SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended April 4, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
-- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
------ ------
Commission File Number 000-24918
---------
SHIVA CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2889151
State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
28 Crosby Drive, Bedford, MA 01730
(Address of principal executive offices, including Zip Code)
(781) 687-1000
(Registrant's telephone number, including area code)
___________________________
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO
The number of shares outstanding of the registrant's Common Stock
as of April 4, 1998 was 30,301,804.
1
<PAGE>
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN
INFORMATION
While responding to a comment letter received from the staff of
the Securities and Exchange Commission (the "SEC"), the Company
reviewed staff guidance issued on September 15, 1998 with respect
to the method used to value acquired in-process research and
development ("R&D") associated with the Company's acquisition of
Isolation Systems Limited ("Isolation") in the first quarter of
1998. As a result of this review, the Company has modified the
method used to value such acquired in-process R&D. Initial
calculations to value the acquired in-process R&D were based upon
a methodology that focused on the after-tax cash flows
attributable to the technology, on an overall basis, without regard
to the stage of completion of individual projects, and the selection of
an appropriate rate of return to reflect the risk associated with
the stage of completion of the technology. Revised calculations
were based upon the methodology set forth in the SEC's September
1998 letter to the AICPA that requires consideration of the stage
of completion of the individual in-process R&D projects at the
date of acquisition. As a result of applying the revised
calculations, the Company has restated its financial statements
for the quarters ended April 4, July 4, and October 3, 1998 (See
Note 8 to the Company's consolidated financial statements).
This Quarterly Report on Form 10Q/A amends and restates items 1
and 2 of Part I and item 6 of Part II of the Company's Quarterly
Report on Form 10-Q previously filed for the quarter ended April
4, 1998.
2
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Balance Sheet
(in thousands, except share related data)
<CAPTION>
April 4, January 3,
1998 1998
--------- ---------
(unaudited)
(As Restated-
See Note 8)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 23,942 $ 58,915
Short-term investments 46,040 36,868
Accounts receivable, net of allowances
of $9,203 at April 4, 1998 and $8,037
at January 3, 1998 20,012 23,169
Inventories 10,844 14,058
Deferred income taxes 8,683 8,683
Prepaid expenses and other current assets 2,139 2,369
-------- --------
Total current assets 111,660 144,062
Property, plant and equipment, net 25,644 26,093
Deferred income taxes 10,088 8,840
Goodwill 34,581 -
Other assets 5,228 3,251
-------- --------
Total assets $187,201 $182,246
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 8 $ 118
Accounts payable 8,129 9,258
Accrued expenses 23,914 22,304
Deferred revenue 10,729 4,068
-------- --------
Total current liabilities 42,780 35,748
Deferred income taxes 561 554
-------- --------
Total liabilities 43,341 36,302
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized, none issued - -
Common stock, $.01 par value; 100,000,000
shares authorized, 30,301,804 and 29,605,848
shares issued and outstanding at April 4,
1998 and January 3, 1998, respectively 303 296
Additional paid-in capital 153,949 153,036
Treasury stock at cost, 106,115 shares
at April 4, 1998 (1,307) -
Unrealized gain on investments 89 110
Cumulative translation adjustment (139) (308)
Accumulated deficit (9,035) (7,190)
-------- --------
Total stockholders' equity 143,860 145,944
-------- --------
Total liabilities and stockholders'
equity $187,201 $182,246
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Statement of Operations
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three months ended
---------------------------
April 4, March 29,
1998 1997
-------- ---------
(As Restated-
See Note 8)
<S> <C> <C>
Revenues:
Product $ 29,816 $ 25,368
Service 8,174 1,541
Royalty 41 4,250
-------- --------
Total revenues 38,031 31,159
-------- --------
Cost of revenues:
Product 13,355 20,087
Service 5,194 1,552
-------- --------
Total cost of revenues 18,549 21,639
-------- --------
Gross profit 19,482 9,520
-------- --------
Operating expenses:
Research and development 4,580 5,961
Selling, general and administrative 14,808 17,898
In-process research and development 2,100 -
Restructuring expenses 1,630 -
-------- --------
Total operating expenses 23,118 23,859
-------- --------
Loss from operations (3,636) (14,339)
Interest income 1,123 962
Interest and other expense (200) (122)
-------- --------
Loss before income taxes (2,713) (13,499)
Income tax benefit (868) (5,129)
-------- --------
Net loss $ (1,845) $ (8,370)
======== ========
Net loss per share -
basic and diluted $ (0.06) $ (0.29)
======== ========
Shares used in computing net loss
per share - basic and diluted 29,854 28,972
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
SHIVA CORPORATION
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
<CAPTION>
Three Months Ended
---------------------------
April 4, March 29,
1998 1997
-------- ---------
(As Restated-
See Note 8)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,845) $ (8,370)
Adjustments to reconcile net
loss to net cash provided (used)
by operating activities:
In-process research and development 2,100 -
Depreciation and amortization 2,937 2,235
Deferred income taxes (880) -
Changes in assets and liabilities,
net of effects of acquisition:
Accounts receivable 3,496 14,901
Inventories 3,305 1,302
Prepaid expenses and other current
assets 301 (5,277)
Accounts payable (1,814) (3,389)
Accrued expenses 1,364 (3,044)
Deferred revenue 6,656 119
Other long-term liabilities - (10)
-------- --------
Net cash provided (used)
by operating activities 15,620 (1,533)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and
equipment (1,617) (3,015)
Payments for acquisition (38,821) -
Capitalized software development costs (88) (155)
Purchases of short-term investments (19,688) (5,333)
Proceeds from maturity and sales of
short-term investments 10,495 6,525
Change in other assets (36) (101)
-------- --------
Net cash used by investing
activities (49,755) (2,079)
-------- --------
Cash flows from financing activities:
Principal payments on long-term
debt and capital lease
obligations (111) (118)
Purchases of treasury stock (1,307) -
Proceeds from exercise of stock
options 553 487
-------- --------
Net cash provided (used) by
financing activities (865) 369
-------- --------
Effects of exchange rate changes
on cash and cash equivalents 27 385
-------- --------
Net decrease in cash and cash
equivalents (34,973) (2,858)
Cash and cash equivalents,
beginning of period 58,915 72,067
-------- --------
Cash and cash equivalents, end
of period $ 23,942 $ 69,209
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
5
<PAGE>
SHIVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries, and have been prepared by the Company in accordance
with generally accepted accounting principles. In the opinion of
management, these unaudited consolidated financial statements
contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash
flows at the dates and for the periods indicated. While the
Company believes that the disclosures presented are adequate to
make the information not misleading, these consolidated financial
statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 3,
1998.
