutions for the business access market.
Selling, General and Administrative. Selling, general and
administrative expenses decreased to $15,138,000 and $45,148,000 in
the three-month and nine-month periods ended October 3, 1998 from
$17,622,000 and $55,929,000 in the comparable periods in fiscal 1997.
These expenses represented 48% and 42% of revenues in the three-month
and nine-month periods ended October 3, 1998, respectively, compared
to 50% and 53% in the corresponding periods in 1997. The decrease in
gross expenses was due to several factors, including lower personnel
costs due to the restructuring of the Company's sales and marketing
organization as discussed below, as well as decreased costs incurred
for travel, channel and marketing programs, trade shows, recruiting,
temporary help and various facilities related expenses. These
decreases were partially offset by increased bad debt expense.
Selling, general and administrative expenses in the three-month and
nine-month periods ended September 27, 1997 are net of expenses
reimbursed by Nortel of $1,623,000 and $3,831,000, respectively,
related to Shiva's Service Provider Group (SPG), a worldwide business
unit comprised of technical sales and support personnel that had been
dedicated to marketing Nortel's remote access equipment to carriers
and service providers through the first quarter of fiscal 1998.
Expenses reimbursed by Nortel in the first quarter of 1998 were
$1,018,000. Nortel no longer funds the SPG unit.
Restructuring Expenses. The Company recorded restructuring expenses
of $2,235,000 and $13,300,000 in the three-month and nine-month
periods ended October 3, 1998, respectively. Restructuring expenses
in the three-month period ended October 3, 1998 consisted of
$1,176,000 in severance, benefits and other personnel-related expenses
and $1,059,000 in professional fees, facilities and other costs.
Restructuring expenses for the nine-month period ended October 3, 1998
consisted of $6,957,000 in severance, benefits and other personnel-
related expenses, $3,570,000 in non-cash expenses for fixed asset
write-downs, and $2,773,000 in professional fees, facilities and other
costs. These restructuring expenses were primarily a result of the
restructuring of the Company's sales and marketing operations as well
as a formal plan announced by the Company on April 15, 1998 to
restructure its worldwide operations and align its financial model
with the strategic focus on providing remote access solutions for
business. Specifically, Shiva discontinued operations at the
Edinburgh, Scotland, facility and has relocated certain technical
support staff to the Wokingham, United Kingdom, facility. The
Edinburgh facility was primarily focused on jointly funded engineering
activities with Nortel. The Company anticipates that substantially
all of the cash restructuring charges will be paid out from the
Company's cash and short-term investment balances by the end of fiscal
1998.
Interest Income and Expense. Interest income decreased during the
three-month period ended October 3, 1998 over the corresponding period
in fiscal 1997 primarily as a result of the cash used in the
acquisition of Isolation Systems, Limited. Interest income increased
during the nine-month period ended October 3, 1998 over the
corresponding period in fiscal 1997 primarily due to the Company's
shift from federal tax-exempt securities into taxable securities,
which resulted in a higher overall yield on its investments. Interest
and other income for the three-month period ended October 3, 1998 was
$715,000 compared with interest and other expense of $26,000 for the
period ended September 27, 1997. This change is primarily due to the
inclusion of $600,000 of income resulting from the option exercised by
Nortel under the 1998 Agreement to license certain Shiva technology.
Income Tax Benefit. The Company's effective tax rate in each of the
three-month and nine-month periods ended October 3, 1998 was 32%, down
from 38% in each of the three-month and nine-month periods ended
September 27, 1997, primarily due to the impact of nondeductible
restructuring charges.
Foreign Currency Fluctuations and Conversion to Euro
Foreign currency fluctuations did not have a significant impact on the
results of operations in the three-month and nine-month periods ended
October 3, 1998 as compared with those of the comparable periods in
fiscal 1997. However, the Company's international operations will
continue to be exposed to adverse movements in foreign currency
exchange rates which may have a material adverse impact on the
Company's financial results. The Company enters into forward exchange
contracts to hedge those currency exposures related to certain assets
and liabilities denominated in non-functional currencies and does not
generally hedge anticipated foreign currency cash flows.
Certain of the member countries of the European Union have agreed to
adopt a new currency, the Euro, as their common legal currency. On
January 1, 1999, the countries will establish fixed conversion rates
between their existing currencies and the Euro. The Company has not
yet completed its analysis of the potential impact the conversion to
the Euro may have on its business or results of operations.
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 certain time-
sensitive software applications that utilize a field of two digits to
define the applicable year. In such applications, a date using "00"
as the year may be recognized as the year 1900 rather than the year
2000.
