SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
------- -------
Commission File Number 0-24918
-------
SHIVA CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2889151
------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
28 Crosby Drive, Bedford, MA 01730
(Address of principal executive offices, including Zip Code)
(781) 687-1000
(Registrant's telephone number, including area code)
-----------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Series A Junior Participating Preferred Stock, $.01 par value
(title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $280,236,069 based on
the closing price of the Common Stock on the Nasdaq Stock Market
on January 30, 1998.
The number of shares outstanding of the registrant's Common Stock
as of January 30, 1998 was 29,692,315.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrant's Proxy Statement for the Annual
Meeting of Stockholders to be held June 18, 1998 are incorporated
by reference into Part III hereof.
2. Portions of the registrant's 1997 Annual Report to
Stockholders for the fiscal year ended January 3, 1998 are
incorporated by reference into Parts I, II and IV hereof.
<PAGE>
Shiva, Shiva with design (the company logo), NetModem, NetModem/E,
NetBridge, NetSerial, TeleBridge, Hublet, LanRover, LanRover Access
Switch, AirSoft, ShivaPPP, ShivaIntegrator, ShivaPort, PowerBurst,
WebRover and EtherGate are registered trademarks of Shiva Corporation.
Shiva Connects, VantagePath, ShivOS, Tariff Management, ShivaRemote,
Shiva AccessPort, ISSAK, Remote-Centric and DIAT are trademarks
of Shiva Corporation. All other trademarks belong to their
respective companies.
<PAGE>
PART I
ITEM 1. Business
General
Shiva Corporation (the "Company") is a leader in the design,
development, manufacture and sale of hardware and software
products that enable remote connectivity to enterprise networks
from locations having access to analog or digital telephone
service or a connection to a public data network such as the
Internet. Founded in 1985 as a Massachusetts corporation, the
Company has applied its expertise in internetworking, personal
computer ("PC") software and telephony to pioneer the "remote
node" approach to remote network access. Shiva's remote access
solutions enable a remote PC to access an existing network as a
fully functional network node, thereby allowing users to access
network resources from their remote PCs as if they were directly
connected to their corporate network. Shiva servers enable users
to connect to computing resources from home, while traveling, or
as part of a branch office or multi-user worksite.
The Company offers a full line of remote access solutions,
technical training and services supporting telecommuters and
remote offices to large enterprise networks and to the ISPs and
Carriers providing remote access to the public data networks.
The enterprise-based remote access servers, such as the LanRover
Access Switch(R), LanRover(R) and ShivaIntegrator(R) product
families, enable network managers of large networks to link
telecommuters, mobile professionals and branch offices with dial-
in access to Local Area Networks ("LANs") offering either remote
node PC-to-LAN connections or LAN-to-LAN dial up connections
through both public and private telephone networks. The
Company's technology also provides LAN-based users the ability to
make dial-out connections from the desktop to the Internet or
other on-line services. Network managers can control and manage
remote user access into the enterprise-based servers with the
Shiva AccessManager security and accounting solution. Shiva
AccessManager is a Windows-based application that provides
comprehensive, centralized and cost-effective remote access
management. For the remote office and smaller branch, the
Company provides the Shiva AccessPort(TM) ISDN client router and
the NetModem(R) server, as well as ShivaRemote(TM) client
software and PowerBurst(R) remote node acceleration software for
enhanced performance. The Company also offers other
communications products, such as the ShivaPort(TM) product family
of communications servers, that permit users to connect
terminals, printers, modems and other serial devices to Ethernet
networks. The Company markets its products in domestic and
international markets through indirect distribution channels to
reach a wide range of customers.
In February 1998, the Company announced the execution of a
definitive agreement to acquire the majority of the assets of
privately-held Isolation Systems, Limited ("Isolation"), an
Ontario corporation, for approximately US$37 million in cash,
subject to closing adjustments (the "Isolation Acquisition").
Isolation is a leading developer of virtual private network
("VPN") hardware and software solutions, which have been in
production shipment since April 1997. Isolation's InfoCrypt(TM)
network gateway integrates tunneling, firewall, X.509 digital
certificate authentication, encryption and key management into a
single, high-performance solution.
Certain information contained herein, and information provided by
the Company or statements made by its employees from time to
time, may contain "forward-looking" information which involve
risks and uncertainties. The Company's actual results may vary
significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but
are not limited to, market acceptance of the Company's products,
the development of competitive products, limitations on financial
and other resources required to engage in product development
activities or to acquire or license third party technology,
factors adversely affecting the demand for, or use of, the
Company's products and other factors described herein. The
Company believes that factors affecting the ability of the
Company's products to achieve broad market acceptance include,
but are not limited to, product performance, price, ease of
adoption and displacement of existing approaches. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating
Results."
Products
Remote Access Products
The LanRover Access Switch Product Family
The LanRover Access Switch is a high-capacity remote access
concentrator that brings LanRover functionality to a cooperative
multiprocessing architecture with industry standard high-speed
buses and extensive call control capabilities. Designed to
support over one hundred sessions, it addresses the needs of
corporate enterprises, Carriers, and ISPs. The LanRover Access
Switch supports the following major remote networking
functionality including single user dial-in, dial-out for LAN
based users, and LAN-to-LAN routing for branch and home office
connectivity over T1, E1, T1/E1 PRI or 56kbps modems. In 1997,
the Company introduced the LanRover D56. The LanRover D56 can
support up to 30 analog and digital sessions at speeds of up to
64kbps over ordinary analog lines. The LanRover Access Switch
offers extensive management and accounting capabilities via Shiva
Net Manager(TM) or Shiva Net Manager for UNIX, as well as support
for a range of security options including centralized security
and third party security such as TACACS and TACACS+, RADIUS,
Security Dynamics, Vasco and Axent Technologies.
The LanRover Remote Access Server Product Family
Shiva's LanRover family of high-performance, multi-platform,
multi-protocol remote access servers are designed to meet the
needs of both network managers and end-users in corporate
environments. They provide remote node dial-in access to the
full range of network services, including electronic mail and
file transfer, as well as providing access to databases and
mainframe applications. LanRover servers support DOS, Windows,
Macintosh, UNIX, and terminal users and IPX, TCP/IP, AppleTalk,
NetBEUI, and 802.2/LLC protocols. The LanRover family enables
shared dial-out to on-line information services and send-fax
support for LAN-attached PCs, in addition to LAN-to-LAN services
over analog or digital dial-up lines. For network managers, the
LanRover family offers centralized network management from a LAN-
based Windows PC or Macintosh; in-band and out-of-band management
from IPX, TCP/IP and AppleTalk and SNMP support as well as full
security features.
In 1997, the Company introduced the LanRover XP/16. The LanRover
XP/16 is a fixed-port, higher density (16-port) V.34 modem
configuration of the LanRover/E and LanRover/E PLUS products.
The LanRover/E and LanRover/E PLUS products are available for
Ethernet or Token Ring environments in 4 or 8 asynchronous serial
port configurations. The LanRover/PLUS, also available for
Ethernet or Token Ring networks, is a modular remote access
server that supports up to eight V.34 modems, ISDN BRI, or high
speed asynchronous serial modules (or any combination of these
three).
The Shiva AccessPort Product Family
The Shiva AccessPort is an ISDN client router that connects
telecommuters and small office users to the corporate LAN and the
Internet using ISDN. Shiva AccessPort has one basic rate ISDN
interface and support for multi-link PPP which allows for
aggregation of the two ISDN b-channels. In addition, two analog
ports are available for users to integrate phone and fax
capabilities over the ISDN phone line. Shiva AccessPort/D is
available without the analog ports for data only applications.
As a complement to Shiva's LanRover and LanRover Access Switch
central site servers, the Shiva AccessPort includes Wizard
Installation software for ease of installation and use, as well
as Monitor software to monitor ISDN usage statistics and call
activity. Tariff Management technologies are employed in the
Shiva AccessPort to reduce the phone charges associated with
remote access while multiple levels of security ensure that data
is kept private.
The ShivaIntegrator Product Family
ShivaIntegrator is a family of ISDN remote access systems that
combine on-demand ISDN networking with a host of Tariff
Management features designed to save on phone charges. The
ShivaIntegrator 150 is a branch office router with one serial
line interface that supports frame relay and one Basic Rate ISDN
interface for connection to the central site or other branch
offices. The ShivaIntegrator 500 is a central site concentrator
which supports Primary Rate ISDN and provides up to 90
simultaneous connections to remote locations and V.35 interface
for leased line connections.
Shiva AccessManager
The Shiva AccessManager is a standards-based security and
accounting solution that allows large enterprises, Internet
Service Providers, and Carriers to control and manage remote user
access. The Shiva AccessManager is a protocol-independent
authentication, authorization and accounting solution for Windows
NT, Windows 95 and Windows 3.11 environments. The Shiva
AccessManager can act as a proxy client for multiple user list
servers including various UNIX platforms, Microsoft NT Domains,
Novell Netware Bindery and Novell Network Directory Services. It
is interoperable with RADIUS/TACACS compliant network access
servers and a wide variety of third party network security
servers such as Security Dynamics, Vasco and Axent Technologies.
It provides a standards-based (ODBC) database interface that
allows detailed accounting data to be stored and manipulated to
generate user specific billing/charge-back reports. These
reports can provide organizations with detailed cost analyses
that can be supported by graphical management statistics and
allow network and business managers to view utilization and
trends.
In fiscal 1997, 1996 and 1995, revenues from remote access
products were approximately $130,413,000, $174,084,000 and
$83,924,000, respectively, or 90%, 87% and 71% of revenues,
respectively.
Other Communications Products
The Company also develops and sells other communications products
including the ShivaPort product family and Appletalk products.
ShivaPort is a high-performance multi-protocol communications
server for Ethernet networks, available in 8, 16, or 32 port
configurations. ShivaPort products permit users to connect large
numbers of terminals, printers, modems and other serial devices
to a LAN. ShivaPort provides simple terminal access, security,
printing and network management features. The Appletalk products
are designed to meet a variety of LAN communications needs of
Macintosh users.
In fiscal 1997, 1996 and 1995, revenues from communications
products were approximately $6,805,000, $16,847,000 and
$24,061,000, respectively, or 5%, 8% and 20% of revenues,
respectively.
Foreign and Domestic Operations and Export Sales
The required information may be found under Note 12 of the Notes
to Consolidated Financial Statements and under the section
captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations", contained in the Company's
Annual Report to Stockholders for the fiscal year ending January
3, 1998 (the "1997 Annual Report to Stockholders"), portions of
which are filed as an exhibit hereto, and is incorporated herein
by reference.
Markets and Customers
During 1997, the Company continued to see a split in the use of
remote access in private and public networks. The private
networks market, consisting of corporations and governmental
agencies, and the public market, consisting of Carriers and
Internet Service Providers ("ISP's"), have different requirements
for the type of products and services required, and each is
characterized by different competitive environments. The private
sector is characterized by the need for greater breadth of
protocol and operating systems support, greater network
management resources and more intensive hourly usage over a
concentrated period of time than the public sector. Shiva's
major competition in this segment are Cisco, 3Com and Bay
Networks. By contrast, the public sector is characterized by
higher call volumes, continuous operation and limited network
management staff thereby requiring more support from Shiva. The
major competitors in this segment are Ascend, 3Com and Cisco.
Competition
Competitive factors in both the private and public segment of the
remote access market include breadth of product features, product
quality and functionality, marketing and sales resources and
customer service and support. In 1997, price became a more
significant competitive factor for the public network access
market and at the high-end of the private network access arena.
Many of the Company's current and potential competitors have
greater financial, marketing, technical and other resources than
the Company. There can be no assurance that the Company will be
able to compete successfully with current or new competitors. In
addition, since the lower end segments of both markets have
numerous competitors, the Company's market share may decline in
the event any one or several of its competitors expands its
existing market share. Increased competition could have a
material adverse effect on the Company's business.
Sales and Marketing
The Company markets its products through numerous indirect
distribution channels worldwide, including distributors, value-
added resellers and OEM strategic partners. The Company actively
supports its indirect channel marketing partners with its own
sales and marketing organization whose role is to stimulate
primary demand and ensure adequate training and sales support.
The Company conducts its North American sales and marketing
activities from its principal office in Bedford, Massachusetts,
as well as from four other North American sales offices. In
international markets, the Company markets its products through
its Wokingham, United Kingdom office as well as field sales
offices in France, Germany, Sweden, South Africa, Singapore,
Australia, Japan, Hong Kong, Brazil, Colombia, Canada and the
Netherlands and through distributors and resellers in many
European countries, South America, Asia, Africa and the Pacific
Rim.
Since 1995, the Company has been party to a strategic
relationship with Northern Telecom Limited ("Nortel"), a major
telecommunications equipment company. The relationship has
evolved over time with the most current version refocusing on an
OEM-type model with development services and product purchase
commitments by Nortel for Nortel Rapport branded versions of
certain of the Company's products. Rapport products provide
solutions for ISPs and other telecommunications companies and
include the LanRover Access Switch product family, the LanRover
Remote Access Server product family and the Shiva AccessPort
product family. In addition the Rapport line includes a product
currently in development by the Company, the VantagePath Remote
Access Concentrator, which Nortel has announced plans to market
as the Rapport Carrier Access Switch. In fiscal 1997 and 1996,
sales to Nortel accounted for 16% and 14%, respectively, of the
Company's total revenues.
Under the terms of a new amendment with Nortel signed on February
27, 1998, and effective until March 20, 2000, Nortel will
purchase minimum quarterly amounts of the Company's products up
to a minimum aggregate amount that will be $40,000,000 or
$55,000,000, depending upon the occurrence of certain contract
conditions. There can be no assurance that Nortel will purchase
in excess of the minimum amount or that the Company will be able
to fulfill such orders from Nortel and thus recognize the revenue
associated with such orders in a linear fashion over the
contract term. Non-linear order patterns from Nortel could cause
material fluctuations in the Company's quarterly financial
results. In addition, the Company will receive professional
services revenue during the first two quarters of fiscal 1998
related to the development of carrier class remote access
technology. There is no obligation on the part of Nortel to
contract for additional such development or for the Company to
provide such services beyond the second quarter of fiscal 1998.
The Company provides most of its distributors and resellers with
product return rights for stock balancing or product evaluation.
The Company also provides most of its distributors and resellers
with price protection rights. Stock balancing rights permit
distributors to return products to the Company for credit against
future product purchases, within specified limits. Product
evaluation rights, available in some markets, permit end-users to
return products to the Company, through the distributor or
reseller from whom such products were purchased, within thirty
days of purchase if such end-user is not fully satisfied. Price
protection rights require that the Company grant retroactive
price adjustments for inventories of the Company's products held
by distributors or resellers if the Company lowers its prices for
such products. Although the Company believes that it has
adequate reserves to cover product returns and price reductions,
there can be no assurance that the Company will not experience
significant returns or price protection adjustments in the future
or that such reserves will be adequate to cover such returns and
price reductions.
Customer Service and Support
The Company believes that a high level of user support is
essential to achieving customer satisfaction. The majority of
the Company's service and support activities historically have
been related to software and network configuration issues, which
are provided by telephone and on-line access to and from the
Company's principal offices. With the market acceptance of the
LanRover Access Switch, installation, on-site maintenance and
deployment services have become increasingly important to ensure
successful implementations of the product at customer sites. The
Company also provides technical support and training to channel
and strategic partners. The Company provides a one-year warranty
on its hardware products and a ninety day software media
warranty. After the expiration of the hardware warranty period,
the Company provides hardware repair services on a fee basis.
Software upgrades are also available for purchase on a fee basis.
Both hardware repairs and software upgrades may be purchased as
part of a comprehensive support program as well. Comprehensive
support programs provide toll-free telephone support lines,
overnight exchange of products, on-site hardware maintenance, and
free or discounted hardware and software revisions and upgrades.
In addition, the Company provides on-line services that are used
to distribute technical advice and software updates. On-line
services include a fax back service and an electronic mail access
service, as well as ISSAK(TM), which is the Company's technical
knowledge base.
Research and Development
The Company's research and development efforts are focused on
developing new products and core technologies for the remote
access market and further enhancing the functionality,
reliability, performance and flexibility of existing products.
Extensive input concerning product development is obtained from
users, both directly and through indirect marketing channel
partners. The Company also receives input from active
participation in industry groups responsible for establishing
technical standards.
In 1997, the Company completed development of the LanRover D56, a
30-port server supporting speeds of up to 64kbps, the LanRover
XP/16, a 16-port version of the Company's LanRover product, and a
56kbps module for the LanRover Access Switch product family. The
Company incorporated frame relay support into its ShivOs
operating system servicing Shiva servers, and VPN enhancements,
including L2F. In addition, the Company continued to work with
Nortel in the development of the VantagePath Access
Concentrator/Rapport Carrier Access Switch, a 256-port Carrier
Class product, however development of this product has not been
completed at this time. The Company is also focusing its
development efforts on additional remote access and telecommuter
needs and providing access to switched digital services. Certain
of these emerging digital services are already supported by the
Company's current product design.
With the Isolation Acquisition, the Company will augment its
technology portfolio with additional virtual private network
("VPN") capabilities. Isolation's InfoCrypt network gateway
integrates tunneling, firewall, X.509 digital certificate
authentication, encryption and key management.
The Company's success depends upon its ability to enhance and
expand its existing products, and to develop new products in a
timely manner that will achieve market acceptance. To meet the
challenges of rapidly changing technology, the Company has
invested and expects to continue to invest heavily in the
development of new products and core technologies; however, there
can be no assurance that the Company will be able to respond
effectively to technological changes or new industry standards or
developments. The Company's business would be adversely affected
if the Company were to incur significant delays or were to be
unsuccessful in developing new products or enhancements, or if
any such products or enhancements did not gain market acceptance.
In fiscal 1997, 1996 and 1995, the Company's research and
development expenditures were approximately $25,545,000,
$23,186,000 and $14,787,000, respectively, or 18%, 12% and 12% of
revenues, respectively. Customer-funded development fees
reimbursed to the Company, which are reflected as an offset to
research and development expenses, were approximately $6,664,000,
$1,718,000 and $955,000, respectively for fiscal 1997, 1996 and
1995.