The results of operations for the three-month period ended
April 4, 1998 are not necessarily indicative of the results
expected for the full fiscal year.
2. EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," and has restated
earnings per share amounts for all periods presented herein.
<TABLE>
<CAPTION>
Three months Three months
ended April 4, ended March 29,
1998 1997
-------------- ---------------
(As restated-
See Note 8)
<S> <C> <C>
Net loss ($1,845,000) ($8,370,000)
============ ============
Weighted average shares outstanding 29,853,766 28,971,621
Common-equivalent shares outstanding - -
------------ -----------
Weighted average and common-
equivalent shares outstanding 29,853,766 28,971,621
Basic and diluted net loss per share ($0.06) ($0.29)
=========== ============
</TABLE>
6
<PAGE>
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
At April 4, 1998, the Company had cash and cash equivalents of
$23,942,000 and $46,040,000 of short-term investments, including
an unrealized gain of $89,000 recorded as a separate component of
stockholders' equity. The Company's short-term investments at
April 4, 1998, classified as available-for-sale, consist of
municipal securities, corporate debt securities, certificates of
deposit, high-grade commercial paper and U.S. Treasury
securities, with various maturity dates through February 2000.
4. INVENTORIES:
<TABLE>
<CAPTION>
Inventories consist of the following:
April 4, January 3,
(in thousands) 1998 1998
-------- ----------
<S> <C> <C>
Raw materials $ 5,707 $ 7,199
Work-in-process 111 57
Finished goods 5,026 6,802
------- -------
$10,844 $14,058
======= =======
</TABLE>
5. COMPREHENSIVE LOSS:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." The Company adopted SFAS 130
on January 4, 1998, which establishes standards for reporting
comprehensive income and its components in the consolidated
financial statements. Comprehensive loss, as restated, for the
three months ended April 4, 1998 was $1,745,000 and includes
after-tax effect of foreign currency translation adjustments and
unrealized holding losses arising during the period.
6. ACQUISITION:
On March 26, 1998, the Company acquired Isolation, a leading
developer of virtual private networking ("VPN") hardware and
software solutions based in Toronto, Ontario in exchange for cash
paid by the Company from its existing cash and short-term
balances. The acquisition was accounted for as a purchase.
Accordingly, the purchase price of approximately $39,724,000 was
allocated to the underlying assets and liabilities based on their
respective fair values at the date of closing. The estimated
fair value of the net assets acquired was $743,000, and
$2,100,000 of the purchase price was allocated to in-process R&D.
The amount allocated to in-process R&D was determined based upon
the methodology set forth in the SEC's September 1998 letter to
the AICPA that requires consideration of the stage of completion of
the individual in-process R&D projects at the date of acquisition.
The in-process R&D was expensed upon acquisition, as it was determined
that technological feasibility had not been established and no
alternative uses existed. The excess of the purchase price over
the net assets acquired and the in-process R&D will be amortized
on a straight-line basis over three years. This excess
approximated $36,881,000, and consisted of $34,581,000 recorded
as goodwill, while the remaining amount, which has been included
in other assets in the accompanying financial statements,
consisted of $2,000,000 related to developed technology and
$300,000 related to an assembled workforce.
7
<PAGE>
Pursuant to an indemnification agreement with Isolation, the
Company has a contingent liability up to a maximum of
approximately $6,500,000 in relation to certain foreign tax
liabilities and associated interest. The obligations of Shiva
only arise if Isolation is assessed or reassessed on the basis
that a portion of the property sold is of a particular nature.
The purpose of the agreement was to ensure that Isolation and its
shareholders were not subject to adverse tax consequences as a
result of the terms of the Company's agreement to acquire
Isolation.
The following summary, prepared on an unaudited pro forma basis,
combines the results of operations as if Isolation had been
acquired as of December 29, 1996; however the one-time charge of
$2,100,000 as a result of the purchase price allocated to in-
process R&D has been excluded due to its non-recurring nature.
The pro forma results have been adjusted in each of the periods
presented below to reflect the loss of interest income as a
result of the cash used in the acquisition as well as the
amortization of goodwill resulting from the transaction.
<TABLE>
<CAPTION>
Three-months ended Three-months ended
(in thousands) April 4, 1998 March 29, 1997
------------------ ------------------
(As Restated -
See Note 8)
<S> <C> <C>
Total revenues $ 39,289 $ 31,386
Operating loss ( 4,656) (18,296)
Net loss ( 2,769) (11,051)
---------- ----------
Net loss per share -
basic and diluted $ ( 0.09) $ ( 0.38)
========== ==========
</TABLE>
The unaudited pro forma results are not necessarily indicative of
what actually would have occurred if the acquisition had been in
effect for the entire periods presented. In addition, they are
not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined
operations.
