Exhibit 13.1
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto.
Overview
Founded in 1985, Shiva develops, manufactures, markets and supports a full
line of digital and analog remote access products. The Company's products
enable users and user sites at enterprises to connect with corporate
information resources, on-line services and the Internet. The Company markets
its products worldwide through distributors, systems integrators, value-added
resellers and strategic partners that include Northern Telecom Limited
("Nortel"), IBM, Hewlett-Packard and Motorola.
In August 1995, the Company acquired Spider Systems Limited ("Spider"), a
leading digital internetworking company based in Edinburgh, UK, through the
issuance of approximately 3,923,606 shares of its common stock (the "Spider
Acquisition").
In June 1996, the Company issued approximately 691,587 shares of its common
stock in exchange for all the outstanding shares of AirSoft, Inc. (the
"AirSoft Acquisition"). AirSoft, Inc. ("AirSoft") designs, manufactures and
sells performance enhancement software products. These products include
PowerBurst(R), a remote node accelerator designed to improve the performance
of file-system-based applications such as electronic mail, spreadsheets and
word processors.
The Spider Acquisition and the AirSoft Acquisition have been accounted for as
poolings of interests, and therefore the consolidated financial information
contained herein has been retroactively combined for all periods presented.
See Notes 1 and 2 of Notes to Consolidated Financial Statements.
The Company derives its revenues from remote access products and other
communications products and services. Remote access products include the
LanRover(R), LanRover Access Switch(TM), Shiva AccessPort(TM),
ShivaIntegrator(R) and the NetModem(R) product lines. Other communications
products and services include communications servers, third-party products,
AppleTalk products, and communications software. The Company also provides a
wide range of service offerings which include consulting, training and
maintenance services.
18
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:
Fiscal Years Percentage Change
---------------------- -------------------
1996 1995 1994 1996 to 1995 to
1995 1994
---------------------- -------------------
Revenues 100% 100% 100% 69% 46%
Cost of revenues 42 41 43 69 41
---- ---- ---- ---- ----
Gross profit 58 59 57 69 50
Operating expenses:
Research and development 12 12 12 57 48
Selling, general and
administrative 34 38 40 55 38
Merger expenses 1 12 -- (86) *
---- ---- ---- ---- ----
Total operating expenses 47 62 52 28 73
---- ---- ---- ---- ----
Income (loss) from operations 11 (3) 5 * *
Interest expense (income) (2) (1) 1 112 *
---- ---- ---- ---- ----
Income (loss) before income taxes 13 (2) 4 * *
---- ---- ---- ---- ----
Income tax provision 5 2 1 285 159
---- ---- ---- ---- ----
Net income (loss) 8% (4)% 3% *% *%
==== ==== ==== ==== ====
<FN>
* Percentages not meaningful.
Fiscal 1996 Compared to Fiscal 1995
Results of Operations
Revenues. Revenues increased by 69%, to $200,119,000 in fiscal 1996, from
$118,581,000 in fiscal 1995. Revenues from the Company's remote access
products increased 107% to $174,084,000, or 87% of revenues, in fiscal 1996
from $83,924,000, or 71% of revenues, in fiscal 1995 primarily due to initial
shipments of the LanRover Access Switch and higher unit shipments of the
LanRover product line. Revenues from the LanRover Access Switch, introduced in
the second quarter of fiscal 1996, were $59,015,000, and revenues from
LanRover products were $89,588,000 and $62,892,000 in fiscal 1996 and 1995,
respectively. These increases were partially offset by a 30% decline in
revenues from the Company's other communications products. The Company
anticipates that revenues from other communications products will continue to
decline and will account for a decreasing percentage of revenue in future
periods. Sales to OEM customers accounted for 22% of revenues in fiscal 1996,
compared with 10% in 1995. Sales to one major OEM customer accounted for 14%
of revenues in fiscal 1996. The Company provides its distributors and
resellers with product return rights for stock balancing and product
evaluation. Revenues were reduced by provisions for product returns of
$13,421,000 and $7,410,000 in fiscal 1996 and fiscal 1995, respectively,
representing 6% of gross revenues in each period. International revenues
increased to $74,779,000, or 37% of revenues, in fiscal 1996, from
$55,197,000, or 47% of revenues, in fiscal 1995. The percentage decrease in
international revenues in fiscal 1996 was primarily due to increased revenues
to the OEM channel which are classified as domestic.