Manufacturing
The Company uses three principal subcontractors, Benchmark
Electronics - Hudson Division, Solectron Scotland Limited and
Avex Electronics, for the manufacture of substantially all of its
products. The Company's internal manufacturing operation, which
iss, located in Bedford, Massachusetts, consists primarily of
material planning, procurement, final assembly and test, quality
assurance and distribution. The Company's products undergo
automated testing, comprehensive quality audits, functional
testing, and environmental stress screening to ensure quality and
reliability.
The Company's manufacturing strategy is to optimize cost,
quality, delivery and flexibility to the Company's customer base
through a leveraged external manufacturing model. This strategy
allows capacity increases while avoiding the capital investment
required to establish and maintain additional manufacturing
facilities. The Company believes that this strategy allows it to
focus its resources on product design, quality assurance,
marketing, and customer support. Although the Company believes
that new suppliers could be evaluated and integrated in a
relatively short period of time, this strategy could lead to
short-term product supply interruptions and could have an adverse
effect on the Company.
Materials used by the Company in its manufacturing processes
include semiconductors, such as microprocessors, memory chips and
other integrated circuits, printed circuit boards, cable
assemblies and pre-formed metal/plastic enclosures. The chipsets
used in certain of the Company's Token Ring connectivity products
and modem products are currently available only from IBM and
Rockwell International, respectively. The Company also sources
certain microprocessors from Motorola. To date, the Company has
not experienced significant delays in the receipt of key
components. The inability to obtain a sufficient supply of key
components as required, or to develop alternative sources if and
as required in the future, could result in delays or reductions
in product shipments which, in turn, could have a material
adverse effect on the Company's results of operations.
Intellectual Property
Although the Company believes that its continued success will
depend primarily on its continuing innovation, sales, marketing
and technical expertise, product support and customer relations,
the Company believes it also needs to protect the proprietary
technology contained in its products. The Company relies primarily
on a combination of patent, copyright, trademark, trade secret
laws and contractual provisions to establish and protect proprietary
rights in its products. The Company has applications pending for
six United States patents and owns one United States patent relating
to remote user network access that expires in 2014. The Company
typically enters into confidentiality and/or license agreements with
its employees, strategic technology partners, indirect channel
marketing partners, customers and suppliers and limits access to and
distribution of its proprietary information.
There can be no assurance that these protections will be adequate
to deter misappropriation of the Company's technologies or
independent third-party development of similar technologies. In
addition, the laws of some countries do not protect the Company's
proprietary rights to the same extent as do the laws of the
United States. The Company is also subject to the risk of
litigation alleging infringement of third-party intellectual
property rights. There can be no assurance that third parties
will not assert infringement claims against the Company with
respect to current or future products. Any such assertion could
require the Company to incur significant legal costs, pay
damages, develop non-infringing technology and acquire licenses
to the technology that is the subject of asserted infringement
resulting in product delays or increased costs.
Employees
At January 3, 1998, the Company employed 610 individuals on a
full-time basis. Of these, 180 were involved in engineering, 290
in sales, marketing and customer support, 49 in manufacturing and
91 in administration, finance and strategic planning. The
Company has no collective bargaining agreement with its
employees. The Company considers its relations with its
employees to be good and has not experienced any interruption of
operations as a result of labor disagreements.
Competition for technical personnel in the Company's industry is
intense. The Company believes that its future success will
depend on its continued ability to attract and retain qualified
personnel.
Executive Officers
The executive officers of the Company as of March 14, 1998, are
as follows:
<TABLE>
<CAPTION>
Name Age Position
--------------------- ---- ----------------------------------
<S> <C> <C>
James L. Zucco, Jr. 47 President, Chief Executive Officer
and Chairman of the Board of
Directors
James F. Finucane 49 Senior Vice President, Research and
Development
Michael J. Duffy 40 Senior Vice President, Worldwide
Sales and Marketing
Robert P. Cirrone 51 Senior Vice President, Finance and
Administration, and Chief Financial
Officer
</TABLE>
Mr. Zucco has served as a director of the Company since May 1997
and as Chairman of the Board since February 1998. Mr. Zucco was
appointed Chief Operating Officer and President of the Company in
April 1997, and was appointed Chief Executive Officer in October
1997. Prior to joining the Company, Mr. Zucco was President,
Network Communication Software at Lucent Technologies from
February 1997 to April 1997 and was previously Vice President and
General Manager, Network Systems North America Carrier Business
since February 1996. From January 1995 to February 1996 Mr.
Zucco served as Vice President and General Manager of AT&T
Advanced Network Applications at AT&T Business Communications
Services. Mr . Zucco was Chief Information and Chief Technology
Officer at AT&T Business Communications Services from November
1993 to January 1995. Mr. Zucco served as Senior Vice President
at MCI Communications Corporation from February 1991 to November
1993.
Mr. Finucane joined the Company as Senior Vice President,
Research and Development in July 1997. Prior to joining the
Company, Mr. Finucane was Vice President of Internet Services
Division at AT&T Labs from December 1995 to July 1997. From
September 1995 to December 1995, Mr. Finucane served as Vice
President of Computer Science Research in the Network Computing
Division of Bell Laboratories. Mr. Finucane was Director of
Product and Service Architecture at AT&T Business Communications
Services from January 1994 to August 1995. From May 1985 to
December 1993, Mr. Finucane was Senior Manager and Advisory
Engineer at MCI Communications Corporation.
Mr. Duffy joined the Company as Senior Vice President, Worldwide
Sales in August 1997. Prior to joining the Company, Mr. Duffy
was Vice President, Sales and Marketing, at GTE Internetworking
Services (BBN) from February 1996 to September 1997. From May
1995 to February 1996, Mr. Duffy was Vice President, North
American Operations, at Intersolv, Inc., a provider of
open/client server software solutions. Mr. Duffy was Executive
Vice President at Software 2000, Inc. from March 1993 to January
1995. Mr. Duffy also served as Software 2000's Vice President,
Sales and Marketing, from January 1990 to March 1993.
Mr. Cirrone joined the Company as Senior Vice President, Finance
and Administration, and Chief Financial Officer in December 1997.
Prior to joining the Company, Mr. Cirrone was Vice President,
Finance, Internal Audit at Sun Microsystems, Inc., from August
1997 to December 1997. From December 1996 to July 1997, Mr.
Cirrone was Vice President, Operations and Chief Quality Officer
at SunExpress Inc., a wholly owned subsidiary of Sun
Microsystems, Inc. Mr. Cirrone was also Sun Express's Director
of Finance, Planning and Administration, from November 1991 to
November 1996.
Executive officers of the Company are elected by the Board of
Directors and serve until their successors are duly elected and
qualified. There are no family relationships among any of the
executive officers of the Company.
ITEM 2. Properties
The Company's principal offices are located in Bedford,
Massachusetts in a facility of approximately 117,139 square feet
under a lease that expires in February 2006. The Company also
leases approximately 51,000 square feet in Bedford for its
manufacturing and sales training operations under a lease
which expires in September 2003. The Company's primary
European operations are located in a facility it owns consisting
of approximately 35,000 square feet in Edinburgh, United Kingdom.
The Company also leases sales offices in New York, Washington,
Illinois, Georgia, California, Canada, Colombia, France, Italy,
Australia, South Africa, the United Kingdom, Germany, Japan, Hong
Kong, the Netherlands, Sweden, and Singapore. The Company
believes that its facilities are well maintained and in good
operating condition, and are adequate to meet its anticipated
level of operations through 1998, at minimum.
ITEM 3. Legal Proceedings
Certain information required by this item may be found in the
section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Legal
Proceedings" appearing in the 1997 Annual Report to Stockholders,
and is incorporated herein by reference.
ITEM 4. Submission Of Matters To Vote Of Security Holders
None
PART II
ITEM 5. Market For The Company's Common Equity And Related
Stockholder Matters
Certain information required by this item may be found in the
section captioned "Quarterly Financial Information" appearing in
the 1997 Annual Report to Stockholders, and is incorporated
herein by reference. The Company sold no unregistered securities
in the fourth quarter of fiscal 1997.
ITEM 6. Selected Financial Data
Information required by this item may be found in the section
captioned "Shiva Corporation Financial Highlights" appearing in
the 1997 Annual Report to Stockholders, and is incorporated
herein by reference.
ITEM 7. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
Information required by this item may be found in the 1997 Annual
Report to Stockholders in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and is incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable.
ITEM 8. Financial Statements And Supplementary Data
Information with respect to this item may be found in the 1997
Annual Report to Stockholders, and is incorporated herein by
reference and indexed by reference under Item 14(a)(1) below.
ITEM 9. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure
None.
PART III
ITEM 10. Directors And Executive Officers Of The Company
Information with respect to Directors of the Company may be found
in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held June 18, 1998 (the "1998 Proxy
Statement") under the caption "Election of Directors" and is
incorporated herein by reference. Information with respect to
Executive Officers of the Company may be found under the section
captioned "Executive Officers of the Company" in Part I of this
report. Information relating to delinquent filings of Forms 3, 4
or 5 by an executive officer or director or beneficial owner of
more than 10% of the shares of common stock of the Company may be
found under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's 1998 Proxy Statement and
is incorporated herein by reference. The 1998 Proxy Statement
will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year
ended January 3, 1998.
ITEM 11. Executive Compensation
Information required by this item may be found under the captions
"Compensation of Directors" and "Executive Compensation" in the
Company's 1998 Proxy Statement and is incorporated herein by
reference.
ITEM 12. Security Ownership Of Certain Beneficial Owners And
Management
Information required by this item may be found under the caption
"Security Ownership of Certain Beneficial Owners and Management"
in the Company's 1998 Proxy Statement and is incorporated herein
by reference.
ITEM 13. Certain Relationships And Related Transactions
Information required by this item may be found under the caption
"Executive Compensation" in the Company's 1998 Proxy Statement
and is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules And Reports
On Form 8-K
(a) (1) Consolidated Financial Statements.
----------------------------------
The following consolidated financial statements and the Report of
Independent Accountants are included in the Company's 1997 Annual
Report to Stockholders and are incorporated herein by reference.
Report of Independent Accountants for the years ended January
3, 1998, December 28, 1996 and December 30, 1995
Consolidated Balance Sheet as of January 3, 1998 and December
28, 1996
Consolidated Statement of Operations for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995
Consolidated Statement of Changes in Stockholders Equity for
the years ended January 3, 1998, December 28, 1996 and
December 30, 1995
Consolidated Statement of Cash Flows for the years ended
January 3, 1998, December 28, 1996 and December 30, 1995
Notes to Consolidated Financial Statements
The Company's 1997 Annual Report to Stockholders is not to be
deemed filed as part of this report except for those parts
thereof specifically incorporated herein by reference.
(a) (2) Financial Statement Schedules.
------------------------------
Page
Schedule I Report of Independent
Accountants on Financial
Statement Schedule S-1
Schedule II Valuation and Qualifying
Accounts S-2
Schedules not listed above have been omitted because they are not
applicable, not required, or the information required to be set
forth therein is included in the consolidated financial
statements or the notes thereto.
(a) (3) List of Exhibits.
---------------- The following exhibits are
filed as part of, or incorporated by reference into, this report
on Form 10-K:
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
<S> <C>
3.1 Restated Articles of Organization of the Company. (1)(5)
3.2 Restated By-Laws of the Company. (1)
4.1 Specimen certificate representing the Common Stock. (8)
4.2 Rights Agreement dated as of September 29, 1995, between
the Company and American Stock Transfer & Trust Company,
which includes as Exhibit A the Form of Certificate of
Vote of Directors Establishing a Series of a Class of
Stock, as Exhibit B the Form of Rights Certificate, and
as Exhibit C the Summary Rights to Purchase Preferred
Stock. (4)
10.1 Registration Rights Agreement dated as of September 3,
1991 by and among the Company and the Investors named
therein, as amended by the Amendment to Registration
Rights Agreement dated as of March 29, 1993, as further
amended by the Amendment No. 2 to Registration Rights
Agreement dated as of July 28, 1993 and as further
amended by an Amendment dated June 13, 1995. (3)
10.2 Amended and Restated 1988 Stock Plan, as amended. (3)(6)
10.3 1994 Non-Employee Director Stock Option Plan. (1)(6)
10.4 1994 Employee Stock Purchase Plan. (1)(6)
10.5 1997 Stock Incentive Plan (6)
10.6 Employment Agreement dated September 15, 1994 by and
between the Company and Frank A. Ingari. (1)(6)
10.7 Incentive and Non-Qualified Stock Option Agreement dated
October 19, 1993 between the Company and Frank A.
Ingari. (1)(6)
10.8 Promissory Note dated December 22, 1997 by and between
the Company and Frank A. Ingari. (6)
10.9 Letter Agreement dated April 28, 1997 by and between
the Company and James L. Zucco, Jr., regarding offer of
employment as President and Chief Operating Officer and
compensation. (6) (9)
10.10 Promissory Note dated September 8, 1997 by and between
the Company and James L. Zucco, Jr. (6) (10)
10.11 Letter Agreement dated July 9, 1997 by and between the
Company and James F. Finucane, regarding offer of
employment and compensation as Senior Vice President,
Engineering. (6) (10)
10.12 Letter Agreement dated August 27, 1997 by and between
the Company and Michael J. Duffy, regarding offer of
employment and compensation as Senior Vice President,
Worldwide Sales. (6) (10)
10.13 Letter Agreement dated December 18, 1997 by and between
the Company and Robert P. Cirrone regarding offer of
employment and compensation as Senior Vice President,
Finance and Administration and Chief Financial Officer.
(6)
10.14 Agreement and General Release dated October 24, 1997 by
and between the Company and Jean-Pierre Boespflug. (6)
10.15 Agreement dated March 21, 1997 between the Company and
Northern Telecom Limited ("Nortel"). (2) (11)
10.16 Lease by and between Beacon Properties, L.P., Landlord
and the Company Tenant, ("Beacon Lease") dated September
5, 1995. (4)
10.17 Amendment #1 to the Beacon Lease, dated October 23, 1995
(8)
10.18 Amendment #2 to the Beacon Lease, dated January 17,1996
(8)
10.19 Lease by and between Walford Company c/o Bernard H.
Kayden, Landlord, and the Company, Tenant, ("Walford
Lease") dated May 24, 1996 (7)
11.1 Statement re: Computation of Per Share Earnings
13.1 Certain portions of the Company's 1997 Annual Report to
Stockholders that have been incorporated herein by
reference.
21.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- -------------------------
<FN>
(1) Incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 33-84884)
(2) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the first quarter 1997.
(3) Incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 33-94134)
(4) Incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 33-97216)
(5) Incorporated herein by reference to the Company's
Registration Statement on Form S-3 (File No. 333-602)
(6) Indicates a management contract or any compensatory plan or
arrangement
(7) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for second quarter 1996.
(8) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for fiscal year 1995.
(9) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the second quarter 1997
(10) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the third quarter 1997
(11) Confidential treatment granted as to certain portions.
----------------------------------------------------
</TABLE>
(b) Reports on Form 8-K: The Company filed a Current Report
on Form 8-K dated February 20, 1998 pursuant to the Item 5
thereof, reporting the Company's announcement of the execution of
a definitive agreement to acquire the majority of the assets of
privately-held Isolation Systems, Limited, an Ontario
corporation, for approximately US$37 million in cash, subject to
closing adjustments.
PAGE
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SHIVA CORPORATION
By: /s/ James L. Zucco, Jr. By: /s/ Robert P. Cirrone
------------------ ---------------------
James L. Zucco, Jr. Robert P. Cirrone
President and Chief Executive Senior Vice President,
Officer Finance and Administration,
(Principal Executive Officer) Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated:
NAME TITLE DATE
- ---- ----- ----
/s/ James L. Zucco, Jr.
- ------------------- March 25, 1998
James L. Zucco, Jr. Director
/s/ David C. Cole
- -------------------
David C. Cole Director March 25, 1998
- -------------------
L. John Doerr Director March 25, 1998
/s/ Richard J. Egan
- -------------------
Richard J. Egan Director March 25, 1998
- -------------------
Henry F. McCance Director March 25, 1998
- -------------------
Paul C. O'Brien Director March 25, 1998
/s/ David B. Yoffie
- -------------------
David B. Yoffie Director March 25, 1998
<PAGE>
Schedule I
Report of Independent Accountants on
Financial Statements Schedule
-------------------------------------
To the Stockholders and Board of Directors
of Shiva Corporation:
Our audits of the consolidated finanacial statements referred to in
our report dated January 27, 1998, except as to Note 16 which is as
of February 19, 1998, appearing in the 1997 Annual Report to
Shareholders of Shiva Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement
Schedule listed in Item 14(a) of this Form 10-K. In our opinion, the
Financial Statement Schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the
related consolidated financial statements.