7. RESTRUCTURING EXPENSES:
The Company recorded $1,630,000 of restructuring expenses
during the first quarter of fiscal 1998. These expenses,
comprised of severance-related costs of $1,482,000 and transition
and other costs of $148,000, were the result of the restructuring
of the Company's sales and marketing operations. As of April 4,
1998, approximately $1,185,000 of these costs had been paid.
8. RESTATEMENT:
While responding to a comment letter received from the staff of
the SEC, the Company reviewed staff guidance issued on September
15, 1998 with respect to the method used to value acquired in-
process R&D associated with the Company's acquisition of
Isolation in the first quarter of 1998. As a result of this
review, the Company has modified the method used to value such
acquired in-process R&D. Initial calculations to value the
acquired in-process R&D were based upon a methodology that
focused on the after-tax cash flows attributable to the
technology on an overall basis, without regard to the stage of
completion of individual projects, and the selection of an
appropriate rate of return to reflect the risk associated with
the stage of completion of the technology. Revised calculations
were based upon the methodology set forth in the SEC's September
1998 letter to the AICPA that requires consideration of the stage
of completion of the individual in-process R&D projects at the
date of acquisition. After applying the revised calculations,
the Company has restated its financial statements for the quarter
ended April 4, 1998 and has decreased the amount of the purchase
price allocated to acquired in-process R&D associated with the
Isolation acquisition from $34,500,000 to $2,100,000 and
increased goodwill by $32,400,000. Goodwill will be amortized
over a three year period. A summary of the significant effects
of the restatement are as follows (in thousands):
8
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations:
Three-months ended April 4, 1998
------------------------------------
As Previously
Reported As Restated
-------------- -----------
<S> <C> <C>
Operating expenses $ 55,518 $ 23,118
Loss before income taxes (35,113) (2,713)
Income tax benefit (11,236) (868)
Net loss (23,877) (1,845)
Net loss per share - basic
and diluted (0.80) (0.06)
Balance Sheet:
Goodwill (1) $ - $ 34,581
Other assets (1) 7,409 5,228
Long-term deferred income taxes 20,456 10,088
Total assets 165,169 187,201
Total stockholders' equity 121,828 143,860
<FN>
(1) Goodwill in the amount of $2,181 was included in other assets
prior to restatement.
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restatement
While responding to a comment letter received from the staff of
the SEC, the Company reviewed staff guidance issued on September
15, 1998 with respect to the method used to value acquired in-
process R&D associated with the Company's acquisition of
Isolation in the first quarter of 1998. As a result of this
review, the Company has modified the method used to value such
acquired in-process R&D. Initial calculations to value the
acquired in-process R&D were based upon a methodology that
focused on the after-tax cash flows attributable to the
technology on an overall basis, without regard to the stage of
completion of individual projects, and the selection of an
appropriate rate of return to reflect the risk associated with
the stage of completion of the technology. Revised calculations
were based upon the methodology set forth in the SEC's September
1998 letter to the AICPA that requires consideration of the stage
of completion of the individual in-process R&D projects at the
date of acquisition. After applying the revised calculations,
the Company has restated its financial statements for the quarter
ended April 4, 1998 and has decreased the amount of the purchase
price allocated to acquired in-process R&D associated with the
Isolation acquisition from $34,500,000 to $2,100,000 and
increased goodwill by $32,400,000. Goodwill will be amortized
over a three year period.
Results of Operations
Nortel Agreement. On February 27, 1998, the Company signed a new
multi-year agreement (the "1998 Agreement") with Northern Telecom
Inc. ("Nortel"). The Company and Nortel have been working
together to provide remote access equipment to service providers
since 1995. Under the new agreement, Nortel will issue purchase
orders for a minimum of $5,000,000 per quarter to purchase the
Company's products within a minimum aggregate amount of
$40,000,000 over the term of the contract which began in the
three-month period ended April 4, 1998. The Company's ability to
recognize revenue related to these purchase orders, however, may
be impacted by several factors including, but not limited to,
the timing of the orders placed, the ability of the Company to
ship product in a timely fashion and product availability. These
OEM purchases from Nortel will replace the minimum royalty
arrangement with the Company that was in effect during fiscal
1997. In addition, the Company will receive total professional
services revenue of $12,000,000 during the first two quarters of
fiscal 1998 from Nortel related to the development of carrier
class remote access technology. The OEM purchases and
professional services are expected to result in higher revenues
from Nortel in fiscal 1998 which will carry lower gross margins.
Gross margins on sales to Nortel are expected to decline in
fiscal 1998 primarily due to the fact that a significant portion
of the revenues from Nortel in fiscal 1997 consisted of royalty
revenues, with little or no direct cost, related to the Rapport
112, an OEM version of the LanRover Access Switch.
On April 23, 1998, Nortel exercised its option to license certain
Shiva technology. This option was part of the 1998 Agreement.
Pursuant to the terms of the agreement, Shiva will record a total
of $26,000,000 ratably over ten quarters beginning in the second
quarter of fiscal 1998, for the license and other items related
to intellectual property.