19
Gross Profit. Gross profit decreased as a percentage of revenues to 58% in
fiscal 1996, compared to 59% in fiscal 1995. This decrease was primarily
attributable to increased revenues of remote access products to the OEM
channel, which typically result in lower gross margins than the Company's
other sales channels. The overall decrease was partially offset by a change
in product mix towards the LanRover and the LanRover Access Switch, which
carry higher gross margins than the Company's other products.
Research and Development. Research and development expenses increased to
$23,186,000 in fiscal 1996 from $14,787,000 in fiscal 1995, representing
12% of revenues in each period. The absolute increase in these expenses was
primarily due to the hiring of additional research and development staff.
Research and development expenses in fiscal 1996 related primarily to
continued enhancement and development of the Company's remote access products,
including the LanRover Access Switch, a high-end remote access concentrator,
and the Shiva AccessPort, an ISDN client router. Customer-funded development
costs reimbursed to the Company, which are reflected as an offset to research
and development expenses, were $1,718,000 in fiscal 1996, compared to $955,000
in fiscal 1995. Capitalized software development costs were $1,186,000 in
fiscal 1996, compared to $827,000 in fiscal 1995. The Company anticipates
continued significant investment in research and development.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $69,087,000 in fiscal 1996 from $44,662,000 in fiscal
1995. These expenses represented 34% and 38% of revenues in fiscal 1996 and
1995, respectively. The absolute increase in expenses was primarily due to
worldwide expansion of the Company's sales, marketing and administrative
operations necessary to support the Company's growth. Expenses as a
percentage of revenues decreased due to revenues growing at a faster rate than
expenses. The Company plans to further invest in its distribution channels in
order to continue its global market penetration.
Merger Expenses. In fiscal 1996, merger-related expenses of $1,987,000 were
expensed in connection with the AirSoft Acquisition. Merger-related expenses
included $1,675,000 of transaction costs for financial advisor, legal,
regulatory, and accounting fees and other related expenses, and $312,000 of
employee severance payments and other costs. In fiscal 1995, merger-related
expenses of $13,986,000 were expensed in connection with the Spider
Acquisition. Merger-related expenses included $6,275,000 of transaction costs
for financial advisor, legal, regulatory, and accounting fees and other
related expenses, $1,482,000 of employee severance payments, $2,644,000 of
phantom stock compensation and $3,585,000 of integration costs, including
elimination of duplicative assets, employee relocation and travel, and
marketing costs related to the introduction of the combined entity.
Interest Income and Expense. Interest income, net of interest expense,
increased to $3,344,000 in fiscal 1996 from $1,574,000 in fiscal 1995 due to
higher investment balances related to funds generated by the Company's
secondary public offering in November 1995.
Income Tax Provision. The Company's effective tax rate was 35% in fiscal
1996. The Company's effective tax rate differs from the combined federal and
state statutory rates primarily due to the utilization of net operating loss
carryforwards and the impact of tax-exempt interest income, partially offset
by non-deductible merger expenses. In fiscal 1995 the Company had an income
tax provision of $2,386,000, despite a pre-tax loss, primarily due to
nondeductible merger costs incurred in connection with the Spider Acquisition.
20
Fiscal 1995 Compared to Fiscal 1994
Revenues. Revenues increased by 46%, to $118,581,000 in fiscal 1995 from
$81,058,000 in fiscal 1994, primarily due to higher unit sales of the
Company's products. Revenues from the Company's remote access products
increased by 87%, to $83,924,000, or 71% of revenues in fiscal 1995 from
$44,825,000, or 55% of revenues, in fiscal 1994, primarily due to higher
revenues from the Company's LanRover and ShivaIntegrator products. These
increases were partially offset by a 13% decline in revenues from the
Company's other communications products. Sales to OEM customers accounted for
10% and 9% of revenues in fiscal 1995 and 1994, respectively. The Company
provides its distributors and resellers with product return rights for stock
balancing and product evaluation. Revenues were reduced by provisions for
product returns of $7,410,000 in fiscal 1995 and $7,092,000 in fiscal 1994
representing 6% and 8% of gross revenues in fiscal 1995 and 1994,
respectively. International revenues increased to $55,197,000, or 47% of
revenues, in fiscal 1995 from $41,942,000, or 52% of revenues, in fiscal 1994.