PRICE WATERHOUSE LLP
Boston, Massachusedtts
January 27, 1998, except
as to Note 16 which is
as of February 19, 1998
<PAGE>
Schedule II
<TABLE>
SHIVA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ---------------------------------------------------------------------------------------------------------------------------
Balance Charged to Charged Balance
For the Period Beginning Costs and to Other at End
Ended Classification of Period Expenses Accounts Deductions of Period
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 30, 1995 Allowance for doubtful accounts and returns $ $3,963 $ 7,731 $ (22) $ (6,421) $ 5,252
December 28, 1996 Allowance for doubtful accounts and returns $ 5,252 $ 14,993 $ 80 $ (9,977) $ 10,347
January 3, 1998 Allowance for doubtful accounts and returns $ 10,347 $ 23,213 $ (94) $ (25,428) $ 8,037
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
SHIVA CORPORATION
DEFERRED TAX ASSET VALUATION ALLOWANCE
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------------------------
Balance Charged to Charged Balance
For the Period Beginning Costs and to Other at End
Ended Classification of Period Expenses Accounts Deductions of Period
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 30, 1995 Deferred tax asset valuation allowance $ 4,125 $ 730 $ 3,076 $ (1,400) $ 6,531
December 28 ,1996 Deferred tax asset valuation allowance $ 6,531 $ - $ - $ (5,673) $ 858
January 3, 1998 Deferred tax asset valuation allowance $ 858 $ - $ - $ - $ 858
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
<S> <C>
3.1 Restated Articles of Organization of the Company. (1)(5)
3.2 Restated By-Laws of the Company. (1)
4.1 Specimen certificate representing the Common Stock. (8)
4.2 Rights Agreement dated as of September 29, 1995, between
the Company and American Stock Transfer & Trust Company,
which includes as Exhibit A the Form of Certificate of
Vote of Directors Establishing a Series of a Class of
Stock, as Exhibit B the Form of Rights Certificate, and
as Exhibit C the Summary Rights to Purchase Preferred
Stock. (4)
10.1 Registration Rights Agreement dated as of September 3,
1991 by and among the Company and the Investors named
therein, as amended by the Amendment to Registration
Rights Agreement dated as of March 29, 1993, as further
amended by the Amendment No. 2 to Registration Rights
Agreement dated as of July 28, 1993 and as further
amended by an Amendment dated June 13, 1995. (3)
10.2 Amended and Restated 1988 Stock Plan, as amended. (3)(6)
10.3 1994 Non-Employee Director Stock Option Plan. (1)(6)
10.4 1994 Employee Stock Purchase Plan. (1)(6)
10.5 1997 Stock Incentive Plan (6)
10.6 Employment Agreement dated September 15, 1994 by and
between the Company and Frank A. Ingari. (1)(6)
10.7 Incentive and Non-Qualified Stock Option Agreement dated
October 19, 1993 between the Company and Frank A.
Ingari. (1)(6)
10.8 Promissory Note dated December 22, 1997 by and between
the Company and Frank A. Ingari. (6)
10.9 Letter Agreement dated April 28, 1997 by and between
the Company and James L. Zucco, Jr., regarding offer of
employment as President and Chief Operating Officer and
compensation. (6) (9)
10.10 Promissory Note dated September 8, 1997 by and between
the Company and James L. Zucco, Jr. (6) (10)
10.11 Letter Agreement dated July 9, 1997 by and between the
Company and James F. Finucane, regarding offer of
employment and compensation as Senior Vice President,
Engineering. (6) (10)
10.12 Letter Agreement dated August 27, 1997 by and between
the Company and Michael J. Duffy, regarding offer of
employment and compensation as Senior Vice President,
Worldwide Sales. (6) (10)
10.13 Letter Agreement dated December 18, 1997 by and between
the Company and Robert P. Cirrone regarding offer of
employment and compensation as Senior Vice President,
Finance and Administration and Chief Financial Officer.
(6)
10.14 Agreement and General Release dated October 24, 1997 by
and between the Company and Jean-Pierre Boespflug. (6)
10.15 Agreement dated March 21, 1997 between the Company and
Northern Telecom Limited ("Nortel"). (2) (11)
10.16 Lease by and between Beacon Properties, L.P., Landlord
and the Company Tenant, ("Beacon Lease") dated September
5, 1995. (4)
10.17 Amendment #1 to the Beacon Lease, dated October 23, 1995
(8)
10.18 Amendment #2 to the Beacon Lease, dated January 17, 1996
(8)
10.19 Lease by and between Walford Company c/o Bernard H.
Kayden, Landlord, and the Company, Tenant, ("Walford
Lease") dated May 24, 1996 (7)
11.1 Statement re: Computation of Per Share Earnings
13.1 Certain portions of the Company's 1997 Annual Report to
Stockholders that have been incorporated herein by
reference.
21.1 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
- -------------------------
<FN>
(1) Incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 33-84884)
(2) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the first quarter 1997.
(3) Incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 33-94134)
(4) Incorporated herein by reference to the Company's
Registration Statement on Form S-1 (File No. 33-97216)
(5) Incorporated herein by reference to the Company's
Registration Statement on Form S-3 (File No. 333-602)
(6) Indicates a management contract or any compensatory plan or
arrangement
(7) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for second quarter 1996.
(8) Incorporated herein by reference to the Company's Annual
Report on Form 10-K for fiscal year 1995.
(9) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the second quarter 1997
(10) Incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the third quarter 1997
(11) Confidential treatment granted as to certain portions.
----------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.5
SHIVA CORPORATION
1997 STOCK INCENTIVE PLAN
--------------------------
1. Purpose
The purpose of this 1997 Stock Incentive Plan (the "Plan")
of Shiva Corporation, a Massachusetts corporation (the
"Company"), is to advance the interests of the Company's
stockholders by enhancing the Company's ability to attract,
retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons
with equity ownership opportunities and performance-based
incentives and thereby better aligning the interests of such
persons with those of the Company's stockholders. Except where
the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporations of Shiva
Corporation as defined in Section 424(f) of the Internal Revenue
Code of 1986, as amended, and any regulations promulgated
thereunder (the "Code") (a "Subsidiary").
2. Eligibility
All of the Company's employees, officers, directors,
consultants and advisors are eligible to be granted options to
purchase Common Stock (each an "Option"), Option under the Plan.
Any person who has been granted an Option under the Plan shall be
deemed a "Participant".
3. Administration, Delegation
(a) Administration by Board of Directors. The Plan will
be administered by the Board of Directors of the Company (the
"Board"). The Board shall have authority to grant Options and to
adopt, amend and repeal such administrative rules, guidelines and
practices relating to the Plan as it shall deem advisable from
time to time, to interpret and correct the provisions of the Plan
and any Option. No member of the Board shall be liable for any
action or determination relating to the Plan made in good faith.
All decisions by the Board shall be final and binding on all
persons having or claiming any interest in the Plan or in any
Option.
(b) Delegation to Executive Officers. To the extent
permitted by applicable law, the Board may delegate to one or more
executive officers of the Company the power to make Options and
exercise such other powers under the Plan as the Board may determine,
provided that the Board shall fix the maximum number of shares
subject to Options to be made by such executive officers and a
maximum number of shares for any one Participant.
(c) Appointment of Committees. To the extent permitted
by applicable law, the Board may delegate any or all of its
powers under the Plan to one or more committees or subcommittees,
each consisting of not less than two members of the Board (a
"Committee"). The Board shall appoint one such Committee, each
member of which shall be an "outside director" within the meaning
of Section 162(m) of the Code and a "non-employee director" as
defined in Rule 16b-3 promulgated under the Securities Exchange
Act of 1934. All references to the Board in the Plan shall mean
a Committee or the Board or the Executive Officer referred to in
Section 4(b) to the extent of such delegation.
4. Stock Available for Options
(a) Number of Shares. Subject to adjustment under
Section 4(c) below, Options may be made under the Plan for up to
one million, four hundred thousand (1,400,000) shares of the
common stock, $.01 par value per share, of the Company (the
"Common Stock"). If any Option expires or is terminated,
surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not
being issued, the unused Common Stock covered by such Option
shall again be available for the grant of Options under the Plan,
subject, however, in the case of Incentive Stock Options (as
defined hereinafter), to any limitation required under the Code.
Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under
Section 4 (c) the maximum number of shares with respect to which
an Option may be granted to any Participant under the Plan shall
not exceed five hundred thousand (500,000) shares per calendar
year, or in the case of an initial Option made in connection with
the employment of a new employee, one million (1,000,000) shares
in the initial calendar year of employment. The per-Participant
limit described in this Section 4(b) shall be construed and
applied consistent with Section 162(m) of the Code.
(c) Adjustment to Common Stock. In the event that the
Board, in its sole discretion, determines that any stock
dividend, extraordinary cash dividend, recapitalization,
reorganization, split-up, spin-off or other similar transaction
affects the Common Stock in a manner that requires an adjustment
in order to preserve the benefits or potential benefits intended
to be made available under the Plan, then the Board may equitably
adjust any or all of (i) the total number and kind of shares
issuable under the Plan, (ii) the number and kind of shares
subject to Options then outstanding, and the exercise, conversion
price or other terms with respect to any outstanding Option. The
number of shares resulting from any such adjustment shall always
be a whole number.
5. Stock Options
(a) General. Subject to the provisions of the Plan, the
Board may grant options to purchase Common Stock (each an
"Option") and determine the number of shares of Common Stock to
be covered by each Option, the exercise price of each Option and
the conditions and limitations applicable to the exercise of each
Option, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
An Option which is not intended to be an Incentive Stock Option
(as defined hereinafter) shall be designated a "Nonstatutory
Stock Option".
(b) Incentive Stock Options. An Option that the Board
intends to be an "incentive stock option" as defined in Section
422 of the Code (an "Incentive Stock Option") shall only be
granted to employees of the Company and shall be subject to and
shall be construed consistent with the requirements of Section
422 of the Code.
(c) Exercise Price. The Board shall establish the
exercise price at the time each Option is granted and specify it
in the applicable option agreement except that Options shall not
be granted with an exercise price that is less than the fair
market value of the Company's Common Stock at the date of grant.
(d) Duration of Options. Each Option shall be
exercisable at such times and subject to such terms and
conditions as the Board may specify in the applicable option
agreement.
(e) Exercise of Option. Options may be exercised only
by delivery to the Company of a written notice of exercise signed
by the proper person together with payment in full as specified
in Section 5(f) for the number of shares for which the Option is
exercised.
(f) Payment Upon Exercise. Common Stock purchased upon
the exercise of an Option granted under the Plan shall be paid
for as follows:
(1) in cash or by check, payable to the order of
the Company;
(2) except as the Board may otherwise determine or
provide in an Option, delivery of an irrevocable and
unconditional undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price, or delivery
by the Participant to the Company of a copy of irrevocable and
unconditional instructions to a broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price; or
(3) any combination of the above permitted forms of
payment.
6. General Provisions Applicable to Options
(a) Transferability of Options. Except as the Board may
otherwise determine or provide in an Option, Options shall not be
sold, assigned, transferred, pledged or otherwise encumbered by
the person to whom they are granted, either voluntarily or by
operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to Participant,
to the extent relevant in the context, shall include references
to authorized transferees.
(b) Documentation. Each Option under the Plan shall be
evidenced by a written instrument in such form as the board shall
determine. Each option may contain terms and conditions in
addition to those set forth in the plan.
(c) Board Discretion. The terms of each type of Option
need not be identical, and the Board need not treat Participants
uniformly.
(d) Termination of Status. The Board shall determine
the effect on an Option of the disability, death, retirement,
authorized leave of absence or other change in the employment or
other status of a Participant and the extent to which, and the
period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary
may exercise rights under the Option.
(e) Mergers, Etc.
(1) Consequences of Mergers, etc. Upon the
occurrence of an Acquisition Event (as defined below), the Board
shall either (i) if there is a surviving or acquiring
corporation, arrange, subject to consummation of the Acquisition
Event, to have that corporation or an affiliate of that
corporation grant to Participants replacement Options (or assume
the Options of the Company), which in the case of Incentive Stock
Options, satisfy, in the determination of the Board, the
requirements of Section 424(a) of the Code, (ii) upon written
notice to Participants at least 10 days prior to the consummation
of the Acquisition Event, provide that all unexercised or
unvested Options will terminate upon the consummation of the
Acquisition Event, except to the extent exercised by the
Participant within a specified period following the date of such
notice; or (iii) make or provide for a cash payment to each
Participant, on or before the consummation of the Acquisition,
equal to the difference, if any, between (A) the fair market
value of the shares of Common Stock subject to outstanding Option
of such Participant, to the extent then exercisable and (B) the
aggregate exercise price, if any, of all such outstanding
Options, in exchange for the termination of all such Options held
by such Participant. An "Acquisition Event" shall mean; (a) any
merger or consolidation which results in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving or acquiring entity) less
than fifty percent of the combined voting power of the voting
securities of the Company or such surviving or acquiring entity
outstanding immediately after such merger or consolidation; (b)
any sale of all or substantially all of the assets of the
company; or (c) the complete liquidation of the Company.
(2) Assumption of Options Upon Mergers, etc. The
Board may grant Options under the Plan in substitution for stock
and stock-based Options held by employees of another corporation
who become employees of the Company as a result of a merger or
consolidation of the employing corporation with the Company or
the acquisition by the Company of property or stock of the
employing corporation. The substitute Options shall be granted
on such terms and conditions as the Board considers appropriate
in the circumstances.
(f) Withholding. Each Participant shall pay to the
Company, or make provision satisfactory to the Board for payment
of, any taxes required by law to be withheld in connection with
Options to such Participant no later than the date of the event
creating the tax liability. In the Board's discretion, and
subject to such conditions as the Board may establish, such tax
obligations may be paid in whole or in part in shares of Common
Stock, including shares retained from the Option creating the tax
obligation, valued at their Fair Market Value. The Company may,
to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to a Participant.
(g) Amendment of Option. The Board may amend, modify or
terminate any outstanding Option, including but not limited to,
substituting therefor another Option of the same or a different
type, changing the date of exercise or realization, converting an
Incentive Stock Option to a Nonstatutory Stock Option, and
accelerating the exercise or vesting of any Option. The
Participant's consent to such action shall not be required unless
the Board determines that the action, taking into account any
related action, would materially and adversely affect the
Participant.
(h) Conditions on Delivery of Stock. The Company will
not be obligated to deliver any shares of Common Stock pursuant
to the Plan or to remove restrictions from shares previously
delivered under the Plan until (i) all conditions of the Option
have been met or removed to the satisfaction of the Company,
(ii) in the opinion of the Company's counsel, all other legal
matters in connection with the issuance and delivery of such
shares have been satisfied, including any applicable securities
laws, stock exchange or stock market rules and regulations, and
(iii) the Participant has executed and delivered to the Company
such representations or agreements as the Company may consider
appropriate to satisfy the requirements of any applicable laws.
7. Miscellaneous
(a) No Right To Employment or Other Status. No person
shall have any claim or right to be granted an Option, and the
grant of an Option shall not be construed as giving a Participant
the right to continued employment or any other relationship with
the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a
Participant free from any liability or claim under the Plan,
except as expressly provided in the applicable Option.
(b) No Rights As Stockholder. Subject to the provisions
of the applicable Option, no Participant or Designated
Beneficiary shall have any rights as a stockholder with respect
to any shares of Common Stock to be distributed with respect to
an Option until becoming the record holder thereof.
(c) Effective Date and Term of Plan. The Plan shall
become effective on the date on which it is approved by the
stockholders of the Company. Grants of Options under the Plan
may be made prior to that date (but contemporaneous with or after
Board adoption of the Plan), subject to approval of the Plan by
such stockholders. No Options shall be granted under the Plan
after the completion of ten years from the earlier of (i) the
date on which the Plan was adopted by the Board or (ii) the date
the Plan was approved by the Company's stockholders, but Options
previously granted may extend beyond that date.
(d) Amendment of Plan. The Board may amend, suspend or
terminate the Plan or any portion thereof at any time, provided
that no amendment shall be made without stockholder approval if
(i) such approval is necessary to comply with any applicable tax
or regulatory requirements, including any securities laws, stock
exchange or stock market rules, or (ii) such amendment increases
the number of shares of Common Stock available under the Plan
pursuant to Section 4(a), other than such increases authorized
under Section 4(c). Amendments requiring stockholder approval
shall become effective when adopted by the Board, but no Option
granted after the date of such amendment shall become exercisable
or vested (to the extent that such amendment to the Plan was
required to grant such Option to a particular Participant) unless
and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not
obtained within twelve months of the Board's adoption of such
amendment, any Option granted on or after the date of such
amendment shall terminate to the extent that such amendment to
the Plan was required to enable the Company to grant such Option
to a particular Participant.
(e) Stockholder Approval. For purposes of this Plan,
stockholder approval shall mean approval by a vote of the
stockholders in accordance with the bylaws of the Company, unless
otherwise required by applicable tax or regulatory laws,
including Sections 162(m) and 422 of the Code, securities laws,
and stock exchange and stock market rules.
(f) Governing Law. The provisions of the Plan and all
Options made hereunder shall be governed by and interpreted in
accordance with the laws of the Commonwealth of Massachusetts,
without regard to any applicable conflicts of law.
<PAGE>
Exhibit 10.8
December 22, 1997
Bedford, Massachusetts
Promissory Note
---------------
On December 22, 1997 for value received, the undersigned promises
to pay to the order of Shiva Corporation the total amount of
$50,000.00. This note is payable on December 31, 2000.
By:/s/ Frank A. Ingari
-------------------
Name: Frank A. Ingari
Growth Ally, LLC
10 Mt. Vernon St. #230
Winchester, MA 01890
<PAGE>
Exhibit 10.13
December 18, 1997
Bob Cirrone
9 Trenton Street
Melrose, Massachusetts 02176
Dear Bob:
On behalf of Shiva Corporation, I am pleased to offer you the
position of Senior Vice President, Chief Financial Officer,
reporting directly to me.
Your initial base compensation will be $7884.61 bi-weekly, which
is $205,000 annualized. Your recurring compensation will
include a base salary and a 50% annualized bonus paid out
quarterly 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 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 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.
December 18, 1997
Page 2
In the event of your involuntary termination other than for
cause, you will be eligible to receive severance pay of one
year's base salary.
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 (781) 687-1890.