Revenues. Revenues increased by 22%, to $38,031,000, in the
three-month period ended April 4, 1998 from $31,159,000 in the
comparable period in fiscal 1997. This increase was principally
due to higher service revenues, which increased to $8,174,000 in
the three-month period ended April 4, 1998 from $1,541,000 during
the comparable period in fiscal 1997. This increase was
primarily due to $6,000,000 in professional services revenue from
Nortel related to the development of carrier class remote access
technology as outlined in the 1998 Agreement.
10
<PAGE>
Remote access revenues increased by 2% to $28,236,000 in the
three-month period ended April 4, 1998 from $27,692,000 in the
comparable period in fiscal 1997. Revenues from the LanRover
Access Switch in the three-month period ended April 4, 1998
increased by 28% to $14,539,000 from $11,366,000 during the same
period in fiscal 1997, primarily due to higher volume shipments.
Revenues from the LanRover Access Switch in the first quarter of
fiscal 1997 included minimum royalty revenues from Nortel that
were based on sales of the Nortel Rapport 112, an OEM version of
the LanRover Access Switch. These royalty revenues, which will
not recur in fiscal 1998 as outlined above, were partially offset
by price protection provisions of $2,800,000 in the three-month
period ended March 29, 1997. Price protection rights require the
Company to grant retroactive price adjustments for inventories of
the Company's products held by distribution partners if the
Company lowers its prices for such products. The price
protection provisions were recorded to account for pricing
actions effective in the second quarter of fiscal 1997 due to
increased price competition and price reductions on V.34 modem
cards due to the availability of 56K modem technology in the
access concentrator market.
Revenues from the LanRover product line decreased by 21% to
$9,746,000 in the three-month period ended April 4, 1998 from
$12,330,000 in the comparable period in fiscal 1997. This
decrease was due to lower volume shipments. LanRover revenues in
the first quarter of 1997 were impacted by price protection
provisions of $3,900,000, which were recorded to account for
pricing actions which became effective in the second quarter of
fiscal 1997 and were in response to increased price competition.
The Company provides its distributors and resellers with product
return rights for stock balancing and product evaluation.
Revenues were reduced by provisions for product returns of
$3,323,000 and $10,619,000 in the three-month periods ended April
4, 1998 and March 29, 1997, respectively, representing 8% and
22% of gross revenues, respectively. The decline in the
provision for product returns was primarily the result of
increased provisions recorded in the three-month period ended
March 29, 1997 to account for slow-moving and discontinued
products in the Company's North American distribution channels.
Revenues from OEM customers were essentially flat and represented
28% of revenues in the three-month period ended April 4, 1998
compared to 33% in the comparable period in fiscal 1997.
International revenues accounted for 39% and 62% of revenues in
the three-month periods ended April 4, 1998 and March 29, 1997,
respectively. International revenues represented a higher
proportion of total revenues in the three-month period ended
March 29, 1997 primarily due to the impact of the return
provisions and price protection provisions that significantly
reduced revenues from the Company's North American distribution
channels.
Gross Profit. Gross profit increased by 105%, to $19,842,000, or
51% of revenues, in the three-month period ended April 4, 1998,
compared to $9,520,000, or 31% of revenues, in the comparable
period in fiscal 1997. Gross profit in the three-month period
ended March 29, 1997 included the negative impact of price
protection provisions of $6,700,000, as discussed above, and
provisions for slow-moving inventories. The provisions for slow-
moving inventories increased cost of revenues by $6,463,000, and
related to V.34 modem cards, for which demand had decreased due
to the availability of 56K modem technology, and certain other
products. Excluding the impact of these provisions, gross profit
as a percentage of revenues would have been 60% in the three-
month period ended March 29, 1997. Gross profit in the three-
month period ended April 4, 1998 included $6,000,000 in
professional services revenue, as well as OEM product revenues
from Nortel. Each of these revenue streams from Nortel carried
lower gross profit percentages than the Company's non-Nortel
product revenues, and significantly lower gross profit
percentages than the Nortel royalty revenues recorded in the year
earlier period. In the future, the Company's gross margins may
be affected by several factors, including but not limited to
product mix, the distribution channels used, changes in component
costs and the introduction of new products.
Research and Development. Research and development expenses
during the three-month period ended April 4, 1998 related to the
development of new and existing remote access products, including
products which incorporate technology to support virtual private
networking. Research and development expenses decreased by 23%,
to $4,580,000, or 12% of revenues, in the three-month period
ended April 4, 1998 from $5,961,000, or 19% of revenues, during
the comparable period in fiscal 1997. The decrease in these
expenses was primarily due to the restructuring of the Nortel
arrangement in fiscal 1998 under which Nortel contracted with the
Company for the development of carrier class remote access
technology. Under the terms of the 1998 Agreement, the Company
will recognize $6,000,000 in professional services revenue during
each of the first two quarters of fiscal 1998 as work is
performed. Accordingly, expenses related to these development
efforts of $3,711,000 in the three-month period ended April 4,
1998 have been included in cost of service revenues in the
accompanying statement of operations. Customer funded
development fees under cost sharing relationships (including
those with Nortel in fiscal 1997), are reflected as an offset to
research and development expenses, and were $1,636,000 in the
three-month period ended March 29, 1997. There were no such fees
recorded in the three-month period ended April 4, 1998.
Capitalized software development costs were $88,000 in the three-
month period ended April 4, 1998 compared with $155,000 in the
comparable period in fiscal 1997. Gross research and development
expenses increased by $627,000 to $8,379,000 in the three month
period ended April 4, 1998 from $7,752,000 in the comparable
period in fiscal 1997. The Company anticipates continued
significant investment in research and development primarily
focused on providing remote access solutions for the business
access market.