Gross Profit. Gross profit increased as a percentage of revenues to 59% in
fiscal 1995, compared to 57% in fiscal 1994. This increase was primarily
attributable to increased revenues from the Company's LanRover products, which
carry higher gross margins than other communications products, partially
offset by increased European sales of lower-priced products through large
volume distributors.
Research and Development. Research and development expenses increased to
$14,787,000, or 12% of revenues, in fiscal 1995 from $9,972,000, or 12% of
revenues, in fiscal 1994. The absolute increase in these expenses was
primarily due to the hiring of additional research and development staff.
Research and development expenses during fiscal 1995 related primarily to
continued enhancements of the Company's remote access products, including the
ShivaIntegrator product line and a new software release for its LanRover and
NetModem product lines. Customer-funded development costs reimbursed to the
Company and government-funded research and development grants, which are
reflected as an offset to research and development expenses, were $955,000 in
fiscal 1995, compared to $901,000 in fiscal 1994. Capitalized software
development costs were $827,000 in fiscal 1995 compared with $293,000 in
fiscal 1994.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $44,662,000, or 38% of revenues, in fiscal 1995 from
$32,427,000, or 40% of revenues, in fiscal 1994. The absolute increase in
expenses was primarily due to expansion of the Company's worldwide sales and
support operations, as the Company continued to build its distribution
channels.
Merger Expenses. In fiscal 1995, merger-related expenses of $13,986,000 were
expensed in connection with the Spider Acquisition. Merger-related expenses
include $6,275,000 of transaction costs for financial advisor, legal,
regulatory, and accounting fees and other related expenses, $1,482,000 of
employee severance payments, $2,644,000 of phantom stock compensation and
$3,585,000 of integration costs, including elimination of duplicative assets,
employee relocation and travel, and marketing costs related to the
introduction of the combined entity.
Interest Income and Expense. The Company had higher interest income in fiscal
1995, due to investment balances related to funds generated by the Company's
public stock offerings in November 1995 and November 1994. Interest expense
consists primarily of interest incurred on the Company's mortgage on its
European headquarters and capitalized lease obligations.
21
Income Tax Provision. The Company had an income tax provision of $2,386,000
in fiscal 1995, despite a pre-tax loss, primarily due to nondeductible
merger costs incurred in connection with the Spider Acquisition. The
Company's effective tax rate was 31% in fiscal 1994.
Foreign Currency Fluctuations
A substantial portion of the Company's international revenues is denominated
in currencies other than the U.S. dollar and is consequently subject to
foreign exchange fluctuations. The net income impact of such fluctuations,
however, is offset to the extent expenses of the Company in international
operations are incurred in the same currencies as its revenues. Foreign
currency fluctuations did not have a significant impact on the comparison of
the results of operations for the periods presented.
Liquidity and Capital Resources
As of December 28, 1996, the Company had $72,067,000 of cash and cash
equivalents and $35,035,000 of short-term investments. Working capital
increased to $130,464,000 at December 28, 1996 from $109,376,000 at December
30, 1995.
Net cash provided by operations totaled $19,552,000 in fiscal 1996. Net cash
provided by operations in fiscal 1996 consisted primarily of net income
adjusted for non-cash expenses including depreciation and amortization, and
increased current liabilities, partially offset by increased accounts
receivable and inventories. The increase in accounts receivable was due to
increased revenue levels and increased days sales outstanding due in part to
changes in the timing of product shipments where shipments occurred late in
the quarter. The increase in inventories was in anticipation of fourth
quarter sales that did not materialize and to support increased revenue levels
over the prior year. Net cash provided by operations was $2,799,000 in fiscal
1995, despite a net loss and increased accounts receivable, due to increased
current liabilities and non-cash expenses included in the net loss such as
depreciation, amortization and certain merger expenses. The increase in
accounts receivable was due to increased revenue levels.