The Company is in the process of assessing its exposure to the Year
2000 issue. The Company has divided the assessment into multiple
projects which are currently being undertaken by Company employees in
applicable functions. The Company may consider the use of independent
consultants or other external resources if major incremental Year 2000
issues are found as a result of the Company's internal Year 2000
assessment. The assessment project includes the Company's product
compliance testing (and related engineering remedial work), internal
systems assessment and third-party supplier assessment. All Year
2000 activity has been funded from operating cash flows, and the
Company has not separately accounted for these costs. The Company's
total cost relating to all of these activities (excluding replacement
systems) has not been, and management anticipates that such costs are
not expected to be material to the Company's financial position,
results of operations or cash flows.
The Company has developed an extensive Year 2000 product test suite
which is based on various industry standard Year 2000 tests. The test
suite can be found on the Company's web site. The Company has tested
approximately fifty percent of its products against the suite, and has
published the test results on the Company's web site at www.shiva.com.
The web site is updated weekly with test results as the testing is
completed. The Company anticipates that all of its products will have
been tested by the end of 1998.
To date, the Company is aware that the SpiderManager and certain Shiva
Access Manager products are not Year 2000 compliant. The
SpiderManager product will display the year number in the activity log
date field as three digits. The Company believes that this
characteristic does not have any system operational implications for
the product, therefore, the Company does not anticipate undertaking
additional research and development or remediation efforts to change
this display characteristic. The Shiva Access Manager NT 1.0 product
uses only two digits to store year information. The system interprets
these two digits as being in the twentieth century before year 2000,
and will interpret the two digits as being in the twenty-first century
after year 2000. The Company believes that this date calculation
methodology could reactivate previously terminated user accounts and
may produce incorrect log files if both twentieth and twenty-first
century dates are involved. This Year 2000 issue has been corrected
in Shiva Access Manager NT at version 2.0 and higher versions. The
Company has strongly recommended that its customers implement the suggested
upgrade to correct the problem. The Company does not anticipate
undertaking additional research and development or remediation efforts
incurring additional expenses to correct this Year 2000 issue. Shiva
Access Manager version 2.x and 3.x support Vasco Data Security, Inc.'s
("Vasco's") time-based hard tokens. After the change of century, any
Vasco time-based hard tokens will fail to authenticate a user which
will cause an authorized user to be denied access to the system.
This Year 2000 issue has been corrected in Shiva Access Manager 4.0
which incorporates new token libraries from Vasco. The Company has
strongly recommended that its customers using Vasco time-based hard
tokens upgrade to version 4.0 or higher versions to correct the
problem. All users of a Vasco time-based hard token must also have
their hard tokens reprogrammed by Vasco in order to correct the Year
2000 issue. The Company does not anticipate undertaking additional
research and development or remediation efforts for this Year 2000
issue. The Shiva Access Manager Accountant cannot allow entry of full
Year 2000 compliant dates into some of its data entry screens. This does
not affect the operation of the software but may cause some resulting
reports to be incorrect. This Year 2000 issue has been corrected and
will be released in the next revision of the product, which is due to
be released in the last quarter of 1998 or first quarter of 1999. The
Company has strongly recommended that customers using Shiva Access Manager
Accountant upgrade to the new release when available. The Company
does not anticipate undertaking additional research and development or
remediation efforts or incurring additional expenses for this Year
2000 issue. To assist customers who have Shiva Access Manager
products that are not Year 2000 compliant, the Company plans to launch
a special upgrade program within the next six months to ensure the
Year 2000 compliant versions are in place by the century change. The
Company does not expect the cost of the upgrade program to be material
to the results of the Company.
Even after extensive testing, there can be no guarantee that one or
more current Company products do not contain Year 2000 issues that may
result in material costs to remedy. The Company's risk of being
subjected to lawsuits relating to Year 2000 issues with its software
products is likely to be greater than other industries. Since
computer systems may involve various hardware, software and firmware
components from different manufacturers, it may be difficult to
determine which component in a computer system may cause a Year 2000
issue. As a result, the Company may be subjected to Year 2000-related
lawsuits independent of whether its products or services are Year 2000
compliant. The possibility and outcome of any such lawsuits and the
potential impact on the Company cannot be determined at this time.
The Company has completed its initial audit of the Company's major
information technology ("IT") systems. The Company replaced its North
American finance and manufacturing system in the third quarter of fiscal
1998 with a Year 2000 compliant system. The Company is planning to complete
all necessary Year 2000 upgrades of its major systems in 1999, and is
currently identifying and developing compliance strategies for its
remaining systems that may be impacted by the Year 2000 issue. The
Company is also assessing its non-IT systems for Year 2000 non-compliance.