11
<PAGE>
Selling, General and Administrative. Selling, general and
administrative expenses decreased by 17%, to $14,808,000 in the
three-month period ended April 4, 1998 from $17,898,000 in the
comparable period in fiscal 1997. These expenses represented 39%
and 57% of revenues in the three-month periods ended April 4,
1998 and March 29, 1997, respectively. The decrease in gross
expenses was due to several factors, including lower personnel
costs due to the restructuring of the Company's sales and
marketing organization as discussed below, as well as decreased
costs incurred for travel, channel and marketing programs, trade
shows and various facilities related expenses. These decreases
were partially offset by increased depreciation and bad debt
expense. Selling, general and administrative expenses in the
three-month periods ended April 4, 1998 and March 29, 1997 are
net of expenses reimbursed by Nortel of $1,018,000 and $676,000,
respectively, related to Shiva's Service Provider Group (SPG), a
worldwide business unit comprised of technical sales and support
personnel dedicated to marketing Nortel's remote access equipment
to carriers and service providers. Nortel will no longer fund
the SPG unit beginning in the second quarter of fiscal 1998.
In-Process Research and Development. In connection with the
acquisition of Isolation, the Company allocated $2,100,000
of the purchase price to in-process R&D. This allocation
represented the estimated fair value based on risk-adjusted cash
flows related to the incomplete research and development
projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility and the
research and development in progress had no alternative future
uses. Accordingly, these costs were expensed as of the
acquisition date.
At the acquisition date, the nature of the acquired in-process
R&D principally related to redesign of the technology and
software operating system to develop next-generation VPN software
technology that would be compliant with evolving industry
standards. The remaining efforts included the completion of
certain design, coding, prototyping, and testing activities that
were necessary to establish that the proposed VPN technologies
met their design specifications, including functional, technical,
and economic performance requirements. This product would become
the basis for the Company's future integrated VPN / remote access
products. The Company anticipates incurring costs of
approximately $1,000,000 to $2,000,000 over the next several
quarters following the acquisition of Isolation, at which time
the Company expects to begin selling such products.
Management believes the Company has a reasonable chance of
successfully completing the in-process R&D, however, there is
risk associated with the completion of the projects and there can
be no assurance that the developed products will meet with either
technological or commercial success. Failure to successfully
complete the projects and/or market the resulting products would
have a material adverse effect on the results of operations and
financial condition of the Company in future periods.
The value assigned to purchased in-process R&D was determined by
estimating the costs to develop the purchased in-process R&D into
commercially viable products, estimating the stage of completion,
estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present value. The
revenue projection used to value the in-process R&D was based on
estimates of relevant market sizes and growth factors, expected
trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.
The estimated revenues for the in-process R&D assumed compound
annual growth rates of 90% in the five years following
introduction, assuming the successful completion and market
acceptance of the products. The estimated revenues for the in-
process R&D products were expected to peak within four to five
years and then decline sharply as other new products and
technologies entered the market.
12
<PAGE>
Gross margins and operating expenses were estimated based on
historical results and management beliefs regarding anticipated
factors affecting profit margins. The Company anticipated that
gross margins as a percentage of revenues would decline over time
as new competitors and competing technologies entered the
marketplace. Additionally, the Company anticipated that
operating expenses as a percentage of revenues would decline over
time due to purchasing power increases and general economies of
scale.
The rates utilized to discount the net cash flows to their
present value were based on cost of capital calculations. Due to
the nature of the forecast and the risks associated with the
projected growth, profitability and developmental projects, a
discount rate of 30 percent was deemed appropriate for the in-
process R&D. This discount rate was commensurate with
Isolation's stage of development and the uncertainties in the
economic estimates as described above.
The Company believed that the foregoing assumptions used in
Isolation's in-process R&D analysis were reasonable at the time
of the acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate product sales,
development costs or profitability, or the events associated with
such projects, will transpire as estimated.
The Company continues to work towards the completion of the
acquired in-process R&D. The risks associated with these efforts
are still considered high and no assurance can be made that the
products resulting from in-process R&D will meet with market
acceptance. In addition, delays in the introduction of such
products may have an adverse impact on the Company's results of
operations and financial condition in future periods.
Restructuring Expenses. The Company recorded restructuring
expenses of $1,630,000 in the three-month period ended April 4,
1998. These expenses, comprised primarily of severance costs,
were the result of the restructuring of the Company's sales and
marketing operations in order to support the Company's strategic
focus on providing remote access solutions for the business
access market.
In addition to the restructuring action discussed above, on April
15, 1998, the Company announced a worldwide restructuring to
align its financial model with the recently announced strategic
focus on providing remote access solutions for business. As a
result of this restructuring, Shiva expects to recognize a pre-
tax charge in the second quarter of fiscal 1998 of approximately
$9,000,000 to $12,000,000. It is anticipated that these actions
will yield approximately $10,000,000 to $15,000,000 in annualized
savings, the impact of which is expected to begin in the third
quarter of fiscal 1998. This restructuring will result in the
elimination of approximately 125 positions worldwide, during the
next several months. Specifically, Shiva will close operations at
the Edinburgh, Scotland, facility and will relocate certain
technical support staff to the Wokingham, United Kingdom,
facility. The Edinburgh facility was primarily focused on
jointly funded engineering activities with Nortel.
Interest Income and Expense. Interest income increased during
the three-month period ended April 4, 1998 over the corresponding
period in fiscal 1997 due to the Company's shift from federal tax-
exempt securities into taxable securities which resulted in a
higher overall yield on its investments. In the future, the
Company expects net interest income and expense to decline due to
the loss of interest income as a result of the cash used in the
acquisition of Isolation.