Sincerely,
James Zucco
President & CEO
Acceptance: /s/ R.P. Cirrone Date: 12/22/97
----------------- --------
<PAGE>
Exhibit 10.14
Shiva Corporation
AGREEMENT AND GENERAL RELEASE
-----------------------------
It is hereby agreed by and between Jean-Pierre Boespflug (hereinafter
referred to as the "Employee") and Shiva Corporation (hereinafter
referred to as "Shiva"), for good and sufficient consideration more
fully described below that:
1. Employment Status. The Employee's service as Senior Vice
President, Research and Development, with Shiva terminated effective
July 23, 1997. Notwithstanding such termination, Employee's
employment with Shiva has continued without interruption from July 23,
1997 to and including the execution of this Agreement and General
Release ("Agreement") and shall continue from and after such date
pursuant to and subject to the terms of this Agreement. Employee
shall continue to be employed with Shiva on a part-time consulting
basis with Shiva until April 10, 1998 (hereinafter referred to as
"Termination Date"). Employee's salary as a consultant shall be equal
to Employee's current base level salary, excluding incentive
compensation. (Employee may not participate in either the 1997 or
1998 Shiva Bonus Plans). Employee agrees to be available as a
consultant to Shiva for up to forty (40) hours per calendar month from
July 24, 1997 through the Termination Date to participate in meetings,
to complete certain project deliverables as needed, and deliver
presentations at Shiva or other locations as needed. In the event of
disagreement over quantity or quality of work performed, the Company
may withhold up to 20% of agreed upon compensation as a sole and
unique remedy. Shiva acknowledges that Employee has complied with any
obligations that he may have had pursuant to this paragraph effective
from July 24, 1997 to and including the execution of this Agreement.
The maximum monthly hours required under this Agreement shall be
adjusted pro rata for the balance of the calendar month following
execution of this Agreement and for the portion of April, 1998 that
Employee shall serve as a consultant. Employee agrees to be
reasonably responsive when Shiva requests services and to use his best
efforts to perform his responsibilities. Shiva agrees to be reasonable
in its requests for specific time and deliverable dates in light of
any professional and/or personal commitments that Employee may have.
Employee hereby agrees that Employee will not represent himself to
third parties as Shiva's Senior Vice President of Research and
Development. The Employee may represent himself as a consultant to
Shiva.
Employee shall not be entitled to participate in any Shiva employee
benefit plans or programs effective after July 23, 1997, except as
stated in this Agreement. Shiva shall continue Employee's current
base level salary as a consultant effective to and including the
Termination Date. On or before the regular Shiva payroll date next
following the Termination Date, Shiva shall pay Employee for all
vacation pay that was accrued but unused by Employee effective as of
July 23, 1997. Employee shall not be considered to have used or
accrued vacation time after July 23, 1997.
2. Tax Treatment. Shiva shall reduce payments to be made to Employee
pursuant to this Agreement by deductions and withholdings that it
reasonably determines to be required for tax purposes.
3. Severance Pay/Benefit Continuance/Options/Miscellaneous. In
return for the execution of this Agreement, Shiva shall provide the
following to Employee:
(a) Severance Pay. Shiva shall pay Employee a lump sum severance
payment of US$50,000 on or before the regular Shiva payroll date next
following the Termination Date.
(b) Benefits.
(1) Medical/Dental. Based on the reduction of Employee's
working hours, Employee became eligible for continuation of
medical/dental coverage pursuant to COBRA effective July 24,
1997. Employee is considered to have elected COBRA coverage
effective July 24, 1997. Shiva shall pay the premiums for such
coverage to and including July 23, 1998, provided that (1)
effective to and including April 10, 1998, Shiva may reduce
Employee's salary by the amount withheld from salary payments to
full-time employees with the same medical/dental coverage for
sharing of medical/dental premium costs; (2) any continuation of
COBRA coverage after July 23, 1998 shall be at Employee's
expense; and (3) notwithstanding the foregoing, Shiva's
obligations under this Section 3(b)(1) shall end effective no
later than Employee's commencement of other employment or
Employee's ineligibility for COBRA under the terms of COBRA.
(2) Other Benefits. Employee's participation in all other
Shiva benefit plans and programs, including but not limited to
life insurance, short and long-term disability, and the 401(k)
plan, ended effective July 23, 1997, provided that Employee shall
have rights under the 401(k) plan based on his participation to
and including July 23, 1997. Employee's rights under the 401(k)
plan shall be governed by the terms of such plan.
(c) Stock Options. Pursuant to the 1988 Stock Plan, as amended and
restated (the "Plan"), Employee will have up to sixty (60) days after
the Termination Date to exercise any vested Stock Rights (as defined
in the Plan). All unvested Stock Rights will be canceled on the
Termination Date.
(d) Miscellaneous.
(1) Relocation Reimbursement. In lieu of repatriation of
Employee and Employee's family back to France, Shiva shall pay
Employee US$20,000.00 on or about April 10, 1998. Without
limiting the scope of the General Release set forth in paragraph
5 below, Employee acknowledges that this payment is in exchange
for Employee's release of all of Shiva's obligations under the
relocation letter to Employee dated June 16, 1997, a copy of
which is attached as Exhibit A, except that notwithstanding such
release, Shiva agrees to provide effective through July 23, 1998
the benefits pursuant to the terms listed under the following
sections in Exhibit A: Car, Children's Schooling, Tax and Tax
Equalization, provided that tax equalization shall only be
provided for Shiva compensation. In addition Shiva shall
reimburse to Employee US$4,500.00 per month for Employee's leased
home in the United States through July 23, 1998, paid in one lump
sum at the date of execution of this agreement. These items
were provided to compensate the Employee for the obligation to
move to the USA as a condition of his employment and subsequent
consulting contract.
(2) Voice Mailbox. Shiva will maintain a voice mail box for
Employee's use at Shiva.
(3) Indemnification. To the extent permitted by its by-laws,
Shiva shall indemnify Employee against any present or future
litigation filed against Shiva for all causes of action. This
indemnification includes, and is not limited to, the present
class action shareholder actions known to Shiva.
4. Company Files, Documents and Other Property. Effective
immediately, the Employee will return to Shiva any keys, credit cards
or other items that he might have in his possession that are the
property of Shiva or of Shiva's French subsidiary, including but not
limited to the following:
(1) an ATT and France Telecom card
(2) a toll pass "Escota"
(3) keys to the Sophia office
(4) payment cards issued on the name Shiva France (Shell/Esso,
Hertz gold, Elf)
(5) Company car in France
Notwithstanding the foregoing, (a) for the purpose of assisting
Employee in his performance of his consulting responsibilities,
Employee may retain Shiva files, reports, books, data and other
documents until no later than the Termination Date; and (b) Shiva
hereby transfers ownership of its Toshiba Tecra laptop computer and
the Nokia mobile phone with PCMCIA and SIM cards that Employee has in
his possession. Employee agrees to change the billing for the service
to his Nokia mobile phone to Employee directly prior to the execution
of this Agreement.
5. Release.
(a) Employee hereby remises, releases, and forever discharges Shiva,
its successors and assigns, all related entities, and the current and
former directors, officers, employees, and agents of each of them (all
referred to hereinafter as the "Company") of and from all debts,
actions, causes of action, suits, accounts, covenants, contracts,
agreements, damages and any and all claims, demands, and liabilities
whatsoever of every name and nature which against the Company Employee
has, claims to have, ever had, or ever claimed to have had, known or
unknown (all hereinafter referred to as "claims") including but not
limited to all claims relating to Employee's employment with Shiva,
the termination of Employee's service with Shiva as Senior Vice
President, Research and Development, or Employee's agreement to the
termination of his employment pursuant to this Agreement; all claims
of alleged wrongful or bad faith termination of employment; all claims
of misrepresentation; all claims of any form of alleged unlawful
employment discrimination, including but not limited to all claims
based upon the Age Discrimination Employment Act of 1967, as amended,
42 U.S.C. 621 et seq., Title VII of the Civil Rights Act of 1964, as
amended, 42 U.S.C. 2000e et seq., or Mass. Gen. Laws ch. 151B; all
claims of breach of either express or implied contract; all claims of
intentional or negligent infliction of emotional distress; all claims
for wages, vacation pay, separation pay, expense reimbursement, or any
form of compensation; all claims for attorneys' fees; and all claims
for reinstatement of employment with Shiva. Employee hereby remises,
releases, and forever discharges Shiva, its successors and assigns,
all related entities, and the current and former directors, officers,
employees, and agents of each of them (all referred to hereinafter as
the "Company") against all claims of a similar nature to the above
listed claims which Employee has, claims to have, ever had, or ever
claimed to have had, known or unknown, which might have arisen under
the laws of France. This release is fully mutual in nature providing
the Employee with the same rights, protection, and certainty accorded
Shiva.
(b) The Employee agrees and acknowledges the payments and benefits
set forth in this Agreement, together with payments and benefits
previously provided to the Employee by Shiva, are the only payments
and benefits he will receive in connection with his employment and
termination.
6. Waiver of Rights and Claims Under the Age Discrimination in
Employment Act of 1967:
(a) The Employee has been informed that since he is 40 years of age
or older, he might have specific rights and/or claims under the
Age Discrimination in Employment Act of 1967, as amended. In
consideration of the compensation described in this Agreement,
the Employee specifically waives such rights and/or claims to the
extent that such rights and/or claims arose prior to the date
this Agreement was executed.
(b) The Employee was advised by Shiva to consult an attorney prior to
executing this Agreement.
(c) The Employee was further advised when presented with this
Agreement on September 15, 1997 that he had at least twenty-one
(21) days from the date of such presentation within which to
consider the Agreement. Employee acknowledges that if he
executed this Agreement before the end of such twenty-one (21)
day period, his decision to do so was entirely voluntary.
7. No Admission. Nothing in this Agreement is to be construed as an
admission by Shiva, its successors, assigns, officers, employees,
and/or agents, whether in their individual or official capacity, of
any liability or unlawful conduct whatsoever.
8. Confidentiality.
(a) Employee agrees not to disclose, either directly or indirectly,
any information whatsoever regarding any claim that Employee
might have or might have had against Shiva of the substance of
this Agreement to any person or organization, including but not
limited to, members of the press and media, present and former
employees of Shiva and other members of the public.
Notwithstanding the foregoing, Employee may disclose such matters
to Employee's spouse, accountant, and/or attorney, provided that
any such person agrees in advance of such disclosure to keep such
information completely confidential. Employee further agrees
that a breach of such obligation by any such person shall be
considered to be a breach of this Agreement by Employee.
Employee may further make disclosure of information identified
above to the extent required by law or legal process, provided
that Employee shall give as much advance notice of such
disclosure as is practicable under the circumstances. Employee
may further make disclosure to the extent reasonably necessary to
enforce Employee's rights under this Agreement. Employee further
agrees that Employee shall not disparage the Company in a
personal manner, a professional manner or otherwise. Likewise,
Shiva agrees that its directors and officers shall not disparage
Employee in a personal matter, a professional matter or
otherwise.
(b) Employee understands and agrees that Employee's employment
created a relationship of confidence and trust between Employee
and Shiva with respect to (i) proprietary information of Shiva;
(ii) trade secrets and other confidential information of Shiva;
(iii) the confidential information of others with which Shiva has
or has had a business relationship (the information referred to
in clauses (i), (ii) and (iii) is referred to, collectively, as
"Confidential Information"). Employee agrees that at all times
Employee shall keep in confidence and trust all Confidential
Information and shall not use or disclose any Confidential
Information without the written consent of Shiva, except as to
the extent necessary to Employee's performance of Employee's
responsibilities as a consultant. The restrictions set forth in
this paragraph 8(b) shall not apply to any information which is
in the public domain, unless such information is in the public
domain as a result of an unauthorized disclosure by Employee.
Notwithstanding anything else contained herein, Employee and
Shiva expressly agree that this Release and the settlement of
Employee's claims will remain non-public and confidential, except
as required by law.
9. Representations and Governing Law.
(a) This Agreement represents a complete understanding between the
parties, supersedes any and all other agreements and
understandings (including, but not limited to, the employment
agreement dated March 24, 1994 between Employee and Shiva),
whether oral or written and may not be modified, altered or
changed except upon written consent of the parties.
(b) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts without giving
effect to the principles of conflicts of law thereof.
(c) This Agreement shall be binding upon and inure to the benefit of
both parties and their respective successors and assigns,
including any Corporation with which or into which Shiva may be
merged or which may succeed to its assets or business. Employee
represents that he has not assigned any claims or rights that he
has had or may have had against Shiva or the Company to anyone.
(d) In case any one or more of the provisions contained in this
Agreement for any reason shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this
Agreement, but this Agreement shall be construed as if such
invalid, illegal or unenforceable provisions had never been
contained herein.
(e) The Employee represents that he has read the foregoing Agreement,
fully understands the terms and conditions of such Agreement, and
is voluntarily executing the same. In entering into this
Agreement, the Employee does not rely on any representation,
promise or inducement made by Shiva, with the exception of the
consideration described in this document.
(f) The Employee may revoke this Agreement for a period of seven (7)
days following its execution and the Agreement shall not become
effective or enforceable until this revocation period has
expired.
Signed this 24th day of October, 1997.
SHIVA CORPORATION
By: /s/ Larry Whitman Employee: /s/ J. Boespflug
----------------- ----------------
Dated: 10/24/97 Dated: Oct 24, 1997
-------------- ------------------
<PAGE>
Exhibit 11.1
SHIVA CORPORATION
Computation of Basic and Diluted Net Income (Loss) Per Share (1)
<TABLE>
<CAPTION>
Year ended
--------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
----------- ------------ ------------
Numerator:
<S> <C> <C> <C>
Net income (loss) ($13,647,000) $16,841,000 ($ 4,852,000)
Denominator:
Denominator for basic earnings
per share--weighted average
shares outstanding 29,266,263 28,424,797 25,079,951
Effect of dilutive securities:
Stock options - 3,034,100 -
----------- ----------- -----------
Denominator for diluted
earnings per share 29,266,263 31,458,897 25,079,951
Basic net income (loss)
per share $ (0.47) $ 0.59 $ (0.19)
Diluted net income (loss)
per share $ (0.47) $ 0.54 $ (0.19)
- -------------------------
<FN>
(1) Basic net loss per share is the same as diluted net loss per share because
the effect of common equivalent shares is antidilutive.
</TABLE>
<PAGE>
Exhibit 13.1
Shiva Corporation Financial Highlights
<TABLE>
<CAPTION>
Fiscal Year
(In thousands, except
per share data) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Remote Access Revenues $130,413 $174,084 $ 83,924 $ 44,825 $ 20,510
Total Revenues 144,329 200,119 118,581 81,058 61,262
Operating Income (Loss)
before Merger Expenses (25,535) 24,669 9,946 3,859 1,764
Merger Expenses -- 1,987 13,986 -- --
Income (Loss) before Income
Taxes (22,013) 26,026 (2,466) 2,961 716
Income Tax Provision (Benefit) (8,366) 9,185 2,386 921 300
Net Income (Loss) (13,647) 16,841* (4,852)** 2,040 416
Net Income (Loss) per Share
Basic (0.47) 0.59* (0.19)** 0.16 0.04
Net Income (Loss) per Share
Diluted (0.47) 0.54* (0.19)** 0.10 0.03
Balance Sheet Data
Total Assets 182,246 198,050 150,123 72,559 29,514
Working Capital 108,314 130,464 109,376 38,307 1,252
Long-term Obligations -- 122 452 4,037 3,418
Stockholders' Equity 145,944 156,834 122,904 44,114 6,072
<FN>
*In the absence of merger expenses incurred in FY96, net income and net income
per diluted share would have been $18.8 million and $0.60, respectively.
**In the absence of merger expenses incurred in FY95, net income and net income
per diluted share would have been $8.5 million and $0.30, respectively.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results
of operations of the Company should be read in conjunction with
the Company's Consolidated Financial Statements and Notes
thereto.
OVERVIEW
Shiva Corporation (the "Company") is a leading global provider of
remote access solutions for business. The Company's products connect
employees, customers and business partners to networks with
industry-leading remote access solutions. The Company was founded
in 1985, and is based in Bedford, Massachusetts, with offices
worldwide. The Company derives its revenues from remote access
products and other communications products and services. Remote
access products include the LanRover(R), LanRover Access
Switch(R), Shiva AccessPort(TM), ShivaIntegrator(R) and the
NetModem(R) product lines. Other communications products and
services include communications servers, AppleTalk products and
communications software. The Company also provides a wide range of
service offerings which include consulting, training and maintenance
services. The Company markets its products worldwide primarily
through distributors, systems integrators, resellers and an
original equipment manufacturer ("OEM") relationship with Northern
Telecom Limited ("Nortel").
In August 1995, the Company acquired Spider Systems Limited
("Spider"), a leading digital internetworking company based in
Edinburgh, UK, through the issuance of approximately 3,923,606
shares of its common stock (the "Spider Acquisition"). In June
1996, the Company issued approximately 691,587 shares of its
common stock in exchange for all the outstanding shares of
AirSoft, Inc. (the "AirSoft Acquisition"). AirSoft, Inc.
("AirSoft") designs, manufactures and sells performance
enhancement software products. These products include
Powerburst(R), a remote node accelerator designed to improve the
performance of file-system-based applications such as electronic
mail, spreadsheets and word processors. The Spider and AirSoft
acquisitions have been accounted for as poolings of interests,
and therefore the consolidated financial information contained
herein has been retroactively combined for all periods presented.
See Notes 1 and 2 of Notes to Consolidated Financial Statements.
On February 19, 1998 the Company entered into a definitive
agreement to acquire substantially all the assets and liabilities
of Isolation Systems Limited (the "Isolation Acquisition") for
approximately $37 million in cash, subject to closing
adjustments. Isolation Systems is a leading developer of virtual
private networking hardware and software solutions based in
Toronto, Ontario. The Isolation Acquisition is expected to close
by March 31, 1998 and will be accounted for as a purchase.
Accordingly, the purchase price will be allocated to the underlying
assets and liabilities based on their respective fair values at the
date of closing. The Company expects to recognize a substantial
charge for purchased in-process research and development in the
first quarter of fiscal 1998.
On February 27, 1998 the Company signed a new multi-year
agreement with Nortel. The Company and Nortel have been working
together to provide remote access equipment to service providers
since 1995. Under the new agreement, Nortel will purchase minimum
quarterly amounts of the Company's products for resale, replacing
the minimum royalty arrangement with the Company that was in
effect during fiscal 1997. In addition, the Company will receive
professional services revenue during the first two quarters of
fiscal 1998 from Nortel related to the development of carrier
class remote access technology. The OEM purchases and
professional services are expected to result in higher revenues
from Nortel in fiscal 1998 which will carry lower gross margins.