The initial assessment of non-IT systems is scheduled to be completed in
the first quarter of 1999.
The Company is in process of developing a Year 2000 plan with each of
the Company's manufacturing contractors. The plans are targeted to be
completed by the end of 1998. The plans will address manufacturing
process, component and supplier Year 2000 readiness/compliance and the
Company does not expect the cost of such plans to be material. The
Company has begun to initiate formal communications and projects with
its significant suppliers and service providers to determine the
extent to which the Company is vulnerable to those third parties'
failure to remedy their Year 2000 issues. The Company has received
some assurances regarding the status of Year 2000 issues from its
vendors; however, there is no guarantee that third party systems will
be compliant, and such non-compliance could have an adverse effect on
the Company. For example, if some of the Company's component vendors
are not Year 2000 compliant it could adversely impact the Company's
Year 2000 compliance program.
The Company currently does not have a comprehensive contingency plan
to address situations that may result if the Company is unable to
achieve Year 2000 readiness of its critical operations. The cost of
developing and implementing such a plan may itself be material. Such
a plan will be developed if it becomes clear that the Company is not
going to achieve its scheduled compliance objectives. If the Company
does not become Year 2000 compliant in a timely manner, the Year 2000
issue could have a material impact on the business, financial condition
and results of operations. Delays in Year 2000 compliance could also
adversely affect the Company's reputation and competitive position and
impair its ability to process customer transactions and orders and payments
of supplierr merchandise.
The foregoing shall be considered a Year 2000 readiness disclosure to
maximum extent allowed under the Year 2000 Information and Readiness
Disclosure Act.
Liquidity and Capital Resources
As of October 3, 1998, the Company had $28,662,000 of cash and cash
equivalents and $39,353,000 of short-term investments. Working
capital decreased by 38% to $66,752,000 at October 3, 1998 from
$108,314,000 at January 3, 1998, primarily due to cash used to acquire
Isolation Systems, Limited.
Net cash provided by operations totaled $16,093,000 for the nine-month
period ended October 3, 1998 compared with $1,623,000 during the
comparable period in fiscal 1997. Net cash provided by operations in
the nine-month period ended October 3, 1998 resulted primarily from
the net loss adjusted for non-cash expenses including in-process
research and development, as well as the decrease in accounts
receivable and inventories and the increase in accrued expenses,
partially offset by a decrease in accounts payable. The decrease in
accounts receivable is primarily due to lower revenues and increased
collection activities. The decrease in inventories is due to decreased
inventory requirements as a result of lower revenue levels. The
increase in accrued expenses is primarily due to increases in accrued
sales, marketing and manufacturing expenses, and the accrued severance
and other costs related to the Company's restructuring efforts. 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 due to decreased revenue levels and the previously
mentioned increase in product return and price protection provisions,
as well as increased collection activity.
Net cash used by investing activities totaled $46,698,000 for the nine-
month period ended October 3, 1998, compared to $18,648,000 during the
comparable period in fiscal 1997. Investment activity in the nine-
month period ended October 3, 1998 consisted primarily of payments
related to the purchase of Isolation Systems, Limited, as well as the
net purchase of short-term investments and fixed assets. Investment
activity in the nine-month period ended September 27, 1997 consisted
primarily of purchases of short-term investments and fixed assets,
partially offset by proceeds from short-term investments upon maturity
or sale.
Net cash provided by financing activities totaled $175,000 for the
nine-month period ended October 3, 1998, compared to $1,670,000 during
the comparable period in fiscal 1997. Net cash provided by financing
activities for the nine-month period ended October 3, 1998 primarily
consisted of proceeds from stock option exercises, partially offset by
the purchase of treasury stock. Net cash provided by financing
activities in the nine-month period ended September 27, 1997
consisted of proceeds from stock option exercises and purchases of
stock under the Company's stock purchase plan, partially offset by
principal payments on long-term debt and capital lease obligations.
The Company has a $5,000,000 unsecured revolving credit facility with
a bank which expires in March 1999. The terms of the credit facility
require the Company to comply with certain restrictive financial
covenants. Borrowings under this facility bear interest at the bank's
prime rate. At October 3, 1998, available borrowings were reduced by
outstanding letters of credit of $842,000 which expire at various
dates in 1998. The Company had no borrowings outstanding under this
line at October 3, 1998. The Company also has a foreign credit
facility of approximately $2,720,000, all of which was available at
October 3, 1998. Available borrowings under this facility are
decreased by guarantees on certain foreign currency transactions. The
terms of the foreign credit facility require the Company to comply
with certain restrictive financial covenants. There were no
borrowings outstanding under this foreign credit facility at October
3, 1998.