Net cash used by investing activities totaled $43,517,000 in fiscal 1996,
compared to $16,993,000 in fiscal 1995. Investment activity in fiscal 1996
and 1995 consisted primarily of net purchases of short-term investments as
well as property, plant and equipment to support the Company's growth.
Net cash provided by financing activities, which consisted of proceeds from
stock option exercises, partially offset by payments on long-term debt and
capital lease obligations, totaled $3,595,000 in fiscal 1996. Net cash
provided by financing activities was $72,174,000 in fiscal 1995, and consisted
primarily of proceeds from the Company's secondary offering in November 1995,
partially offset by payments on the Company's outstanding debt and capital
lease obligations.
The Company has a $5,000,000 unsecured revolving credit facility with a bank
which expires in June 1997. Borrowings under the revolving credit facility
bear interest at the bank's prime rate. The terms of the credit facility
require the Company to maintain a minimum level of profitability and specified
financial ratios. At December 28, 1996, available borrowings were reduced by
outstanding letters of credit of $843,000 which expire at various dates in
1997. The Company had no borrowings outstanding under this line at December
28, 1996. The Company also has a foreign credit facility of approximately
$1,695,000 of which approximately $1,259,000 was available at December 28,
1996. Available borrowings under this facility are decreased by the value of
the outstanding debt payable to the European Coal and Steel Community Fund and
22
guarantees on certain foreign currency transactions. The terms of the foreign
credit facility require the Company to maintain a minimum level of
profitability and specified financial ratios. There were no borrowings
outstanding under this foreign credit facility at December 28, 1996.
The Company enters into forward exchange contracts to hedge against certain
foreign currency transactions for periods consistent with the terms of the
underlying transactions. The forward exchange contracts have maturities that
do not exceed one year. At December 28, 1996, the Company had outstanding
forward exchange contracts to purchase $575,000 and to sell $8,380,000 in
various foreign currencies which matured and settled on January 15, 1997.
The Company believes that its existing cash and short-term investment
balances, together with borrowings available under the Company's bank credit
facilities, are sufficient to meet the Company's cash requirements for the
foreseeable future.
Recently Enacted Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued Statement No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS 125), which provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS 125 will be effective for the
Company's fiscal year 1997. The Company has reviewed the implications of the
statement, and based on its initial evaluation, believes that it will not have
a material impact on the Company's financial position or results of operations
upon adoption.
Factors That May Affect Future Results
From time to time, information provided by the company or statements made by
its employees may contain "forward-looking" information which involve risks
and uncertainties. In particular, statements contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations which
are not historical facts may be "forward-looking" statements. The Company's
actual future results may differ significantly from those stated in any
forward-looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below and the accuracy of the
Company's internal estimates of revenue and operating expense levels.
The Company is in the process of transitioning its relationship with Nortel to
one in which Nortel is able to distribute certain of the Company's products to
the telco market under a royalty-based arrangement. The new relationship may
result in decreased Company product revenues and the loss of direct control
over those market sectors that Nortel will supply with the Company's products.
The Company's quarterly operating results may vary significantly from quarter
to quarter depending on factors such as the timing of significant orders and
shipments of its products, changes and delays in product development, new
product introductions by the Company and its competitors, the mix of
distribution channels through which the Company's products are sold and
seasonal customer buying patterns. There can be no assurance that the Company
will be able to continue its growth in revenues or sustain its profitability
on a quarterly or annual basis. Revenues can be difficult to forecast due to
the fact that the Company's sales cycle varies substantially depending upon
market, distribution mechanism and end user customer. The Company's expense
levels are based, in part, on its expectations as to future revenues. If
revenue levels are below expectations, operating results may be adversely
affected. In addition, the Company's distribution partners typically stock
significant levels of inventory, and the Company's revenues may fluctuate
based on the level of partner inventories in any particular quarter.