Gross margins on sales to Nortel are expected to decline in fiscal
1998 primarily due to the fact that a significant portion of the
revenues from Nortel in fiscal 1997 consisted of royalty revenues,
with little or no associated direct cost, related to the Rapport
112, an OEM version of the LanRover Access Switch.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of
operations data of the Company expressed as a percentage of
revenues for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Year Percentage Change
1997 1996 1995 1997 to 1996 1996 to 1995
---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C>
Product and other
revenues 88% 99% 100% (36%) 67%
Royalty revenues 12 1 - 602 *
-- -- --- --- --
Total revenues 100% 100% 100% (28) 69
Cost of revenues 49 42 41 (14) 69
-- -- -- ---- --
Gross profit 51 58 59 (38) 69
Operating expenses:
Research and
development 18 12 12 10 57
Selling,
general and
administra-
tive 50 34 38 6 55
Merger expenses 0 1 12 * (86)
- - -- - ----
Total
operating
expenses 68 47 62 4 28
-- -- -- - --
Income (loss)
from operations (17) 11 (3) (213) *
Interest income (2) (2) (1) 5 112
--- --- --- - ---
Income (loss)
before income
taxes (15) 13 (2) (185) *
---- -- --- ----- -
Income tax
provision
(benefit) (6) 5 2 (191) 285
--- - - ----- ---
Net income (loss) (9)% 8% (4)% (181)% *%
=== == ==== ====== ==
<FN>
* Percentages not meaningful.
</TABLE>
FISCAL 1997, 1996 and 1995
REVENUES.
Revenues totaled $144,329,000, $200,119,000 and $118,581,000 in
fiscal 1997, 1996 and 1995, respectively. Remote access revenues
represented 90%, 87% and 71% of revenues in fiscal 1997, 1996 and
1995, respectively. Revenues from LanRover products were
$50,138,000, $89,588,000 and $62,892,000 in fiscal 1997, 1996 and
1995, respectively. The decline in LanRover revenues in fiscal
1997 was primarily due to lower volume shipments and price
reductions which became effective in the second quarter. LanRover
revenues were also impacted by price protection provisions of
$3,900,000 recorded in the first quarter of fiscal 1997. The
price protection provisions related to the LanRover were recorded
to account for pricing actions which became effective in the
second quarter and were in response to increased price
competition. The increase in LanRover revenues in fiscal 1996
over fiscal 1995 was primarily due to increased volume shipments.
Revenues from the LanRover Access Switch were $65,163,000 in fiscal
1997, compared to $59,015,000 in fiscal 1996. The increase in
revenues from the LanRover Access Switch in fiscal 1997 over fiscal
1996 was primarily due to the timing of the introduction of the
product into the marketplace in the second quarter of fiscal 1996.
Revenues from the LanRover Access Switch in fiscal 1997 include
royalty revenues attributable to an agreement with Northern
Telecom Limited (the"Nortel Agreement"), under which the Company
earned royalties, subject to quarterly minimums in fiscal 1997,
based on sales of the Nortel Rapport 112, an OEM version of the
LanRover Access Switch. In fiscal 1997, the Company transitioned
its relationship with Nortel from an OEM relationship where Nortel
purchased certain products from the Company for resale, to a
predominantly royalty-based arrangement, which resulted in lower
revenues that carried higher gross margins. In addition, revenues
from the LanRover Access Switch in fiscal 1997 were negatively
impacted by weakness in the mid-tier Internet Service Provider
("ISP") market in North America, which resulted in a decline in
sales through the Company's premium value-added reseller ("PVAR")
channel, and by price protection provisions of $2,800,000
recorded in the first quarter. The price protection provisions
were recorded to account for pricing actions, effective in the
second quarter of fiscal 1997, taken 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 remote access products were $15,112,000,
$25,479,000 and $21,031,000 in fiscal 1997, 1996 and 1995,
respectively. The decline in other remote access products in
fiscal 1997 was primarily due to lower volume shipments of the
Integrator product line, while the increase in fiscal 1996
relative to fiscal 1995 was primarily due to the introduction
of the Shiva AccessPort product for the small office and home
office market. Revenues from other communications products were
$6,805,000, $16,847,000 and $24,061,000 in fiscal 1997, fiscal
1996 and fiscal 1995, respectively. The declines in revenues
from other communications products were 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.
International revenues accounted for 49%, 37% and 47% of total
revenues in fiscal 1997, 1996 and 1995, respectively. In fiscal
1997, international revenues, which declined on an absolute basis
from fiscal 1996, represented a higher proportion of total revenues
due to decreased revenues in North America. This decrease in
revenues in North America was due to several factors discussed
above, including lower revenues from Nortel and other OEM partners,
the decline in sales through the PVAR channel and the price
protection reserves recorded in the first quarter of fiscal 1997.
International revenues descreased as a perecentage of revenues
in fiscal 1996 compared to fiscal 1995 primarily due to increased
revenues to the OEM channel which are classified as domestic.
Revenues from OEM customers accounted for 24% of revenues in
fiscal 1997, compared with 22% in 1996 and 10% in 1995. Revenues
from Nortel accounted for 16% and 14% of revenues in fiscal 1997
and fiscal 1996, respectively.
The Company provides its distributors and resellers with product
return rights for stock balancing and product evaluation. Revenues
were reduced by provisions for product returns of $16,088,000,
$13,421,000 and $7,410,000 in fiscal 1997, fiscal 1996 and fiscal
1995, respectively. These provisions represented 10% of gross
revenues in fiscal 1997, and 6% of revenues in both fiscal 1996
and fiscal 1995. The increase in the provision for product returns
in fiscal 1997 was to account for estimated returns of slow-moving
and discontinued products in the Company's North American
distribution channels.
GROSS PROFIT. Gross profit decreased as a percentage of revenues
to 51% in fiscal 1997, compared to 58% and 59% in fiscal 1996 and
1995, respectively. Gross profit as a percentage of revenues
decreased in fiscal 1997 from fiscal 1996 primarily due to the
price decreases on the LanRover and LanRover Access Switch products,
the previously mentioned price protection reserves totaling
$6,700,000 and provisions for slow-moving inventories of $6,463,000
and $2,605,000 recorded in the first and fourth quarters,
respectively. The impact of these price decreases and reserves
was partially offset by the 100% gross margin royalty revenues
from Nortel, and cost reductions on several components. The
provisions for slow-moving inventories, which increased cost of
revenues, 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 addition, gross profit was negatively
impacted in fiscal 1997 by an increase in manufacturing overhead
costs as a percentage of revenue due to the lower revenue base.
The decrease in gross profit as a percentage of revenues in
fiscal 1996 from fiscal 1995 was primarily attributable to
increased revenues of remote access products to the OEM channel,
which typically result in lower gross margins than the Company's
other sales channels. This decrease was partially offset by a
change in product mix towards the LanRover and the LanRover
Access Switch, which carry higher gross margins than the
Company's other products. In the future, gross margins are
likely to decrease due to the new multi-year OEM and professional
services agreement with Nortel which replaced the royalty
arrangement in effect during fiscal 1997 as previously discussed,
and continued price competition. The Company's gross margins may
also be affected by several factors, including, but not limited
to, product mix, the distribution channels used, changes in
component costs and the introduction of new products.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$25,545,000, $23,186,000 and $14,787,000 in fiscal 1997, 1996 and
1995, respectively, and represented 18% of revenues in fiscal
1997 compared to 12% of revenues in both fiscal 1996 and 1995.
Research and development expenditures in fiscal 1997 related to
the development of new and existing remote access products,
including the LanRover D/56, the LanRover XP16, and 56K modules
for the LanRover Access Switch. In addition, the Company also
continued to work with Nortel on the development of products and
product features specific to the service provider markets,
including the VantagePath(TM) Access Concentrator, a 256-port carrier
class product. The increase in these expenses in fiscal 1997
from 1996 was primarily due to increased costs of prototype
materials, increased personnel and associated overhead costs, and
temporary help. The increase in expenses in fiscal 1996 from
1995 related primarily to the hiring of additional research and
development staff and associated overhead costs. Customer-funded
development costs reimbursed to the Company, which are reflected
as an offset to research and development expenses, were
$6,664,000 in fiscal 1997, compared to $1,718,000 and $955,000 in
fiscal 1996 and 1995, respectively. The increase in customer-
funded development costs in fiscal 1997 was due to the cost
sharing arrangements with Nortel, under which Nortel funds certain
costs associated with the development of products and product
features specific to the carrier and service provider markets.
Capitalized software development costs were $923,000, $1,186,000
and $827,000 in fiscal 1997, 1996 and 1995, respectively. The
Company anticipates continued significant investment in research
and development.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were $72,903,000, $69,087,000 and
$44,662,000 in fiscal 1997, 1996 and 1995, respectively. The
increase in gross expenses during fiscal 1997 was primarily due
to increased costs incurred for advertising, trade shows, sales
incentives, and facilities. Selling, general and administrative
expenses in 1997 are net of expenses reimbursed by Nortel of
$5,186,000 related to Shiva's Service Provider Group ("SPG"),
a worldwide business unit comprised of technical sales and
support personnel which marketed Nortel's remote access
equipment to carriers and service providers. The new agreement
with Nortel signed on February 27, 1998 extended the funding by
Nortel of the SPG unit through the first quarter of fiscal 1998.
The increase in selling, general and administrative expenses
in fiscal 1996 over fiscal 1995 was primarily due to worldwide
expansion of the Company's sales, marketing and administrative
operations necessary to support the Company's growth.
MERGER EXPENSES. In fiscal 1996, merger related expenses of
$1,987,000 were recorded in connection with the AirSoft
Acquisition. Merger-related expenses included $1,675,000 of
transaction costs for financial advisor, legal, regulatory and
accounting fees and other related expenses, and $312,000 of
employee severance payments and other costs. In fiscal 1995,
merger-related expenses of $13,986,000 were recorded in
connection with the Spider Acquisition. Merger-related expenses
included $6,275,000 of transaction costs for financial advisor,
legal, regulatory, and accounting fees and other related
expenses, $1,482,000 of employee severance payments, $2,644,000
of phantom stock compensation and $3,585,000 of integration
costs, including elimination of duplicative assets, employee
relocation and travel, and marketing costs related to the
introduction of the combined entity.
INTEREST INCOME AND EXPENSE. Interest income, net of interest
expense, increased to $3,522,000 in fiscal 1997 from $3,344,000
and $1,574,000 in fiscal 1996 and 1995, respectively. The
increase in fiscal 1997 was primarily due to lower interest and
other expense. The increase in fiscal 1996 was primarily due to
increased interest income due to higher average investment
balances in fiscal 1996 as a result of the funds generated by the
Company's secondary public offering in November 1995.
INCOME TAX PROVISION. The Company's effective tax rate was 38%
in fiscal 1997 which differs from the combined federal and state
statutory rate primarily due to restrictions on the use of
various state net operating loss carryforwards. The Company recorded
a deferred income tax benefit in fiscal 1997 reflecting the benefit
of future deductible temporary differences and net operating loss
and credit carryforwards expected to be realized. Realization of
the associated deferred tax asset is dependent upon generating
sufficient taxable income and, although not assured, management
believes that it is more likely than not that the deferred tax
asset will be realized. In fiscal 1996, the Company's effective
tax rate was 35%, which differs from the combined federal and
state statutory rates primarily due to the utilization of net
operating loss carryforwards and the impact of tax-exempt interest
income, partially offset by non-deductible merger expenses. In
fiscal 1995 the Company had an income tax provision of $2,386,000,
despite a pre-tax loss, primarily due to non-deductible merger
costs incurred in connection with the Spider Acquisition.
FOREIGN CURRENCY FLUCTUATIONS
Foreign currency fluctuations did not have a significant impact
on the comparison of the results of operations for the periods
presented. However, the Company's international operations will
continue to be exposed to adverse movements in foreign currency
exchange rates which may have a material adverse impact on the
Company's financial results. The Company enters into forward
exchange contracts to hedge those currency exposures related to
certain assets and liabilities denominated in non-functional
currencies and does not generally hedge anticipated foreign
currency cash flows.
YEAR 2000
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software
failures (the "Year 2000 issue") which can arise in time-
sensitive software applications 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 believes that all of its
products are currently Year 2000 compliant, with the exception of
the SpiderManager product, which will display the year number in
the activity log date field as three digits. The Company believes
that this characteristic does not have any system operational
implications for the product. Therefore, the Company does not
anticipate having to undertake additional research and development
efforts in this regard. In addition, the Company is in the process
of replacing many of its business and operating computer systems
with software which, when upgraded, will be Year 2000 compliant.
The Company is planning to complete all necessary Year 2000 upgrades
of its major systems in 1998, and is currently identifying and
developing conversion strategies for its remaining systems that
may be impacted by the Year 2000 issue. While the Company does
not believe the Year 2000 issue will have a material impact on
the Company, there can be no assurance that unanticipated problems
will not arise that will have a material adverse effect on the
Company's business and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
As of January 3, 1998, the Company had $58,915,000 of cash and
cash equivalents and $36,868,000 of short-term investments.
Working capital decreased to $108,314,000 at January 3, 1998 from
$130,464,000 at December 28, 1996. As a result of the Isolation
Acquisition which is expected to be completed in the first quarter
of fiscal 1998, the Company's cash and short-term investment balances
will be reduced by approximately $37,000,000.
Net cash provided by operations totaled $1,445,000 in fiscal
1997. Net cash provided by operations in fiscal 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 lower revenue levels and lower days sales
outstanding as a result of improved collection activities. Net
cash provided by operations was $19,552,000 in fiscal 1996, which
consisted primarily of net income adjusted for non-cash expenses
and increased current liabilities, partially offset by increased
accounts receivable and inventories. The increase in accounts
receivable was due to higher revenue levels and days sales
outstanding due in part to changes in the timing of product
shipments where shipments occurred late in the fourth quarter of
fiscal 1996. The increase in inventories was in anticipation of
fourth quarter sales that did not materialize and to support
increased revenue levels over the prior year.
Net cash used by investing activities totaled $16,385,000 in
fiscal 1997 compared to $43,517,000 in fiscal 1996. Investment
activities in fiscal 1997 and fiscal 1996 consisted primarily of
purchases of property, plant and equipment and short-term
investments, partially offset by proceeds from short-term
investments upon maturity or sale. The decrease in cash used by
investing activities was primarily due to net purchases of short-
term investments of $1,884,000 in fiscal 1997, compared to
$25,872,000 in fiscal 1996.
Net cash provided by financing activities totaled $1,785,000 and
$3,595,000 in fiscal 1997 and 1996, respectively, and 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 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 January 3, 1998,
available borrowings were reduced by outstanding letters of
credit of $838,000 which expire at various dates in 1998. The
Company had no borrowings outstanding under this line at January
3, 1998. The Company also has a foreign credit facility of
approximately $2,625,000 of which approximately $2,523,000 was
available at January 3, 1998. Available borrowings under this
facility are decreased by the value of the outstanding debt
payable to the European Coal and Steel Community Fund and
guarantees on certain foreign currency 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
January 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 January 3, 1998, the company had outstanding foreign
exchange contracts to purchase $2,490,000 and to sell $638,000 in
various foreign currencies which matured and settled on January
21, 1998.
The Company believes that its existing cash and short-term
investment balances, together with borrowings available under
the Company's bank credit facilities,are sufficient to meet the
Company's cash requirements for at least the next twelve months.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
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." In October 1997, the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 97-2, "Software
Revenue Recognition". The Company does not expect that these
statements, which the Company will implement in fiscal 1998 as
required, will have a material effect on the Company's financial
statements.
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, expenditures, ability to
achieve Year 2000 compliance, effects of the new agreement with
Nortel and completion of the Isolation Acquisition 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 has been party to a strategic relationship with
Nortel since 1995 which has evolved over time. Under the terms of
a new agreement with Nortel signed on February 27, 1998, Nortel
will purchase minimum quarterly amounts of the Company's products
within a minimum aggregate amount that will be $40,000,000 or
$55,000,000, depending upon the occurrence of certain contract
conditions. There can be no assurance that Nortel will purchase
in excess of the minimum amount or that the Company will be able
to fulfill such orders from Nortel and thus recognize the revenue
associated with such orders, in a linear fashion over the
contract term. Non-linear order patterns from Nortel could cause
material fluctuations in the Company's quarterly financial
results. In addition, the Company will receive professional
services revenue during the first two quarters of fiscal 1998
related to the development of carrier class remote access
technology. There is no obligation on the part of Nortel to
contract for additional such development or for the Company to
provide such services beyond the second quarter of fiscal 1998.
Revenues from Nortel accounted for 16% and 14% of revenues in
fiscal 1997 and 1996, respectively.
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 fiscal
1997, due in part to increased competition. There can be no
assurance that the Company will be successful in modifying
current product offerings to increase sales of its products.
The Company depends on third party distributors and value-added
resellers for a significant portion of the Company's revenues.
The loss of certain of these distributors and resellers could
have a material adverse impact on the Company's results of
operations. Moreover, many of these distributors and resellers
also act as resellers of competitive products. Therefore, there
is risk that these distributors and resellers may focus their
efforts on marketing products other than those sold by the
Company. This may require the Company to offer various
incentives to such distributors and resellers, which may
adversely impact the Company's results of operations.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. The Company's future success will depend
on its ability to enhance its existing products and to introduce
new products and services to meet and adapt to changing customer
requirements and emerging technologies, such as 56K, virtual
private networking ("VPN") and other technologies. The
introduction of new products requires the Company to manage the
transition from its older product offerings in order to mimize
the impact on customer ordering patterns, avoid excessive levels
of obsolete inventories and to ensure that adequate supplies of
new products are available to meet customer demand.
The Company's success in accomplishing development objectives
depends in large part upon its ability to attract and retain
highly skilled technical personnel including, in particular,
management personnel in the areas of research and development and
technical support. Competition for such personnel is intense.
There can be no assurance that the Company will be successful in
attracting and retaining the personnel it requires to accomplish
its objectives. Delays in new product development or the failure
of new products to achieve market acceptance, could have a
material adverse effect on the Company's operating results. In
addition, there can be no assurance that the Company will be
successful in identifying, developing, manufacturing or marketing
new product or service offerings or enhancing its existing
offerings.