The Company enters into forward exchange contracts to hedge against
certain foreign currency transactions for periods consistent with the
terms of the underlying transactions. The forward exchange contracts
have maturities that do not exceed one year. At October 3, 1998, the
Company had outstanding forward exchange contracts to purchase
$7,093,000 and to sell $1,016,000 in various currencies which mature
on various dates through February 26, 1999.
The Company believes that its existing cash and short-term investment
balances, together with borrowings available under the Company's bank
credit facilities, will be sufficient to meet the Company's cash
requirements for at least the next twelve months.
Certain Factors That May Affect Future Results
Certain information contained herein, and information provided by the
Company or statements made by its employees may, from time to time,
contain "forward-looking" information which involve risks and
uncertainties. Any statements contained in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere herein that are not historical facts may be
"forward-looking" statements. Certain information contained herein
concerning the Company's anticipated plans and strategies for its
business, available cash and cash equivalents and sources of financing,
research and development and other expenditures, effects of the
restructuring actions, ability to achieve Year 2000 compliance,
and effects of the 1998 Agreement and the 1998 Amendment with Nortel
consists of forward-looking statements. Without limiting the
foregoing, the words "believes," "expects," "anticipates," "plans,"
and similar expressions are intended to identify forward-looking
statements. The Company's actual future results may differ
significantly from those stated in any forward-looking statements.
Factors that may cause such differences include, but are not limited
to, the factors discussed below.
The Company's quarterly operating results may vary significantly from
quarter to quarter depending on factors such as the timing of
significant orders and shipments of its products, changes and delays
in product development, new product introductions by the Company and
its competitors, the mix of distribution channels through which the
Company's products are sold and seasonal customer buying patterns.
There can be no assurance that the Company will be able to achieve
future revenue growth and profitability on a quarterly or annual
basis. Revenues can be difficult to forecast due to the fact that the
Company's sales cycle varies substantially depending upon market,
distribution mechanism and end-user customer. The Company's expense
levels are based, in part, on its expectations as to future revenues.
If revenue levels are below expectations, operating results may be
adversely affected. In addition, the Company's distribution partners
typically stock significant levels of inventory, and the Company's
revenues may fluctuate based on the level of partner inventories in
any particular quarter.
The Company'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 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. In particular, the rapid entry of large telecommunications
and service provider competitors, such as Lucent and Nortel, to the
remote access market, in addition to large traditional networking
vendors, such as Cisco and 3Com, has resulted in increased
competition. In addition, customers increasingly view remote access
offerings as a component of an end-to-end solution that is most
effectively provided by very large-scale companies, which have
significantly greater resources than the Company and which customers
may perceive as best suited to address a variety of their needs over a
long period of time. Increased competition has resulted and may
continue to result in price reductions and loss of market share, which
has and may continue to 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 currently 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 fiscal
1998 and fiscal 1997, due in part to increased competition. There can
be no assurance that the Company will be successful in modifying
current product offerings to increase sales of its products.
The Company depends on third party distributors and value-added
resellers for a significant portion of the Company's revenues. The
loss of certain of these distributors and resellers could have a
material adverse impact on the Company's results of operations.
Moreover, many of these distributors and resellers also act as
resellers of competitive products. Therefore, there is risk that
these distributors and resellers may focus their efforts on marketing
products other than those sold by the Company. This may require the
Company to offer various incentives to such distributors and
resellers, which may adversely impact the Company's results of
operations.
The market for remote access products has changed dramatically in
recent years. Computer users have increasingly utilized the Internet
for remote access. A number of factors contributed to this
transition, including cost, ease of use and the increasing public
awareness, use and acceptance of the Internet. In order to address
the changing needs of this market, the Company has recently revised
its strategic focus, seeking to decrease its reliance on its
traditional products and on its relationship with Nortel while
devoting additional resources to products that increase the security
of remote access conducted on the Internet and allowing the
establishment of virtual private networks ("VPNs"). The introduction
of new products and the Company's new strategic focus will require the
Company to successfully manage the transition from traditional product
offerings in order to minimize the impact on customer ordering
patterns, avoid excessive levels of obsolete inventories and ensure
that adequate supplies of both new and traditional products are
available to meet customer demand. The new Internet-based products
represented less than 10% of the Company's sales in the third quarter
of 1998, and there can be no assurance the Company's new products will
achieve increased market acceptance. The Company's future success
will depend upon its ability to implement the transition to Internet-
based and VPN products and to meet and adapt to changing customer
requirements and emerging technologies. There can be no assurance the
Company will be successful in its new strategic focus.
The Company's success in accomplishing development objectives depends
in large part upon its ability to attract and retain highly skilled
technical personnel including, in particular, management personnel in
the areas of research and development and technical support.