Income Tax Benefit. The Company's effective tax rate in the
three month period ended April 4, 1998 was 32%, down from 38% in
the three-month period ended March 29, 1997, primarily due to the
impact of nondeductible restructuring charges.
13
<PAGE>
Foreign Currency Fluctuations
Foreign currency fluctuations did not have a significant impact
on the comparison of the results of operations in the three-month
period ended April 4, 1998 with those of the comparable period in
fiscal 1997. However, the Company's international operations
will continue to be exposed to adverse movements in foreign
currency exchange rates which may have a material adverse impact
on the Company's financial results. The Company enters into
forward exchange contracts to hedge those currency exposures
related to certain assets and liabilities denominated in non-
functional currencies and does not generally hedge anticipated
foreign currency cash flows.
Year 2000
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software
failures (the "Year 2000 issue") which can arise in time-
sensitive software applications which utilize a field of two
digits to define the applicable year. In such applications, a
date using "00" as the year may be recognized as the year 1900
rather than the year 2000. The Company believes that all of its
products are currently Year 2000 compliant with the exception of
the SpiderManager product, which will display the year number in
the activity log date field as three digits. The Company
believes that this characteristic does not have any system
operational implications for the product. Therefore, the Company
does not anticipate having to undertake additional research and
development efforts in this regard. In addition, the Company is
in the process of replacing many of its business and operating
computer systems with software which, when upgraded, will be Year
2000 compatible. The Company is planning to complete all
necessary Year 2000 upgrades of its major systems in 1998, and is
currently identifying and developing conversion strategies for
its remaining systems that may be impacted by the Year 2000
issue. While the Company does not believe that the Year 2000
issue will have a material impact on the Company, there can be no
assurance that unanticipated problems will not arise that will
have a material adverse effect on the Company's business and
results of operations.
Liquidity and Capital Resources
As of April 4, 1998, the Company had $23,942,000 of cash and cash
equivalents and $46,040,000 of short-term investments. Working
capital decreased by 36% to $68,880,000 at April 4, 1998 from
$108,314,000 at January 3, 1998.
Net cash provided by operations totaled $15,620,000 for the three-
month period ended April 4, 1998 compared with net cash used by
operations of $1,533,000 during the comparable period in fiscal
1997. Net cash provided by operations in the three-month period
ended April 4, 1998 resulted primarily from the net loss adjusted
for non-cash expenses including in-process R&D, as well as the
decrease in accounts receivable and inventories and an increase
in deferred revenue. The decrease in accounts receivable is
primarily due to increased collection activities, and the
decrease in inventories is due to better inventory management.
The increase in deferred revenue is primarily due to cash
payments received from Nortel during the quarter that relate to
professional services that will be provided during the second
quarter of fiscal 1998. Net cash used by operations in the three-
month period ended March 29, 1997 resulted primarily from the net
loss and decreased current liabilities, partially offset by
decreased accounts receivable. The decrease in accounts
receivable was due to decreased revenue levels and the previously
mentioned increase in product return and price protection
provisions.
Net cash used by investing activities totaled $49,755,000 for the
three-month period ended April 4, 1998, compared to $2,079,000
during the comparable period in fiscal 1997. Investment activity
in the three-month period ended April 4, 1998 consisted primarily
of payments related to the purchase of Isolation, as well as the
purchase of short-term investments and fixed assets. Investment
activity in the three-month period ended March 29, 1997 consisted
primarily of purchases of fixed assets, partially offset by
proceeds from short-term investments upon maturity or sale.
14
<PAGE>
Net cash used by financing activities totaled $865,000 for the
three-month period ended April 4, 1998, compared to net cash
provided of $369,000 in the comparable period in fiscal 1997.
Net cash used by financing activities for the three-month period
ended April 4, 1998 primarily consisted of the purchase of
treasury stock, partially offset by proceeds from stock option
exercises. Net cash provided by financing activities in the
three-month period ended March 29, 1997 consisted of proceeds
from stock option exercises, partially offset by principal
payments on long-term debt and capital lease obligations.
The Company has a $5,000,000 unsecured revolving credit facility
with a bank which expires in September 1998. The terms of the
credit facility require the Company to comply with certain
restrictive financial covenants. Borrowings under this facility
bear interest at the bank's prime rate. At April 4, 1998,
available borrowings were reduced by outstanding letters of
credit of $834,000 which expire at various dates in 1998. The
Company had no borrowings outstanding under this line at April 4,
1998. The Company also has a foreign credit facility of
approximately $2,666,000, all of which was available at April 4,
1998. Available borrowings under this facility are decreased by
guarantees on certain foreign currency transactions. The terms
of the foreign credit facility require the Company to comply with
certain restrictive financial covenants. There were no
borrowings outstanding under this foreign credit facility at
April 4, 1998.
The Company enters into forward exchange contracts to hedge
against certain foreign currency transactions for periods
consistent with the terms of the underlying transactions. The
forward exchange contracts have maturities that do not exceed one
year. At April 4, 1998, the Company had outstanding forward
exchange contracts to purchase $495,000 and to sell $261,000 in
various currencies which will mature by July 23, 1998.
The Company believes that its existing cash and short-term
investment balances, together with borrowings available under the
Company's bank credit facilities, will be sufficient to meet the
Company's cash requirements for at least the next twelve months.