The Company operates in a highly competitive market that is
characterized by an increasing number of well-funded competitors
from diverse industry sectors, including but not limited to
suppliers of software, modems, terminal servers, routers, hubs,
data communications products and companies offering remote access
solutions based on emerging technologies, such as switched
digital telephone services, remote access service offerings by
telephony providers via telephone networks and other providers
through public networks such as the Internet. Increased
competition could result in price reductions and loss of market
share which would adversely affect the Company's revenues and
profitability. There can be no assurance that the Company will
be able to continue to compete successfully with new or existing
competitors.
The Company does business worldwide, both directly and via sales
to United States-based original equipment manufacturers, who sell
such products internationally. The Company expects that
international revenues will continue to account for a significant
portion of its total revenues. Although most of the Company's
sales are denominated in US Dollars, exchange rate fluctuations
could cause the Company's products to become relatively more
expensive to customers in a particular country, causing a decline
in revenues and profitablility in that country. In addition,
international sales, particularly in Europe, are typically
adversely affected in the third quarter due to a reduction in
business activities during the summer months. Furthermore, global
and/or regional economic factors and potential changes in laws
and regulations affecting the Company's business, including
without limitation, communications regulatory standards, safety
and emissions control standards, difficulty in staffing and
managing foreign operations, longer payment cycles and difficulty
in collecting foreign receivables, currency exchange rate
fluctuations, changes in monetary and tax policies, tariffs,
difficulties in enforcement of intellectual property rights and
political uncertainties, could have an adverse impact on the
Company's financial condition or future results of operations.
The 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.
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. At January 3, 1998 and December 28, 1996,
one customer accounted for 31% and 19% of the accounts receivable
balance, respectively.
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.
Other factors that may affect future results include the accuracy
of the Company's internal estimates of revenues and operating expense
levels, the outcome of the litigation discussed below under
"Legal Proceedings," the Company's ability to complete all necessary
Year 2000 upgrades in a timely and cost-effective manner, the
realization of the intended benefits of the Isolation Acquisition
and the ability of the Company to integrate the acquired business
into the Company's existing operations, and material changes in
the level of customer-funded research and development activities.
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.
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Balance Sheet
(In thousands, except share-related data)
<CAPTION>
January 3, December 28,
1998 1996
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 58,915 $ 72,067
Short-term investments 36,868 35,035
Accounts receivable, net of
allowances of $8,037 at
January 3, 1998 and $10,347
at December 28, 1996 23,169 39,904
Inventories 14,058 17,958
Deferred income taxes 8,683 4,420
Prepaid expenses and other
current assets 2,369 1,602
----- -----
Total current assets 144,062 170,986
------- -------
Property, plant and equipment 26,093 23,855
Deferred income taxes 8,840 1,372
Other assets 3,251 1,837
----- -----
Total assets $182,246 $198,050
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 118 $ 367
Accounts payable 9,258 17,130
Accrued expenses 22,304 19,619
Deferred revenue 4,068 3,406
----- -----
Total current liabilities 35,748 40,522
------ ------
Long-term debt and capital lease
obligations -- 122
Deferred income taxes 554 572
--- ---
Total liabilities $ 36,302 $ 41,216
-------- --------
Commitments and contingencies
(Notes 13 and 14)
Stockholders' equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value;
100,000,000 shares authorized,
29,605,848 and 28,891,216 shares
issued and outstanding at
January 3, 1998 and December 28,
1996, respectively 296 289
Additional paid-in capital 153,036 149,564
Unrealized gain on investments 110 175
Cumulative translation adjustment (308) 349
Retained earnings (accumulated deficit) (7,190) 6,457
------- -----
Total stockholders' equity 145,944 156,834
------- -------
Total liabilities and stockholders'
equity $182,246 $198,050
======== ========
<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)
<CAPTION>
Year Ended
----------------------------------------
January 3, December 28, December 30,
1998 1996 1995
----------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
<S> <C> <C> <C>
Product and other
revenues $126,757 $197,615 $118,581
Royalty revenues 17,572 2,504 --
------ ----- --
Total revenues 144,329 200,119 118,581
Cost of revenues 71,416 83,177 49,186
------ ------ ------
Gross profit 72,913 116,942 69,395
------ ------- ------
Operating expenses:
Research and dev-
elopment 25,545 23,186 14,787
Selling, general and
administrative 72,903 69,087 44,662
Merger expenses -- 1,987 13,986
-- ----- ------
Total operating
expenses 98,448 94,260 73,435
------ ------ ------
Income (loss) from
operations (25,535) 22,682 (4,040)
-------- ------ -------
Interest income 4,003 4,139 2,279
Interest and other
expense (481) (795) (705)
----- ----- -----
Income (loss) before
income taxes (22,013) 26,026 (2,466)
Income tax provision
(benefit) (8,366) 9,185 2,386
------- ----- -----
Net income (loss) $(13,647) $ 16,841 $ (4,852)
========= ======== =========
Net income (loss) per
share - basic $( 0.47) $ 0.59 $ (0.19)
========= ======== =========
Net income (loss) per
share - diluted $( 0.47) $ 0.54 $ (0.19)
========= ======== =========
Shares used in comput-
ing net income (loss)
per share - basic 29,266 28,425 25,080
====== ====== ======
Shares used in comput-
ing net income (loss)
per share - diluted 29,266 31,459 25,080
====== ====== ======
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share-related data)
<CAPTION>
Common Stock
-------------------- Additional
Number of Par paid-in
shares Value capital
----------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 24,478,087 245 49,275
Exercise of stock options 1,117,557 11 1,736
Issuance of common stock in
settlement of dividend
payable 20,014 -- 406
Issuance of common stock in
settlement of phantom stock
plan 31,462 1 2,283
Issuance of common stock under
employee stock purchase plan 21,582 -- 314
Secondary public offering, net
of stock issuance costs of
$583 2,291,878 23 76,115
Tax benefit related to stock
options -- -- 3,328
Unrealized gain on investments -- -- --
Currency translation adjustments -- -- --
Net loss -- -- --
Elimination of Spider net
income for the three-month
period ended March 31, 1995 -- -- --
----------------------------------
Balance at December 30, 1995 27,960,580 280 133,457
Exercise of stock options 899,048 9 3,516
Issuance of common stock
under employee stock
purchase plan 31,588 -- 772
Tax benefit related to
stock options -- -- 11,819
Unrealized gain on investments -- -- --
Currency translation adjustments -- -- --
Net income -- -- --
----------------------------------
Balance at December 28, 1996 28,891,216 289 149,564
Exercise of stock options 628,838 6 1,254
Issuance of common stock
under employee stock
purchase plan 85,794 1 881
Tax benefit related to
stock options -- -- 1,337
Unrealized loss on investments -- -- --
Currency translation adjustments -- -- --
Net loss -- -- --
-----------------------------------
Balance at January 3, 1998 29,605,848 $296 $153,036
===================================
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share-related data)
<CAPTION>
Unrealized Cumulative Unearned
gain(loss) on translation ESOP
investments adjustment compensation
---------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1994 -- (468) (305)
Exercise of stock options -- -- --
Issuance of common stock in
settlement of dividend
payable -- -- --
Issuance of common stock in
settlement of phantom stock
plan -- -- 305
Issuance of common stock under
employee stock purchase plan -- -- --
Secondary public offering, net
of stock issuance costs of
$583 -- -- --
Tax benefit related to stock
options -- -- --
Unrealized gain on investments 137 -- --
Currency translation adjustments -- (118) --
Net loss -- -- --
Elimination of Spider net
income for the three-month
period ended March 31, 1995 -- -- --
-------------------------------
Balance at December 30, 1995 137 (586) --
Exercise of stock options -- -- --
Issuance of common stock
under employee stock
purchase plan -- -- --
Tax benefit related to
stock options -- -- --
Unrealized gain on investments 38 -- --
Currency translation adjustments -- 935 --
Net income -- -- --
-----------------------------
Balance at December 28, 1996 175 349 --
Exercise of stock options -- -- --
Issuance of common stock
under employee stock
purchase plan -- -- --
Tax benefit related to
stock options -- -- --
Unrealized loss on investments (65) -- --
Currency translation adjustments -- (657) --
Net loss -- -- --
-----------------------------
Balance at January 3, 1998 $110 $(308) $--
=============================
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share-related data)
<CAPTION>
Retained earnings
Total
(accumulated stockholders'
deficit) equity
------------------------------------
<S> <C> <C>
Balance at December 31, 1994 (4,633) 44,114
Exercise of stock options -- 1,737
Issuance of common stock in
settlement of dividend
payable -- 406
Issuance of common stock in
settlement of phantom stock
plan -- 2,589
Issuance of common stock under
employee stock purchase plan -- 314
Secondary public offering, net
of stock issuance costs of
$583 -- 76,138
Tax benefit related to stock
options -- 3,328
Unrealized gain on investments -- 137
Currency translation adjustments -- (118)
Net loss (4,852) (4,852)
Elimination of Spider net
income for the three-month
period ended March 31, 1995 (899) (899)
----------------------------------
Balance at December 30, 1995 (10,384) 122,904
Exercise of stock options -- 3,525
Issuance of common stock
under employee stock
purchase plan -- 772
Tax benefit related to
stock options -- 11,819
Unrealized gain on investments -- 38
Currency translation adjustments -- 935
Net income 16,841 16,841
----------------------------------
Balance at December 28, 1996 6,457 156,834
Exercise of stock options -- 1,260
Issuance of common stock
under employee stock
purchase plan -- 882
Tax benefit related to
stock options -- 1,337
Unrealized loss on investments -- (65)
Currency translation adjustments -- (657)
Net loss (13,647) (13,647)
-----------------------------------
Balance at January 3, 1998 $ (7,190) $145,944
===================================
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Shiva Corporation
Consolidated Statement of Cash Flows
<CAPTION>
Year Ended
------------------------------------------
Increase (decrease) in January 3, December 28, December 30,
cash and cash equivalents 1998 1996 1995
(In thousands) ------------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
<S> <C> <C> <C>
Cash flows from
operating activities
Net income (loss) $(13,647) $16,841 $(4,852)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Merger expenses -- -- 3,766
Depreciation and
amortization 10,363 6,968 3,756
Deferred income taxes (10,991) (2) (811)
Changes in assets and
liabilities:
Accounts receivable 16,121 (15,675) (7,906)
Inventories 3,726 (9,804) (2,023)
Prepaid expenses and
other current assets (742) 391 (67)
Accounts payable (7,645) 7,585 122
Accrued compensation
and benefits (80) 360 2,444
Accrued expenses 3,678 13,434 6,548
Deferred revenue 679 (134) 1,846
Other long-term
liabilities (17) (412) (24)
------------------------------------
Net cash provided by
operating activities 1,445 19,552 2,799
------------------------------------
Cash flows from investing
activities
Purchase of property,
plant and equipment (11,295) (16,089) (7,031)
Capitalized software
development costs (829) (1,183) (827)
Purchases of short-term
investments (50,177) (34,136) (11,188)
Proceeds from maturities
of short-term
investments 48,293 8,264 2,200
Change in other assets (2,377) (373) (147)
------------------------------------
Net cash used by
investing activities (16,385) (43,517) (16,993)
------------------------------------
Cash flows from financing
activities
Net repayments under
short-term debt -- -- (1,885)
Principal payments on
long-term debt and
capital lease obliga-
tions (357) (702) (4,075)
Proceeds from issuance of
common stock, net -- -- 76,138
Proceeds from exercise of
stock options and
employee stock purchase
plan 2,142 4,297 2,054
Dividends paid -- -- (58)
------------------------------------
Net cash provided by
financing activities 1,785 3,595 72,174
------------------------------------
Effects of exchange rate
changes on cash and cash
equivalents 3 (766) 153
------------------------------------
Net increase (decrease)
in cash and cash
equivalents (13,152) (21,136) 58,133
Cash and cash equivalents,
beginning of period 72,067 93,203 36,068
Elimination of Spider net
cash activity for the
three months ended March
31, 1995 -- -- (998)
------------------------------------
Cash and cash equivalents,
end of period $58,915 $72,067 $93,203
====================================
Supplemental disclosure
of cash flow information
Interest paid $ 236 $ 195 $ 748
Income taxes paid $ 2,430 $ 471 $ 143
Supplemental disclosure
of noncash financing
activities
Issuance of common stock
in settlement of dividend
payable $ -- $ -- $ 406
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
SHIVA CORPORATION
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Shiva Corporation (the "Company") is a leading global provider of
remote access solutions for business. The Company's products connect
employees, customers and business partners to networks with
industry-leading remote access solutions. The Company was founded
in 1985, and is based in Bedford, Massachusetts, with offices
worldwide. The Company markets its products worldwide primarily
through distributors, systems integrators, resellers and original
equipment manufacturers.
A summary of the Company's significant accounting policies
follows:
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to
December 31.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The
consolidated financial information contained herein include the
accounts of Spider Systems Limited ("Spider") and AirSoft, Inc.
("AirSoft") for all periods presented (see Note 2).
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment provided
that no significant Company obligations remain and collection of
the related receivable is probable. The Company provides most
of its distributors and resellers with price protection rights
and return rights for stock rotation or product evaluation. An
allowance for estimated future returns is recorded at the time
revenue is recognized based on the Company's return policies and
historical experience. Although the Company believes it has
adequate reserves to cover product returns and price protection
rights, there can be no assurance that the Company will not
experience significant returns or price protection adjustments in
the future or that such reserves will be adequate to cover such
returns and price protection rights. Revenue from technical
support and product maintenance contracts is deferred and
recognized ratably over the period the services are performed.
The Company provides a one-year warranty on hardware products and
a ninety-day warranty on software media. A provision is made at
the time of sale for product warranty costs. The Company has
historically provided customers with a variety of technical
support services, including free services which it is not
contractually obligated to provide. A provision is made at the
time of sale for the cost of such free services.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. The Company invests its excess cash in U.S.
Treasury securities, municipal securities, corporate debt
securities, money market funds of major financial institutions,
high-grade commercial paper and time deposits that are subject to
minimal credit and market risk.
All of the Company's cash equivalents and short-term investments
are recorded at fair value and classified as available-for-sale
in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's investments at January 3, 1998 and
December 28, 1996 include unrealized gains of $110,000 and
$175,000, respectively, recorded as a separate component of
stockholders' equity. The Company's short-term investments at
January 3, 1998 have various maturity dates through 1999.
Realized gains or losses on the sale of securities are calculated
using the specific identification method. Realized gains or
losses in fiscal 1997 and 1996 were not significant.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk include accounts receivable which
are primarily due from distributors, resellers and OEM customers
throughout the world. The Company performs ongoing evaluations
of customers' financial condition and, generally, does not
require collateral. In addition, the Company maintains reserves
for potential credit losses, and such losses, in the aggregate,
have not exceeded management expectations. At January 3, 1998
and December 28, 1996, one customer accounted for 31% and 19% of
the accounts receivable balance, respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments,
which include cash, cash equivalents and short-term investments,
accounts receivable, other assets, accounts payable, long-term
debt and capital lease obligations, approximate their fair value
at January 3, 1998 and December 28, 1996.
FORWARD FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts as a
hedge against exposure to fluctuations in exchange rates
associated with certain transactions denominated in foreign
currencies, including intercompany and trade accounts receivable
and payable, and does not use them for trading purposes. The
contracts are marked to market with gains and losses, not
material in amount, recognized currently in interest and other
expense in the accompanying financial statements and generally
offset exchange gains or losses on the related transactions. Cash
flows from the contracts are classified as cash flows from
operating activities. Exposure to credit risk for these
contracts is minimal since the counterparties are major financial
institutions, and is generally limited to the unrealized gains on
such contracts should any counterparties fail to perform as
contracted. Exposure to market risk is limited to movements in
currency rates. At January 3, 1998, the Company had outstanding
forward exchange contracts to purchase $2,490,000 and to sell
$638,000 in various foreign currencies which matured and settled
on January 21, 1998. The fair value of outstanding forward
exchange contracts approximates the original value due to the
relatively short terms, generally less than three months.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. There can be no assurance that products or
technologies developed by others will not make the Company's
inventories obsolete.
The Company is currently dependent on 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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of
the related assets. Equipment held under capital leases is
stated at the lower of the fair market value of the equipment or
the present value of the minimum lease payments at the inception
of the leases and is amortized on a straight-line basis over the
shorter of the lives of the related assets or the term of the
leases. Maintenance and repair costs are expensed as incurred.
Upon sale or retirement of property, plant and equipment, the
applicable cost of the disposed asset and the related accumulated
depreciation are eliminated. Any resulting gains or losses are
reflected in results of operations.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT
COSTS
Research and development costs, other than certain software
development costs, are charged to expense as incurred. Software
development costs incurred subsequent to the establishment of
technological feasibility, and prior to general release of the
product to the public, are capitalized and amortized to cost of
revenues on a straight-line basis over the estimated useful lives
of the related products, generally eighteen to thirty-six months.
It is reasonably possible that the remaining estimated useful
lives of the related products could be reduced in the future due
to competitive pressures. Unamortized software development costs
of $761,000 and $1,134,000 are included in other assets at
January 3, 1998 and December 28, 1996, respectively.
Amortization expense was $1,206,000, $777,000 and $370,000 in
fiscal 1997, 1996 and 1995, respectively.
The Company receives fees under product development contracts
with certain customers. Product development fees are recorded
as a reduction of research and development costs as work is
performed pursuant to the related contracts and defined
milestones are attained. Losses, if any, are provided for at the
time that management determines that development costs will
exceed related fees. Payments received under product
development contracts prior to the completion of the related work
and attainment of milestones are recorded as deferred
liabilities. In fiscal 1997, 1996 and 1995 the Company recorded
product development fees related to customer-specific projects of
$1,464,000, $1,718,000 and $955,000, respectively, and incurred
development costs of $1,056,000, $922,000 and $1,135,000,
respectively, under such contracts. In addition, in fiscal 1997
the Company recorded product development fees of $5,200,000 from
Nortel to fund certain costs associated with the development of
products and product features specific to the carrier and service
provider markets. Nortel agreed to fund up to $5,200,000 of
costs in fiscal 1997 related to the development of such products,
provided that the Company incurred a minimum of $10,400,000 of
carrier-related development costs. The Company incurred costs
in excess of these levels on carrier related development in
fiscal 1997.