Competition for such personnel is intense. There can be no assurance
that the Company will be successful in attracting and retaining the
personnel it requires to accomplish its objectives. Delays in new
product development or the failure of new products to achieve market
acceptance, could have a material adverse effect on the Company's
operating results. In addition, there can be no assurance that the
Company will be successful in identifying, developing, manufacturing
or marketing new product or service offerings or enhancing its
existing offerings.
The Company does business worldwide, both directly and via sales to
United States-based original equipment manufacturers, who sell such
products internationally. The Company expects that international
revenues will continue to account for a significant portion of its
total revenues. Although most of the Company's sales are denominated
in US Dollars, exchange rate fluctuations could cause the Company's
products to become relatively more expensive to customers in a
particular country, causing a decline in revenues and profitability in
that country. In addition, international sales, particularly in
Europe, are typically adversely affected in the third quarter due to a
reduction in business activities during the summer months.
Furthermore, global and/or regional economic factors and potential
changes in laws and regulations affecting the Company's business,
including without limitation, communications regulatory standards,
safety and emissions control standards, difficulty in staffing and
managing foreign operations, longer payment cycles and difficulty in
collecting foreign receivables, currency exchange rate fluctuations,
changes in monetary and tax policies, tariffs, difficulties in
enforcement of intellectual property rights and political
uncertainties, could have an adverse impact on the Company's financial
condition or future results of operations.
Some of the Company's products incorporate encryption, or scrambling,
features to protect the security, confidentiality, and integrity of
text or data transmissions. Products with encryption features are
subject to export restrictions under the laws of the U.S., Canada, and
other countries. In countries other than the U.S. and Canada,
encryption products may also be subject to import and/or use
restrictions. These restrictions may require the Company or its
customers to obtain licenses; may require technical modifications to
products; and may prohibit sales of some products to certain
destinations or customers. In light of these restrictions, the
Company's products available abroad may contain significantly weaker
encryption capabilities than those available in the U.S. and Canada,
and there can be no assurance that the Company will continue to be
able to export its products to destinations outside of the U.S. and
Canada. Accordingly, these restrictions could potentially have an
adverse effect on the Company's business, financial conditions, or
results of operations.
The Company is exposed to potential credit risks as a result of
accounts receivable from distributors, resellers, OEM and direct
customers, with respect to which the Company does not generally
require collateral.
The Company is currently dependent on three subcontractors for the
manufacture of significant portions of its products. Although the
Company believes that there are a limited number of other qualified
subcontract manufacturers for its products, a change in subcontractors
could result in delays or reductions in product shipments. In
addition, certain components of the Company's products are only
available from a limited number of suppliers. The inability to obtain
sufficient key components as required could also result in delays or
reductions in product shipments. Such delays or reductions could
have an adverse effect on the Company's results of operations.
The Company's proposed acquisition by Intel Corporation is subject to
a number of closing conditions, including, without limitation,
regulatory and stockholder approval. Accordingly, there can be no
assurance the proposed transaction will be consummated. The failure
of the Company to consummate the transaction could require the Company
to pay certain fees and expenses pursuant to its agreement with Intel
and could also adversely impact the Company's relationships with
current and potential employees, customers, suppliers and others. As
a result of these and other factors, such failure could have a
material adverse effect on the Company's business, financial condition
and results of operations, including an adverse impact on the Company's
fourth quarter revenues. In addition, any announcement concerning
the actual or potential termination of the transaction could have a
material adverse effect on the trading price of the Common Stock.
The legal proceedings discussed below under the caption "Legal
Proceedings" could have a material adverse effect on the Company's
financial condition.
See also the discussion above under the caption "Year 2000."
The market price of the Company's securities could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating
results, changes in earnings estimates by analysts, and market
conditions in the industry, as well as general economic conditions and
other factors external to the Company.
Other factors that may affect future results include the accuracy of
the Company's internal estimates of revenues and operating expense
levels and the realization of the intended benefits of the 1998
restructuring.