Factors That May Affect Future Results
Certain information contained herein, and information provided by
the Company or statements made by its employees may, from time to
time, contain "forward-looking" information which involve risks
and uncertainties. Any statements contained in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere herein that are not historical facts may
be "forward-looking" statements. Certain information contained
herein concerning the Company's anticipated plans and strategies
for its business, available cash and cash equivalents and sources
of financing, research and development and other expenditures,
effects of the restructuring actions, ability to achieve Year
2000 compliance, and effects of the new agreement with Nortel
consists of forward-looking statements. Without limiting the
foregoing, the words "believes," "expects," "anticipates,"
"plans," and similar expressions are intended to identify forward-
looking statements. The Company's actual future results may
differ significantly from those stated in any forward-looking
statements. Factors that may cause such differences include, but
are not limited to, the factors discussed below.
The Company's quarterly operating results may vary significantly
from quarter to quarter depending on factors such as the timing
of significant orders and shipments of its products, changes and
delays in product development, new product introductions by the
Company and its competitors, the mix of distribution channels
through which the Company's products are sold and seasonal
customer buying patterns. There can be no assurance that the
Company will be able to achieve future revenue growth and
profitability on a quarterly or annual basis. Revenues can be
difficult to forecast due to the fact that the Company's sales
cycle varies substantially depending upon market, distribution
mechanism and end user customer. The Company's expense levels
are based, in part, on its expectations as to future revenues.
If revenue levels are below expectations, operating results may
be adversely affected. In addition, the Company's distribution
partners typically stock significant levels of inventory, and the
Company's revenues may fluctuate based on the level of partner
inventories in any particular quarter.
15
<PAGE>
The Company has been party to a strategic relationship with
Nortel since 1995 which has evolved over time. Under the terms of
a new agreement with Nortel signed on February 27, 1998, Nortel
will purchase minimum quarterly amounts of the Company's products
within a minimum aggregate amount of $40,000,000 over the term of
the contract, which began in the three-month period ended April
4, 1998. There can be no assurance that Nortel will purchase in
excess of the minimum amount or that the Company will be able to
fulfill such orders from Nortel and thus recognize the revenue
associated with such orders, in a linear fashion over the
contract term. Non-linear order patterns from Nortel could cause
material fluctuations in the Company's quarterly financial
results. In addition, the Company has received, and will
continue to receive, professional services revenue from Nortel
through the second quarter of fiscal 1998 related to the
development of carrier class remote access technology. There is
no obligation on the part of Nortel to contract for additional
such development or for the Company to provide such services
beyond the second quarter of fiscal 1998. Revenues from Nortel
accounted for 16% and 14% of revenues in fiscal 1997 and 1996,
respectively.
On March 26, 1998, the Company completed its acquisition of
Isolation, a leading developer of VPN hardware and software
solutions based in Toronto, Ontario. Achieving the anticipated
benefits of this acquisition or any other acquisitions the
Company may undertake will depend in part upon whether the
effective integration of the acquired companies' research and
development organizations, products and technologies, and sales,
marketing and administrative organizations is accomplished in a
timely manner. There can be can be no assurance that the Company
will be successful in integrating the operations of Isolation.
Moreover, the integration process may temporarily divert
management attention from the day-to-day business of the Company.
Failure to successfully accomplish the integration of Isolation
could have a material adverse effect on the Company's business,
financial condition and/or results of operations.
The Company's LanRover and LanRover Access Switch products are
experiencing increased market competition which has caused the
Company to take pricing actions and may require the Company to
take future pricing actions. The Company provides most of its
distribution partners with product return rights for stock
balancing or product evaluation and price protection rights.
Stock balancing rights permit a return of products to the Company
for credit against future product purchases, within specified
limits. Product evaluation rights permit end-users to return
products to the Company through the distribution partner from
whom such products were purchased, within 30 days of purchase if
such end-user is not fully satisfied. Price protection rights
require the Company to grant retroactive price adjustments for
inventories of the Company's products held by distribution
partners if the Company lowers its prices for such products.
These price protection provisions have adversely affected and may
continue to adversely affect revenues and profitability in the
future. There can be no assurance that the Company will not
experience significant returns or price protection adjustments in
the future or that the Company's reserves will be adequate to
cover such returns and price reductions.
The Company increasingly relies on sales of the LanRover Access
Switch to achieve its revenue and profitability objectives.
Sales of other communications products and other remote access
products, including the LanRover product, decreased in the first
quarter of fiscal 1998 and fiscal 1997, due in part to increased
competition. There can be no assurance that the Company will be
successful in modifying current product offerings to increase
sales of its products.
The Company depends on third party distributors and value-added
resellers for a significant portion of the Company's revenues.
The loss of certain of these distributors and resellers could
have a material adverse impact on the Company's results of
operations. Moreover, many of these distributors and resellers
also act as resellers of competitive products. Therefore, there
is risk that these distributors and resellers may focus their
efforts on marketing products other than those sold by the
Company. This may require the Company to offer various
incentives to such distributors and resellers, which may
adversely impact the Company's results of operations.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. The Company's future success will depend
on its ability to enhance its existing products and to introduce
new products and services to meet and adapt to changing customer
requirements and emerging technologies, such as VPN and other
technologies. The introduction of new products requires the
Company to manage the transition from its older product offerings
in order to minimize the impact on customer ordering patterns,
avoid excessive levels of obsolete inventories and to ensure that
adequate supplies of new products are available to meet customer
demand.
16
<PAGE>
The Company's success in accomplishing development objectives
depends in large part upon its ability to attract and retain
highly skilled technical personnel including, in particular,
management personnel in the areas of research and development and
technical support. Competition for such personnel is intense.