ADVERTISING COSTS
Advertising costs, other than certain direct-response advertising
costs, are charged to expense as incurred. The Company has not
incurred significant costs associated with direct-response
advertising in fiscal 1997, 1996, and 1995, and there were no
capitalized advertising costs at January 3, 1998 or December 28,
1996. Advertising costs were $5,268,000, $3,177,000, and
$3,042,000 in fiscal 1997, 1996 and 1995, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", which is an asset and liability method of
accounting for income taxes. Under this method, deferred tax
assets and liabilities are recognized for the expected future tax
consequences, utilizing current tax rates, of temporary
differences between the carrying amounts and the tax bases of
assets and liabilities. Deferred tax assets are recognized, net
of any valuation allowance, for the estimated future tax effects
of deductible temporary differences and tax operating loss and
credit carryforwards. Deferred income tax expense represents the
change in the net deferred tax asset and liability balances.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees. In January 1996, the
Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." (See Note 10).
FOREIGN CURRENCY TRANSLATION
Financial statements of international subsidiaries, where the
local currency is the functional currency, are translated using
period-end exchange rates for assets and liabilities and at
average rates during the period for results of operations. The
resulting foreign currency translation adjustments are included
as a separate component of stockholders' equity. For
international subsidiaries where the functional currency is other
than the local currency, monetary assets and liabilities are
translated using period-end exchange rates, nonmonetary assets
and liabilities are translated at historical rates and results of
operations are translated at average rates for the period. The
resulting foreign currency translation adjustments are included
in interest and other expense in the accompanying financial
statements. Gains or losses resulting from foreign currency
translation were not significant in fiscal 1997, 1996 and 1995.
NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128. This Statement requires the presentation
of basic and diluted earnings per share. Basic earnings per
common share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of stock options.
Dilutive common equivalent shares are excluded from the computation of
diluted earnings per share during periods of net loss because their
effect would be anti-dilutive. The Company has restated all prior
period per share data presented as required by SFAS No. 128
(See Note 16).
RECLASSIFICATIONS
Certain reclassifications have been made to amounts in the
financial statements of fiscal 1996 and 1995 in order to conform
to the current year presentation.
2. BUSINESS COMBINATIONS
In June 1996, the Company issued 691,587 shares of common stock
in exchange for all outstanding shares of AirSoft (the "Airsoft
Acquisition"), a developer of performance enhancement software
products, in a business combination accounted for as a pooling of
interests. The consolidated financial statements for all periods
presented have been retroactively combined to reflect the AirSoft
Acquisition. No adjustments to conform accounting methods were
required; however, certain amounts have been reclassified with
regard to the presentation of the financial information of the
companies.
Merger related expenses of $1,987,000 were expensed upon
consummation of the AirSoft Acquisition in the quarter ended June
29, 1996. Merger-related expenses include $1,675,000 of
transaction costs for financial advisor, legal, regulatory and
accounting fees and other related expenses, and $312,000 of
employee severance payments and other costs.
In August 1995, the Company issued approximately 3,923,606 shares
of common stock in exchange for all outstanding shares of Spider
(the "Spider Acquisition"), a digital internetworking company
based in Edinburgh, UK, in a business combination accounted for
as a pooling of interests. The consolidated financial statements
for all periods presented have been retroactively combined to reflect
the Spider Acquisition.
Spider's fiscal year end of March 31 was changed to conform to
the Company's fiscal year end. Spider's results of operations
for the year ended March 31, 1995 have been combined with the
Company's results of operations for the year ended December 31,
1994. The results of operations for fiscal 1995 are for the
twelve months ended December 30, 1995, for both Shiva and Spider.
Spider's unaudited results of operations for the three months
ended March 31, 1995 (including revenues, operating income, and
net income of $12,592,000, $1,350,000 and $899,000 respectively)
have been included in the combined results of operations for both
fiscal 1994 and 1995. Therefore, Spider's net income for the
three month period ended March 31, 1995 has been eliminated from
stockholders' equity.
Merger related expenses of $13,986,000 were expensed upon
consummation of the Spider Acquisition in the quarter ended
September 30, 1995. Merger-related expenses include $6,275,000
of transaction costs for financial advisor, legal, regulatory,
and accounting fees and other related expenses, $1,482,000 of
employee severance payments, $2,644,000 of phantom stock
compensation and $3,585,000 of integration costs, including
elimination of duplicative assets, employee relocation and
travel, and marketing costs related to the introduction of the
combined entity.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash, cash equivalents and short-term investments consist of the
following:
(In thousands)
<TABLE>
<CAPTION>
Amortized Unrealized Fair
January 3, 1998 Cost Gain/(Loss) Market Value
---- ----------- ------------
<S> <C> <C> <C>
Cash and cash equivalents:
Municipal securities $ 23,435 $ -- $ 23,435
Commercial paper 20,583 (9) 20,574
Certificates of deposit 2,010 -- 2,010
Corporate debt securities 2,510 91 2,601
Money market funds 2,459 -- 2,459
Cash held in banks 7,836 -- 7,836
----- -- -----
Total cash and cash
equivalents 58,833 82 58,915
------ -- ------
Short-term investments:
Municipal securities 12,543 17 12,560
Corporate debt securities 9,107 15 9,122
Certificates of deposit 7,077 -- 7,077
Treasury securities 8,113 (4) 8,109
----- --- -----
Total short-term
investments 36,840 28 36,868
------ -- ------
Total cash, cash
equivalents and
short-term investments $95,673 $110 $95,783
======= ==== =======
Amortized Unrealized Fair
December 28, 1996 Cost Gain/(Loss) Market Value
---- ----------- ------------
Cash and cash equivalents:
Municipal securities $ 48,204 $ 16 $48,220
Money market funds 6,921 -- 6,921
Cash held in banks 16,926 -- 16,926
------ -- ------
Total cash and cash
equivalents 72,051 16 72,067
------ -- ------
Short-term investments:
Municipal securities 34,876 159 35,035
------ --- ------
Total cash, cash
equivalents and
short-term investments $106,927 $175 $107,102
======== ==== ========
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
(In thousands) January 3, December 28,
1998 1996
---- ----
<S> <C> <C>
Raw materials $ 7,199 $ 6,218
Work-in-process 57 1,506
Finished goods 6,802 10,234
------- ------
$14,058 $17,958
======= =======
</TABLE>
In the first quarter of fiscal 1997, the Company recorded a
writedown of excess and obsolete inventory of $6,463,00. In
the fourth quarter of fiscal 1997, the Company recorded an
additional writedown for excess and obsolete inventory of
$2,605.000. The fourth quarter writedown resulted in a decrease
in net income of $1,615,000, or $0.05 per share. Both writedowns
are included in cost of revenues in the accompanying consolidated
statement of operations and resulted in a decrease in net income
of $5,622,000, or $0.19 per share, in fiscal 1997.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Useful life January 3, December 28,
(in years) 1998 1996
-----------------------------
(In thousands)
<S> <C> <C> <C>
Land $ 328 $ 339
Buildings 50 4,210 4,301
Furniture and fixtures 5 4,110 3,589
Machinery and equipment 3 - 5 34,639 25,288
Leasehold improvements Lease Term 3,341 2,461
----- -----
46,628 35,978
Less - Accumulated
depreciation and amortization 20,535 12,123
------ ------
$26,093 $23,855
====== ======
</TABLE>
Machinery and equipment include equipment under capital leases of
$206,000 at January 3, 1998 and December 28, 1996. Accumulated
amortization related to equipment under capital leases totals
$195,000 and $153,000 at January 3, 1998, and December 28, 1996,
respectively. Amortization of equipment under capital leases is
included in depreciation expense. In fiscal 1997 and fiscal
1996, the Company disposed of approximately $121,000 and
$5,474,000 in property and equipment, respectively. The
resulting loss on these disposals was not significant.
6. ACCRUED EXPENSES
<TABLE>
<CAPTION>
Accrued expenses consist of the following:
(In thousands)
January 3, December 28,
1998 1996
---------------------------
<S> <C> <C>
Research and development $ 1,986 $1,171
Selling, general and
administrative 10,281 9,112
Compensation and benefits 5,634 5,871
Income taxes 2,241 1,802
Other 2,162 1,663
----------------------
$22,304 $19,619
======================
</TABLE>
7. BORROWINGS
CREDIT ARRANGEMENTS
Under the terms of a credit agreement (the "Credit Agreement")
with a U.S. bank, the Company has a $5,000,000 unsecured
revolving credit facility (the "Revolver") which bears interest
at the bank's prime rate (8.5% at January 3, 1998). At January 3,
1998, available borrowings were reduced by outstanding letters
of credit of $838,000 related to certain office leases. These
letters of credit expire at various dates through 1998. While
the Company may repay all or a portion of the Revolver borrowings
at any time, any outstanding principal must be repaid in full by
September 1998. The terms of the Credit Agreement require the
Company to comply with certain restrictive financial covenants.
There were no borrowings outstanding under the Revolver at
January 3, 1998 or December 28, 1996.
The Company also has a foreign credit facility secured by all
assets of Shiva Europe Limited of approximately $2,625,000, of
which $2,523,000 was available at January 3, 1998. Available
borrowings under this facility are decreased by the value of the
outstanding debt payable to the European Coal and Steel Community
Fund and guarantees on certain foreign currency and other
transactions. Borrowings under the foreign credit facility bear
interest at the bank's prime rate plus 1.25% (8.5% at January 3,
1998). The terms of the foreign credit facility require the
Company to comply with certain restrictive financial covenants.
There were no borrowings outstanding under the foreign credit
facility at January 3, 1998.
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt at January 3, 1998 consists of capital lease
obligations of $16,000 and mortgage loans payable to the European
Coal and Steel Community Fund ("ECSC") of $102,000 which are
related to the Company's facility in Edinburgh, UK. The capital
lease obligations, which are payable during fiscal 1998, bear
interest at rates varying from 11.4% to 14.3% and are secured by
the underlying equipment. The ECSC mortgage loans are payable in
semi-annual installments of $97,000 plus accrued interest at 10%.
The Company paid the outstanding balance of the mortgage loans
in January 1998.
8. INCOME TAXES
The components of income (loss) before income taxes are as
follows:
(In thousands)
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
------------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
<S> <C> <C> <C>
Domestic ($30,823) $22,906 $ 2,387
Foreign 8,810 3,120 4,853)
----- ----- -----
($22,013) $26,026 $(2,466)
========= ======= ========
</TABLE>
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
(In thousands) Year Ended
------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
------------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
<S> <C> <C> <C>
Current:
Federal ($660) $7,561 $3,401
State -- 1,013 186
Foreign 1,948 613 (390)
----- --- -----
1,288 9,187 3,197
----- ----- -----
Deferred:
Federal (8,791) (1,244) (333)
State (811) 923 (75)
Foreign (52) 319 (403)
---- --- -----
(9,654) (2) (811)
------- --- -----
($8,366) $9,185 $2,386
======= ====== ======
</TABLE>
The significant components of the net deferred tax asset
(liability) are as follows:
<TABLE>
<CAPION>
January 3, December 28,
1998 1996
(In thousands) ---- ----
<S> <C> <C>
Deferred tax assets:
Reserves not currently
deductible $7,480 $4,275
Net operating loss
carryforwards 8,927 2,381
Tax credit carryforwards 1,287 597
Other 1,059 58
----- --
Gross deferred tax assets 18,753 7,311
------ -----
Deferred tax liabilities
Capitalized software development
costs (234) (406)
Depreciation (607) (736)
Other (85) (91)
---- ----
Gross deferred tax
liabilities (926) (1,233)
Deferred tax asset valuation
allowance (858) (858)
----- -----
$16,969 $5,220
======= ======
</TABLE>
The difference between the income tax provision and income taxes
computed using the applicable U.S. statutory federal tax rate are
as follows:
<TABLE>
<CAPTION>
(In thousands) Year Ended
----------------------------------------
January 3, December 28, December 30,
1998 1996 1995
-----------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
<S> <C> <C> <C>
Taxes computed at
federal statutory rate (35)% 35% 35%
State income taxes, net
of federal tax benefit (3) 5 (16)
Foreign income taxed at
different rates -- -- (2)
Research and development
tax credits -- -- 3
Change in valuation
allowance -- (6) 27
Non-deductible merger
expenses -- 3 (127)
Tax exempt interest (2) (3) --
Other 2 1 (17)
- - ----
Effective income tax rate (38)% 35% (97)%
===== === =====
</TABLE>
At January 3, 1998, the Company had federal and state net
operating loss carryforwards of approximately $23,756,000, which
expire at various dates through 2013. The Company also had
federal and state research and development tax credit
carryforwards of $1,197,000, which expire at various dates
through 2013. Ownership changes, as defined by the Internal
Revenue Code, may limit the amount of net operating loss and tax
credit carryforwards that can be utilized to offset future
taxable income or tax liability.
In fiscal 1996, the deferred tax valuation allowance decreased by
$5,673,000 due to the realization of deferred tax assets related
to employee stock options and the change in the amount of
AirSoft's net operating losses and tax credits expected to be
utilized in the carryforward period. Of this amount, $3,976,000
related to employee stock options and was therefore recorded as a
credit to stockholders' equity. The Company has recorded a
valuation allowance for the tax benefit of certain net operating
loss carryforwards with substantial limitations since realization
of these future benefits is not sufficiently assured at January
3, 1998. The deferred tax asset recognized reflects the benefit
of future deductible temporary differences and net operating loss
and credit carryforwards expected to be realized. Realization of
the asset is dependent on generating sufficient taxable income
and, although not assured, management believes that it is more
likely than not that the deferred tax asset will be realized.
9.STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN
On September 20, 1995 the Company's Board of Directors adopted a
Stockholder Rights Plan and pursuant thereto declared a dividend
of one preferred stock purchase right for each outstanding share
of common stock to stockholders of record at the close of
business on October 13, 1995. Each right entitles holders of the
Company's common stock to purchase one one-hundredth of a share
(a "Unit") of a new series of junior participating preferred
stock, $.01 par value per share, at an exercise price of $300.00
per unit, subject to adjustment. The rights are exercisable and
become exercisable for common stock only under certain
circumstances and in the event of particular events relating to a
change in control of the Company. The rights may be redeemed by
the Company under certain circumstances pursuant to the plan.
The rights expire on October 13, 2005, unless earlier redeemed or
exchanged. The rights have certain antitakeover effects, in that
they would cause substantial dilution to a person or group that
attempts to acquire a significant interest in the Company on
terms not approved by the Board of Directors.
COMMON STOCK
On November 30, 1995, the stockholders approved an increase in
the authorized shares of common stock from 25,000,000 shares to
50,000,000 shares. On April 2, 1996, the Company's Board of
Directors declared a two-for-one split of the Company's common
stock which was effective on April 22, 1996. All shares and per
share amounts included in the accompanying consolidated financial
statements have been adjusted to give retroactive effect to this
stock split for all periods presented. On May 15, 1996, the
stockholders approved an increase in the authorized shares of
common stock from 50,000,000 to 100,000,000 shares.
Each share of common stock entitles the holder to one vote on all
matters submitted to a vote of the Company's stockholders.
Common stockholders are entitled to receive dividends, if any, as
may be declared by the Board of Directors, subject to any
preferential dividend rights of any preferred stockholders.
10. STOCK PLANS
Stock Option Plans
The 1988 Stock Plan (the "1988 Plan") provides for the grant of
incentive stock options, stock awards, and stock purchase rights
for the purchase of up to an aggregate of 8,200,000 shares of the
Company's common stock by officers, employees, consultants and
directors of the Company. In May 1996, the stockholders approved
an increase in the number of shares issuable under the 1988 Plan
from 8,200,000 to 9,700,000 and extended the expiration date of
the 1988 Plan from December 31, 1997 to December 31, 2000.
In March 1997, the Compensation Committee of the Board of
Directors approved a stock option repricing program pursuant to
which all employees of the Company (excluding executive officers)
could elect to exchange their outstanding options for new options
granted under the 1988 Plan. The Company repriced the options
because the exercise prices of such options were significantly
higher than the fair market value of the Company's common stock,
and therefore did not provide the desired incentive to employees.
Options to purchase 2,194,276 shares of common stock, with an
average exercise price per share of $38.08, were surrendered and
repriced at an exercise price of $15.13 per share, which
represented a 10% premium over the closing price of the Company's
common stock on March 7, 1997. The number of repriced options is
therefore included in the number of options granted and canceled
during fiscal 1997 in the table below. The repriced options were
not exercisable until September 5, 1997. All other terms and
conditions of the options remained unchanged.
In May 1997, the stockholders approved the 1997 Stock Incentive
Plan (the "1997 Incentive Plan") which expires on January 24,
2007. The 1997 Incentive Plan provides for the grant of up to an
aggregate of 1,400,000 options to purchase the Company's common
stock by all officers, employees, consultants and directors
of the Company. In October 1997, the Board of Directors approved
the 1997 Employee Stock Plan (the "1997 Employee Plan") which
expires on October 3, 2007. The 1997 Employee Plan provides
for the grant of stock options for the purchase of up to an
aggregate of 1,000,000 shares of the Company's common stock
by all employees of the Company, except those employees who
are also officers or directors of the Company.
The Compensation Committee of the Board of Directors is
responsible for administration of all of the Company's stock
plans. The Compensation Committee determines the term of each
option, the option exercise price, the number of shares for which
each option is granted and the rate at which each option is
exercisable. Options generally vest ratably over four years.
The Company may not grant an employee incentive stock options
with a fair value in excess of $100,000 that are first
exercisable during any one calendar year.