Because of the foregoing factors, the Company believes that period-to-
period comparisons of its financial results are not necessarily
meaningful and expects that its results of operations may fluctuate
from period to period in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not Applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in the following legal proceedings:
Lirette, et al. v. Shiva Corporation, et al., Civil Action No. 97-
11159-WGY, a purported class action complaint filed against the
Company, Frank Ingari, Cynthia Deysher and David Cole, in the United
States District Court for the District of Massachusetts on May 21,
1997 and Abraham Schwartz and Norman Marcus v. Shiva Corporation,
Case No. BC164278, a purported class action complaint filed against
the Company in the Superior Court of the State of California for the
County of Los Angeles on January 17, 1997. The federal court complaint
seeks damages, interest, fees and expenses. The state court complaint
seeks damages, interest, fees and expenses, including punitive damages
and treble damages. The federal matter is in the pre-discovery phase,
and a motion to dismiss has been filed and is being considered by the
court. The state matter is in discovery. The Company is unable to
determine at this time the potential liability, if any, of either of
these actions. Accordingly, no provision has been made in the
consolidated financial statements for these claims. It is possible
that the Company could incur a material loss related to these actions
in the future.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
Exhibit 4.1 Amendment No. 1 to Rights Agreement dated as of
September 29, 1995 between the Company and
American Stock Transfer & Trust Company, dated
as of October 19, 1998.
Exhibit 10.1 Amendment dated September 28, 1998 to the
Agreement dated February 27, 1998 by and
between the Company and Northern Telecom, Inc.
Exhibit 27.0 Financial Data Schedule.
(b) Reports on Form 8-K: The Company filed no reports on Form 8-K
during the three-month period ended October 3, 1998.
<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 17, 1998 by: /s/ Robert P. Cirrone
------------------------------
Senior Vice President, Finance
and Administration,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
SHIVA CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- - ----------- ----------------------
<S> <C>
Exhibit 4.1 Amendment No. 1 to Rights Agreement dated as of
September 29, 1995 between the Company and
American Stock Transfer & Trust Company, dated as
of October 19, 1998.
Exhibit 10.1 Amendment dated September 28, 1998 to the
Agreement dated February 27, 1998 by and between
the Company and Northern Telecom, Inc.
Exhibit 27.0 Financial Data Schedule.
- - ----------------------------------------
</TABLE>
<PAGE>
Exhibit 4.1
AMENDMENT NO. 1
TO
RIGHTS AGREEMENT
This AMENDMENT NO. 1 (the "Amendment") to the Rights Agreement
(the "Rights Agreement") dated as of September 29, 1995 between Shiva
Corporation, a Massachusetts corporation (the "Company"), and American
Stock Transfer & Trust Company (the "Rights Agent"), is entered into as
of the 19th day of October, 1998. Capitalized terms not otherwise defined
herein shall have the respective meanings given to them in the Rights
Agreement by and between the parties hereto.
RECITALS
WHEREAS, the Board of Directors has determined that it is in the
best interests of the Company to amend the Rights Agreement as set forth
herein in connection with the execution of that certain Agreement and
Plan of Merger dated as of October 19, 1998, as the same may be amended
from time to time (the "Merger Agreement"), among the Company, Intel
Corporation, a Delaware corporation ("Intel"), and Intel Networks,
Incorporated, a Massachusetts corporation and a direct, wholly-owned
subsidiary of Intel ("Merger Sub") (pursuant to which Merger Agreement,
among other things, Merger Sub shall merge with and into the Company (the
"Merger")).
WHEREAS, the Company has requested that the Rights Agreement be amended
in accordance with Section 27 of the Rights Agreement, as set forth herein,
and the Rights Agent is willing to amend the Rights Agreement as set forth
herein.
AGREEMENT
NOW, THEREFORE, the parties, intending to be legally bound, hereby
agree as follows:
1. Section 7(a) of the Rights Agreement is hereby amended to read in
its entirety as follows:
"(a) Subject to Section 7(e) hereof, the registered holder
of any Rights Certificate may exercise the Rights evidenced
thereby (except as otherwise provided herein including,
without limitation, the restrictions on exercisability set
forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate,
with the form of election to purchase and the certificate
on the reverse side thereof duly executed, to the Rights
Agent at the office of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase
Price with respect to the total number of one one-
hundredths of a share of Preferred Stock (or other
securities, cash or other assets, as the case may be) as to
which such surrendered Rights are then exercisable, at or
prior to the earlier of (i) the Final Expiration Date,
(ii) the time at which the Rights are redeemed as provided
in Section 23 hereof, (iii) the time at which the Rights
expire pursuant to Section 13(d) hereof, (iv) the time at
which such Rights are exchanged as provided in Section 24
hereof, or (v) immediately prior to the Effective Time, as
defined in the Agreement and Plan of Merger dated as of
October 19, 1998, as the same may be amended from time to
time, between the Company, Intel Corporation, a Delaware
corporation ("Intel"), and Intel Networks, Incorporated, a
Massachusetts corporation and a direct, wholly-owned
subsidiary of Intel ("Merger Sub"), pursuant to which
Merger Agreement, among other things, the Merger Sub shall
merge with and into the Company (the "Merger") (the earlier
of (i), (ii), (iii), (iv) and (v) being herein referred to
as the "Expiration Date")."