There can be no assurance that the Company will be successful in
attracting and retaining the personnel it requires to accomplish
its objectives. Delays in new product development or the failure
of new products to achieve market acceptance, could have a
material adverse effect on the Company's operating results. In
addition, there can be no assurance that the Company will be
successful in identifying, developing, manufacturing or marketing
new product or service offerings or enhancing its existing
offerings.
The Company operates in a highly competitive market that is
characterized by an increasing number of well-funded competitors
from diverse industry sectors, including but not limited to
suppliers of software, modems, terminal servers, routers, hubs,
data communications products and companies offering remote access
solutions based on emerging technologies, such as switched
digital telephone services, remote access service offerings by
telephony providers via telephone networks and other providers
through public networks such as the Internet. Increased
competition could result in price reductions and loss of market
share which would adversely affect the Company's revenues and
profitability. There can be no assurance that the Company will
be able to continue to compete successfully with new or existing
competitors.
The Company does business worldwide, both directly and via sales
to United States-based original equipment manufacturers, who sell
such products internationally. The Company expects that
international revenues will continue to account for a significant
portion of its total revenues. Although most of the Company's
sales are denominated in US Dollars, exchange rate fluctuations
could cause the Company's products to become relatively more
expensive to customers in a particular country, causing a decline
in revenues and profitability in that country. In addition,
international sales, particularly in Europe, are typically
adversely affected in the third quarter due to a reduction in
business activities during the summer months. Furthermore, global
and/or regional economic factors and potential changes in laws
and regulations affecting the Company's business, including
without limitation, communications regulatory standards, safety
and emissions control standards, difficulty in staffing and
managing foreign operations, longer payment cycles and difficulty
in collecting foreign receivables, currency exchange rate
fluctuations, changes in monetary and tax policies, tariffs,
difficulties in enforcement of intellectual property rights and
political uncertainties, could have an adverse impact on the
Company's financial condition or future results of operations.
The Company is exposed to potential credit risks as a result of
accounts receivable from distributors, resellers, OEM and direct
customers, with respect to which the Company does not generally
require collateral.
The Company is currently dependent on three subcontractors for
the manufacture of significant portions of its products.
Although the Company believes that there are a limited number of
other qualified subcontract manufacturers for its products, a
change in subcontractors could result in delays or reductions in
product shipments. In addition, certain components of the
Company's products are only available from a limited number of
suppliers. The inability to obtain sufficient key components as
required could also result in delays or reductions in product
shipments. Such delays or reductions could have an adverse
effect on the Company's results of operations.
The market price of the Company's securities could be subject to
wide fluctuations in response to quarter-to-quarter variations in
operating results, changes in earnings estimates by analysts, and
market conditions in the industry, as well as general economic
conditions and other factors external to the Company.
Other factors that may affect future results include the accuracy
of the Company's internal estimates of revenues and operating
expense levels, the outcome of the litigation discussed below
under "Legal Proceedings," the Company's ability to complete all
necessary Year 2000 upgrades in a timely and cost-effective
manner, the realization of the intended benefits of the Isolation
Acquisition and the ability of the Company to integrate the
acquired business into the Company's existing operations, and
material changes in the level of customer-funded research and
development activities.
17
<PAGE>
Because of the foregoing factors, the Company believes that
period-to-period comparisons of its financial results are not
necessarily meaningful and expects that its results of operations
may fluctuate from period to period in the future.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
Exhibit 10.1* Agreement by and between the Company and Northern
Telecom Limited dated February 27, 1998 is incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
April 4, 1998 (File No. 000-24918).
Exhibit 10.2* Amendment dated March 13, 1998 to the Agreement by
and between the Company and Northern Telecom Limited
dated February 27, 1998 is incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 4, 1998
(File No. 000-24918).
Exhibit 27 Restated Financial Data Schedule
-----------------------------------------
<FN>
* Confidential treatment previously granted as to certain
portions of such document.
</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 Isolation, a privately-held
Ontario corporation, for approximately $37,000,000 in cash,
subject to closing adjustments.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SHIVA CORPORATION
Date: January 21, 1999 by: /s/ Robert P. Cirrone
---------------------
Senior Vice President,
Finance and Administration,
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
19
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
Exhibit 10.1* Agreement by and between the Company and Northern
Telecom Limited dated February 27, 1998 is incorporated
herein by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
April 4, 1998 (File No. 000-24918).
Exhibit 10.2* Amendment dated March 13, 1998 to the Agreement by
and between the Company and Northern Telecom Limited
dated February 27, 1998 is incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 4, 1998
(File No. 000-24918).
Exhibit 27 Restated Financial Data Schedule
-----------------------------------------
* Confidential treatment previously granted as to certain
portions of such document.
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-03-1998
<PERIOD-END> APR-04-1998
<CASH> 23,942
<SECURITIES> 46,040
<RECEIVABLES> 29,214
<ALLOWANCES> 9,202
<INVENTORY> 10,844
<CURRENT-ASSETS> 111,660
<PP&E> 48,645
<DEPRECIATION> 23,001
<TOTAL-ASSETS> 187,201
<CURRENT-LIABILITIES> 42,780
<BONDS> 0
0
0
<COMMON> 303
<OTHER-SE> 143,557
<TOTAL-LIABILITY-AND-EQUITY> 187,201
<SALES> 38,031
<TOTAL-REVENUES> 38,031
<CGS> 18,549
<TOTAL-COSTS> 18,549
<OTHER-EXPENSES> 23,118
<LOSS-PROVISION> 663
<INTEREST-EXPENSE> 200
<INCOME-PRETAX> (2,713)
<INCOME-TAX> (868)
<INCOME-CONTINUING> (1,845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,845)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