Under the Company's stock plans, incentive stock options may be
granted at an exercise price per share of not less than the fair
value per common share on the date of the grant (not less than
110% of the fair value in the case of holders of more than 10% of
the Company's voting stock). Nonqualified stock options may be
granted to an eligible officer, employee, consultant, or director
at an exercise price per share of not less than either the book
value per common share or 50% of the fair value per common share
on the date of grant.
Options granted under the Company's stock plans generally expire
ten years from the date of the grant (five years for incentive
stock options granted to holders of more than 10% of the
Company's voting stock). The Compensation Committee, at the
request of any optionee, may convert incentive stock options that
have not been exercised at the date of conversion into
nonqualified stock options.
In connection with the AirSoft acquisition, the Company assumed
119,076 options in June 1996. These assumed options were granted
at prices equal to the fair market value at the date of grant,
become exercisable in installments (generally ratably over four
years) and expire ten years from the date of grant. The Company
does not intend to issue any additional options under the AirSoft
stock option plan.
On October 21, 1994, the stockholders approved the 1994 Director
Stock Option Plan (the "1994 Director Option Plan") under which
options to purchase up to an aggregate of 550,000 shares of the
Company's common stock may be granted to nonemployee directors at
an exercise price per share equal to the fair value per common
share on the date of grant. Under the 1994 Director Option Plan,
each nonemployee director was granted an option to purchase
33,000 common shares (the "initial shares") on July 17, 1995, and
an option to purchase an additional 7,000 common shares on the
third Monday in July of each year thereafter, through December
31, 1999. Eligible directors who were previously granted stock
options under the 1988 Plan were not granted an option to
purchase the initial shares. Twenty-five percent of the options
granted under the 1994 Director Option Plan are exercisable one
year from the date of grant and every year thereafter, provided
that the optionee remains a director. Options generally expire
ten years from the date of grant.
Transactions under the Company's stock plans during fiscal 1997,
1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996 Fiscal 1995
----------- ----------- -----------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period 5,086,183 $24.86 4,056,159 $11.06 3,709,354 $1.88
Granted 6,994,834 12.61 2,325,422 38.98 1,581,848 27.32
Exercised 628,838 2.00 899,048 3.94 1,100,059 1.35
Canceled 3,748,063 31.87 396,350 25.08 134,984 14.42
--------------- ---------------- ---------------
Outstanding at
end of period 7,704,116 $12.20 5,086,183 $24.86 4,056,159 $11.06
========= ====== ========= ====== ========= ======
Options exercis-
able at end of
period 2,504,432 1,258,216 683,814
========= ========= =======
Weighted average
fair value of
options granted
during the
period $ 8.33 $ 24.73 $ 16.25
====== ======= =======
Options available
for future
grant 1,297,358 2,148,746 2,583,793
========= ========= =========
</TABLE>
The following table summarizes information about options
outstanding at January 3, 1998 for all of the Company's stock
option plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at January Contractual Exercise at January Exercise
3, 1998 Life (in Price 3, 1998 Price
years)
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .75-6.80 978,013 5.97 $1.93 845,090 $1.73
8.31-10.88 2,348,900 9.53 9.41 385,750 9.20
12.44-14.75 2,198,720 9.55 13.26 308,232 12.92
15.13-18.06 1,754,742 9.11 15.19 731,957 17.04
20.25-66.25 423,741 7.96 33.54 233,403 31.96
---------------------------------------------------
7,704,116 8.90 $12.20 2,504,432 $7.92
===================================================
</TABLE>
The fair value of each option grant under the Company's stock
option plans is estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Expected life (years) 5 5 5
Risk-free interest rate 6.26% 6.19% 6.02%
Volatility 81.35% 64.00% 61.00%
Dividend yield 0.00% 0.00% 0.00%
</TABLE>
Employee Stock Purchase Plan
On October 21, 1994, the stockholders approved the 1994 Employee
Stock Purchase Plan (the "1994 Stock Purchase Plan") which
enables eligible employees to purchase shares of common stock.
Under the 1994 Stock Purchase Plan, eligible employees may
purchase up to an aggregate of 700,000 shares of common stock
during six-month plan periods commencing on February 1 and August
1 of each year at a price per share of 85% of the lower of the
market price per share on the first or last business day of the
six-month plan period. An employee's rights terminate upon
voluntary withdrawal from the 1994 Stock Purchase Plan or upon
termination of employment. At January 3, 1998 and December 28,
1996, 561,036 and 646,830 shares, respectively, were available
for issuance. In fiscal 1997 and 1996, employees purchased
85,794 and 31,588 shares of stock, respectively. The weighted-
average fair value of shares granted during 1997, 1996 and 1995
were $9.07, $24.73 and $16.25 per share, respectively.
The fair value of shares issued under the 1994 Stock Purchase
Plan is estimated using the Black-Scholes option pricing model
with the following assumptions:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Expected life (years) 0.5 0.5 0.5
Risk-free interest rate 6.26% 6.19% 6.02%
Volatility 81.35% 64.00% 61.00%
Dividend yield 0.00% 0.00% 0.00%
</TABLE>
Fair Value Disclosures
No compensation expense has been recognized related to the Company's
stock plans under AFB No. 25, as the exercise price of the stock
options granted was equal to the market price of the underlying
common stock on the date of grant. Had compensation cost for
the Company's stock plans been determined based on the fair value
at the grant dates, as prescribed in SFAS 123, the Company's net
income (loss) and net income (loss) per share would have been as
follows (in thousands, except per share information):
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net income (loss) As reported $ (13,647) $16,841 $(4,852)
Pro forma (29,025) 4,814 (6,277)
Basic net income
(loss) per share As reported $ (.47) $ .59 $ (.19)
Pro forma (.99) .17 (.25)
Diluted net income
(loss) per share As reported $ (.47) .54 (.19)
Pro forma (.99) .15 (.25)
<FN>
Since options vest over several years and additional option
amounts are expected to be made each year, the above pro forma
disclosures are not necessarily representative of pro forma
effects of reported operations for future years.
</TABLE>
11. RETIREMENT PLANS
The Company sponsors a 401(k) retirement savings plan covering
all domestic employees of the Company who meet minimum age and
service requirements. The plan allows participants to defer a
portion of their annual compensation on a pre-tax basis. The
Company matches 50% of the first 6% (3% in fiscal 1996 and fiscal
1995) of each participating employee's contributions, subject to
certain limitations and may, at its discretion, make additional
contributions to the plan. The Company made matching
contributions of $519,000, $230,000 and $150,000 to the plan in
fiscal 1997, 1996 and 1995, respectively.
The Company also sponsors a defined contribution plan for all
eligible European employees of the Company. Participation in the
plan is available to substantially all salaried employees and to
certain groups of hourly paid employees. Company contributions
are based on a percentage of the employees' base salaries and in
some cases, bonus compensation. The Company made contributions
of $409,000, $437,000 and $318,000 to the plan in fiscal 1997,
1996 and 1995, respectively.
12. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: the
development, manufacture, sale and support of network
communications products and services.
In fiscal 1997 and 1996, Nortel accounted for $23,266,000 (16%)
of revenues and $27,905,000 (14%) of revenues, respectively. In
addition, the Company received customer-funded development fees
of $5,610,000 and $910,000 from Nortel in fiscal 1997 and 1996,
respectively, which are recorded as an offset to research and
development expenses in the accompanying consolidated statement
of operations.
International revenues totaled $70,146,000, $74,779,000 and
$55,197,000 in fiscal 1997, 1996 and 1995, respectively. Export
revenues, primarily to Europe and the Asia Pacific regions, were
$53,588,000, $20,166,000 and $6,699,000 in fiscal 1997, 1996 and
1995, respectively.
Intercompany sales and transfers between geographic areas are
accounted for at prices which are designed to be representative
of unaffiliated party transactions.
<TABLE>
<CAPTION>
North
America Europe Eliminations Total
------- ------ ------------ -----
<S> <C> <C> <C> <C>
1997
Revenues to unaffiliated
customers $127,771 $16,558 $ -- $144,329
Intercompany revenue 7,687 2,966 (10,653) --
----- ----- -------- --------
Total revenues 135,458 19,524 (10,653) 144,329
------- ------ -------- -------
Income (loss) from
operations (31,875) 5,591 749 (25,535)
Identifiable assets 170,076 12,170 -- 182,246
1996
Revenues to unaffiliated
customers $145,506 $54,613 $ -- $200,119
Intercompany revenue 10,269 4,443 (14,712) --
------ ----- -------- -------
Total revenues 155,775 59,056 (14,712) 200,119
------- ------ -------- -------
Income from operations 19,604 3,745 (667) 22,682
Identifiable assets 163,050 35,749 (749) 198,050
1995
Revenues to unaffiliated
customers $ 70,083 $48,498 $ -- $118,581
Intercompany revenue -- 607 (607) --
------ ------ ----- --
Total revenues 70,083 49,105 (607) 118,581
------ ------ ----- -------
Loss from operations (797) (3,243) -- (4,040)
Identifiable Assets 140,006 24,581 (14,464) 150,123
</TABLE>
13. COMMITMENTS
The Company leases office and operating facilities and certain
equipment under operating and capital leases (See Notes 5 and 7)
that expire through February 2006. Future minimum lease payments
under operating and capital leases with initial or remaining non-
cancelable terms of one or more years are as follows as of
January 3, 1998:
<TABLE>
<CAPTION>
(In thousands)
Fiscal Operating Leases Capital
- ------ Leases
- ------ --------------------------------
<S> <C> <C>
1998 3,645 16
1999 3,211 --
2000 2,930 --
2001 2,743 --
2002 2,731 --
Thereafter 6,397 --
----- --
Total minimum lease payments $21,657 16
======= ==
Less - Amount representing interest --
--
Net present value of minimum lease payments $16
===
</TABLE>
Rental expenses under operating leases was $4,223,000, $3,244,000
and $1,934,000 in fiscal 1997, 1996 and 1995, respectively.
14. CONTINGENCIES
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. 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.
15. RELATED PARTY TRANSACTIONS
In fiscal 1997, the Company made two non-interest bearing loans
to certain officers of the Company in the amounts of $700,000 and
$50,000 in the form of promissory notes. The notes receivable,
included in other assets at January 3, 1998, are unsecured. The
$700,000 note is due upon termination of employment of the
officer but no later than September 8, 2002, and the $50,000 note
is due on December 31, 2000.
16. NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------
January 3, December 28, December 30,
1998 1996 1995
-----------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
<S> <C> <C> <C>
Numerator:
Net income (loss) ($13,647,000) $16,841,000 ($ 4,852,000)
Denominator:
Denominator for basic
earnings per share-
weighted average shares
outstanding 29,266,263 28,424,797 25,079,951
Effect of dilutive
securities:
Stock options - 3,034,100 -
---------- ---------- ----------
Denominator for diluted
earnings per share 29,266,263 31,458,897 25,079,951
Basic net income (loss)
per share ($0.47) $0.59 ($0.19)
Diluted net income (loss)
per share ($0.47) $ 0.54 ($0.19)
<FN>
(1) Potential dilutive securities excluded from the 1997, 1996
and 1995 diluted net income (loss) per share computation
includes outstanding options to purchase 7,704,116, 35,000 and
4,056,159 shares of common stock, respectively.
</TABLE>
17. SUBSEQUENT EVENT
On February 19, 1998,the Company entered into a definitive
agreement to acquire substantially all of the assets and liabilities
of Isolation Systems Limited for approximately $37 million in cash,
subject to closing adjustments. Isolation Systems is a leading
developer of virtual private networking hardware and software
solutions based in Toronto, Ontario. The Isolation Acquisition is
expected to close by March 31, 1998 and will be accounted for as
a purchase. Accordingly, the purchase price will be allocated to
the underlying assets and liabilities based on their respective
fair values at the date of closing. The Company expects to
recognize a substantial charge for in-process research and
development in the first quarter of fiscal 1998.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Shiva Corporation
In our opinion, based upon our audits and the report of other
auditors, the accompanying consolidated balance sheet and related
consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Shiva Corporation
and its subsidiaries at January 3, 1998 and December 28, 1996,
and the results of their operations and their cash flows for each
of the three years in the period ended January 3, 1998, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the
financial statements of AirSoft, Inc., a wholly-owned subsidiary,
which statements reflect total revenues of $860,000 and a net
loss of $1,973,000 for the year ended December 31, 1995. Those
statements were audited by other auditors whose report thereon
has been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for AirSoft, Inc. as of and
for the period described above, is based solely on the report of
the other auditors. We conducted our audits of these statements
in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
January 27, 1998, except
as to Note 16 which is
as of February 19, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of AirSoft, Inc.:
We have audited the statements of operations, stockholders'
equity and cash flows of Airsoft, Inc., (the Company) for the
year ended December 31, 1995, (none of which are presented
herein). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statements presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements of Airsoft, Inc. present
fairly, in all material respects, the results of its operations
and its cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 28, 1996
(June 16, 1996 as to Note 8)
<PAGE>
<TABLE>
Quarterly Financial Information (unaudited) (1)
<CAPTION>
First Second Third Fourth
Quarter(2) Quarter Quarter Quarter(2)
------- ------- ------- -------
(In thousands, except per share
data)
Fiscal 1997
<S> <C> <C> <C> <C>
Revenues $31,159 $39,738 $35,581 $37,851
Gross profit 9,520 23,789 20,262 19,342
Net loss (8,370) (996) (2,130) (2,151)
Net loss per share - basic $ (0.29) $ (0.03) $ (0.07) $ (0.07)
Net loss per share - diluted $ (0.29) $ (0.03) $ (0.07) $ (0.07)
Common Stock Prices ----- High $ 36.75 $ 13.88 $ 16.44 $ 14.69
Low $ 11.88 $ 8.25 $ 10.06 $ 8.13
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 1996
Revenues $43,309 $51,485 $57,109 $48,216
Gross profit 25,924 30,088 33,348 27,582
Merger expenses - 1,987 - -
Net income 4,339 4,975 6,027 1,500
Net income per share - basic $ 0.15 $ 0.17 $ 0.21 $ 0.05
Net income per share - diluted $ 0.14 $ 0.16 $ 0.19 $ 0.05
Common Stock Prices ----- High $ 48.13 $ 87.25 $ 85.88 $ 58.50
Low $ 25.13 $ 44.38 $ 41.25 $ 33.25
<FN>
(1) The Company has restated all quarterly net income (loss) per share data
as required by SFAS No. 128.
(2) In the first quarter of fiscal 1997, the Company recorded a writedown of
excess and obsolete inventory of $6,463,000. In the fourth quarter of fiscal
1997, the Company recorded an additional writedown for excess and obsolete
inventory of $2,605,000. The fourth quarter writedown resulted in a decrease
in net income of $1,615,000, or $0.05 per share. Both writedowns are included
in cost of revenues in the accompanying consolidated statement of operations
and resulted in a decrease in net income of $5,622,000, or $0.19 per share,
in fiscal 1997.
</TABLE>
As of January 30, 1998 the closing price of the Company's common stock on
the Nasdaq National Market was $9.44 per share and as of that same date there
were 759 record holders of the Company's common stock. This does not reflect
persons or entities who hold their stock in nominee or "street" name through
various brokerage firms. The Company has never paid any cash dividends on
its common stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings
to fund the development and growth of its business.
<PAGE>
Exhibit 21.1
SHIVA CORPORATION
LIST OF SUBSIDIARIES
as of February 24, 1998
<TABLE>
<CAPTION>
State or
Jurisdiction of
Name Incorporation
<S> <C>
Shiva Corporation Massachusetts
Shiva Credit Corporation Massachusetts
Shiva Foreign Sales Corp. St. Thomas, U.S. Virgin Islands
Shiva Securities Corporation Massachusetts
Spider Systems Inc. Massachusetts
Shiva Europe Holdings I B.V. Netherlands
Shiva Europe Limited United Kingdom
Spider Shiva International Systems France
Shiva Corporation South Africa (Proprietary)
Limited South Africa
Shiva Worldwide Holdings Ltd. Delaware
Shiva Andina Limitada Colombia
Shiva Australia Pty Ltd Australia
Shiva do Brasil Ltda Brazil
Shiva Canada Inc. Canada
Shiva Communications Hong Kong Ltd. Hong Kong
Shiva Communications Singapore Pte Ltd Singapore
Shiva Japan Ltd Japan
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (File Nos
333-10663 and 333-10951) and Registration Statements on Form S-8 (File Nos
33-86514, 333-04231, 333-08561 and 333-12895) of Shiva Corporation and its
subsidiaries of our report dated January 27, 1997, appearing in this Form
10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedule, which appears in this Form 10-K.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, Massachusetts
<PAGE>
Exhibit 23.2
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in the Registration
Statements Nos. 333-10663 and 333-10951 of Shiva Corporation on
Form S-3 and Registration Statement Nos. 333-38269,333-27719,
333-86514, 333-04231, 333-08561 and 333-12895 of Shiva Corporation
on Form S-8 of our report dated March 28, 1996 (June 16, 1996 as
to Note 8) (relating to the financial statements of Airsoft, Inc.
not presented separately herein), appearing in Amendment No. 2 to
the Current Report on Form 8-K/A of Shiva Corporation dated
August 13, 1996.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
San Jose, California
March 26, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 58,915
<SECURITIES> 36,868
<RECEIVABLES> 31,206
<ALLOWANCES> 8,037
<INVENTORY> 14,058
<CURRENT-ASSETS> 144,062
<PP&E> 46,628
<DEPRECIATION> 20,535
<TOTAL-ASSETS> 182,246
<CURRENT-LIABILITIES> 35,748
<BONDS> 0
0
0
<COMMON> 296
<OTHER-SE> 145,648
<TOTAL-LIABILITY-AND-EQUITY> 182,246
<SALES> 126,757
<TOTAL-REVENUES> 144,329
<CGS> 71,416
<TOTAL-COSTS> 71,416
<OTHER-EXPENSES> 98,448
<LOSS-PROVISION> 469
<INTEREST-EXPENSE> 481
<INCOME-PRETAX> (22,013)
<INCOME-TAX> (8,366)
<INCOME-CONTINUING> (13,647)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,647)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