2. Section 35 of the Rights Agreement is hereby added as follows:
"Section 35. Intel Transaction. Notwithstanding any
provision of this Rights Agreement to the contrary, no
Distribution Date, Stock Acquisition Date or Triggering
Event shall be deemed to have occurred, neither Intel nor
any Affiliate or Associate of Intel (including without
limitation the Merger Sub) shall be deemed to have become an
Acquiring Person and no holder of Rights shall be entitled
to exercise such Rights under or be entitled to any rights
pursuant to Section 7(a), 11(a) or 13(a) of this Rights
Agreement by reason of (x) the approval, execution, delivery
or effectiveness of the Merger Agreement or (y) the
consummation of the transactions contemplated under the
Merger Agreement in accordance with the terms thereof
(including, without limitation, the consummation of the
Merger)."
3. Except as amended hereby, the Rights Agreement shall remain unchanged
and shall remain in full force and effect.
4. This Amendment may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall
constitute one instrument.
[signatures on following page]
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed by their respective duly authorized representatives as of the
date first above written.
SHIVA CORPORATION
By: /s/ Robert P. Cirrone
---------------------------
Name: Robert P. Cirrone
Title: Senior Vice President,
Finance and Administration
Chief Financial Officer
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: /s/Herbert J. Lemmer
---------------------------
Name: Herbert J. Lemmer
Title: Vice President
Exhibit 10.1
st8936h
AMENDMENT
Amendment effective as of September 28, 1998 by and between SHIVA
Corporation ("SHIVA"), a Massachusetts corporation, with offices
at 28 Crosby Drive, Bedford, MA and Northern Telecom Inc. ("NORTEL"),
a Delaware corporation, with offices at 4001 E. Chapel Hill-Nelson
Hwy., Research Triangle Park, NC.
NORTEL and SHIVA agree that:
a. This is an amendment to that certain Agreement by and between SHIVA
and NORTEL which was executed by the parties thereto on February 27,
1998 ("2/27/98 Agreement"). Section 8 of the 2/27/98 Agreement is
deleted in its entirety and replaced with the following:
8. By September 30, 1998, Northern Telecom Inc. shall pay SHIVA Four
Million Five Hundred Thousand Dollars ($4,500,000) and thereafter, at
mid-quarter, during each of the next succeeding five (5) calendar
quarters, Northern Telecom Inc. shall pay SHIVA Three Million One
Hundred Thousand Dollars ($3,100,000) for a cumulative total of
Twenty Million Dollars ($20,000,000), according to the below-listed
payment schedule, immediately upon receipt of SHIVA's invoice:
September 30, 1998 $4,500,000
November 15, 1998 $3,100,000
February 15, 1999 $3,100,000
May 15, 1999 $3,100,000
August 15, 1999 $3,100,000
November 15, 1999 $3,100,000
These payments are in lieu of NORTEL's prior product purchase commit-
ments to SHIVA. SHIVA hereby releases and discharges NORTEL from any
claims or liability arising out of nonperformance of such commitments
by NORTEL prior to September 25, 1998.
Commencing upon execution of the Amendment to this Agreement which is
effective as of September 28, 1998 and continuing for the next succeeding
five (5) calendar quarters, until December 31, 1999, SHIVA will provide
NORTEL with the following support and development resources, to work on
a full-time basis, under NORTEL's direction and control with respect to
PRODUCTS:
SHIVA Function Level Resource Available
- - -------------- ----- ------------------
Customer Support 3 Resource equivalent to two full
time persons
Development 4 Resource equivalent to two full
time persons
SHIVA is responsible for Level 3 and Level 4 Support as defined below.
NORTEL is responsible for Level 1 and 2 Support, as defined below, to
its end-users.
Level 1 Support shall mean that level of support whereby the supporting
party (NORTEL) provides the primary interface through direct communication
with its end users concerning software problems, defects and potential
defects. The provider of Level 1 support will use reasonable efforts to
accomplish problem determination on the appropriate hardware and software
platform when problems which have occurred are reported, to the extent
such problem determination is possible.
Level 2 Support shall mean that level of support whereby the supporting
party (NORTEL) undertakes reasonable efforts to re-create and identify
the errors and defects reported to it by its customers and to document
such problems to the provider of Level 3 Support with failure analysis
data and test case that will enable the Level 3 Support provider to
re-create the reported defect on the software and hardware platform on
which the product is supported by the party providing Level 3 Support.
Level 2 Support will also identify instances where customers seek
technical advice and assistance. In addition, the Level 2 Support
provider will search the problem database for known problems and provide
existing corrections to its customers. The problem database will be
made available to NORTEL upon execution of this Agreement.
Level 3 Support shall mean the level of support whereby the supporting
party (SHIVA) undertakes reasonable efforts to correct errors and defects
in the PRODUCTS including without limitation all hardware, software and
firmware included in such PRODUCTS and tests and delivers validated fixes
in response to requests from the provider of Level 2 Support where Level
2 Support has exercised reasonable efforts to re-crate and identify the
errors and defects reported to it. Level 3 Support includes updating
the problem database to identify corrections to known problems. Level 3
Support shall also provide technical guidance to Level 2 Support as
appropriate to assist Level 2 Support in resolving technical issues for
their customers.
Level 4 Support shall mean that level of support whereby the supporting
party (SHIVA) undertakes reasonable efforts to correct errors and defects
in the PRODUCTS including without limitation all hardware, software and
firmware included in such PRODUCTS and tests and delivers validated fixes.
Level 4 support requested will only be accepted from SHIVA Bedford, MA
Level 3 support personnel, once reasonable efforts have been exercised
to re-create and identify the errors and defects reported to it. This
support is limited to errors and defects in such PRODUCTS and feature
enhancements. Feature enhancements are defined as existing features
(which shall include the Merit Radius Server software as described below
and all features previously committed to Siris in ShivOS 5.4.3) that
require adaptation to comply with new specifications. Prior to any such
feature enhancement work being performed by Level 4 support personnel,
written acceptance/permission must be provided from the SHIVA NORTEL
Account Manager (currently Julian Welch) to the Level 4 support personnel,
which acceptance/permission shall not be unreasonably withheld. To the
extent that such instances cannot be resolved by Level 3 Support, Level 4
Support shall also provide technical guidance to Level 2 Support as
appropriate to assist Level 2 Support in resolving technical issues
for their customers.
The parties agree to meet during the first week of each quarter, to
determine support objectives for the quarter and subsequent quarters and
to review services provided during prior quarter(s) to ensure that service
objectives are being met.
Any additional professional development or support services or performance
of special projects that NORTEL requires beyond the Level 3 and Level 4
support described above may be obtained at a rate of $2,500 per day plus
travel, living and materials for such projects. Such additional professional
services will be provided upon SHIVA's receipt and acceptance of NORTEL's
purchase order authorizing additional services, which acceptance shall not
be unreasonably withheld.
In addition to the support and professional services described above, SHIVA
agrees that it has accepted NORTEL's previous purchase order for the Merit
Radius Server software development effort. SHIVA further agrees, within
thirty (30) days after execution of this Agreement, to provide NORTEL with
a master copy of the software which will allow NORTEL's current installed
base and inventory of Rapport 8s and 112s to be converted to the latest
standard production release of ShivOS, which is ShivOS 5.4.2, provided at
no additional charge or license fee payable to SHIVA. NORTEL shall identify
a list of current NORTEL customers of Rapport 8s and 112s that will be
converted and will provide this list to SHIVA prior to SHIVA's delivery of
such software. The software upgrade of NORTEL's Rapport 8 and Rapport 112
installed base is limited to those NORTEL customers whose names appear on
the list. The upgrade materials provided by SHIVA are limited to the
software master only. All other materials that may be required for customer
upgrade are to be supplied by NORTEL, at NORTEL's expense.
SHIVA further agrees to provide NORTEL with a copy of the software which
will allow Siris, a NORTEL customer, to be converted to the next standard
production release of ShivOS which incorporates the features committed to
Siris in Release 5.4.3, at no additional charge or license fee payable to
SHIVA, other than the charge described in the previously accepted Siris
purchase order.
b. Section 10 of the 2/27/98 Agreement is deleted in its entirety. Sections
5.1, 5.2, 5.3, 5.4, 9.4, 12, and Exhibits D and G of the Marketing and
Distribution Agreement dated 03/21/97 are deleted in their entirety.
This Amendment may be executed by the parties hereto on separate counter-
parts, each of which shall constitute an original, but all of which when
taken together shall constitute but one and the same instrument. Any
signature of this Agreement by a party which is communicated by that party
to the other party through facsimile shall constitute execution of this
Agreement by the communicating party.
Except as set forth in this Amendment and other properly executed prior
amendments and letter agreements, the above-referenced Agreements between
SHIVA and NORTEL shall remain unchanged and enforceable in accordance with
its terms.
Shiva Corporation Northern Telecom Inc.
By: /s/ Robert Cirrone By: /s/ Glenn Falcao
------------------ -----------------
Robert Cirrone Glenn Falcao
Title: Chief Financial Officer Title: President, Internet and
Service Provided Networks
Date: September 28, 1998 Date:
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<SECURITIES> 39,353
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