23
The Company's LanRover product is experiencing increased market competition
which may require future pricing actions. The Company provides most of its
distribution partners with product return rights for stock balancing or
product evaluation and price protection rights. Stock balancing rights permit
a return of products to the Company for credit against future product
purchases, within specified limits. Product evaluation rights permit end-
users to return products to the Company through the distribution partner from
whom such products were purchased, within 30 days of purchase if such end-user
is not fully satisfied. Price protection rights require the Company to grant
retroactive price adjustments for inventories of the Company's products held
by distribution partners if the Company lowers its prices for such products.
There can be no assurance that the Company will not experience significant
returns or price protection adjustments in the future or that the Company's
reserves will be adequate to cover such returns and price reductions.
The Company increasingly relies on sales of the LanRover Access Switch to
achieve its revenue and profitability objectives. Sales of other
communications products and other remote access products, including the
LanRover product, did not meet the Company's expectations in 1996 due in part
to increased competition. There can be no assurance that the Company will be
successful in modifying current product offerings to increase sales of
LanRover products.
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent new product
introductions. The Company's future success will depend on its ability to
enhance its existing products and to introduce new products and services to
meet and adapt to changing customer requirements and emerging technologies.
The Company's success in accomplishing development objectives depends in large
part upon its ability to attract and retain highly skilled technical personnel
including, in particular, management personnel in the areas of research and
development and technical support. Competition for such personnel is intense.
There can be no assurance that Shiva will be successful in attracting and
retaining the personnel it requires to accomplish its objectives. Delays in
new product development or the failure of new products to achieve market
acceptance could have a material adverse effect on the Company's operating
results. In addition, there can be no assurance that the Company will be
successful in identifying, developing, manufacturing or marketing new
product or service offerings or enhancing its existing offerings.
The Company operates in a highly competitive market that is characterized by
an increasing number of well-funded competitors from diverse industry sectors,
including but not limited to suppliers of software, modems, terminal servers,
routers, hubs, data communications products and companies offering remote
access solutions based on emerging technologies such as switched digital
telephone services, remote access service offerings by telephony providers via
telephone networks and other providers through public networks such as the
Internet. Increased competition could result in price reductions and loss of
market share which would adversely affect the Company's revenues and
profitability. There can be no assurance that the Company will be able to
continue to compete successfully with new or existing competitors.
The Company does business worldwide, both directly and via sales to United
States-based original equipment manufacturers, who sell such products
internationally. Global and/or regional economic factors and potential
changes in laws and regulations affecting the Company's business, including
without limitation, communications regulatory standards, safety and emissions
control standards, currency exchange rate fluctuations, changes in monetary
policy and tariffs, difficulties in enforcement of intellectual property
rights and political uncertainties, could have an adverse impact on the
Company's financial condition or future results of operations.
24
The market price of the Company's securities could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating
results, changes in earnings estimates by analysts, and market conditions in
the industry, as well as general economic conditions and other factors
external to the Company.
Contingencies
On January 17, 1997, a complaint, Abraham Schwartz and Norman Marcus v. Shiva
Corporation, was filed against the Company in the Superior Court of the State
of California for the County of Los Angeles. The plaintiffs purport to bring
this action on behalf of a class of purchasers of the Company's common stock
between September 17, 1996 and January 7, 1997. The Complaint asserts that
the Company made false or misleading statements in violation of state and
federal law, including: state law negligent misrepresentation, fraud, and
deceit, California Corporation Code Chapters 1507, 25400, and 25500,
California Civil Code Chapters 1709-10, and Section 12(2) of the Securities
Act of 1933, 15 U.S.C. Chapter 771(2). On behalf of the purported class, the
plaintiffs seek compensatory damages, treble damages under California law,
punitive damages under California law, punitive damages, attorneys' fees,
costs and interest. On February 24, 1997, the Company filed a demurrer to the
complaint. The Company believes the claim to be without merit and intends to
vigorously defend against the action. The action is in its earliest stages
and the Company is unable to determine at this time the potential liability,
if any.
25
SHIVA CORPORATION
Consolidated Balance Sheet
(In thousands, except share related data)
December 28, December 30,
1996 1995
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 72,067 $ 93,203
Short-term investments 35,035 9,125
Accounts receivable, net of allowances of
$10,347 at December 28, 1996 and $5,252 at
December 30, 1995 39,904 22,982
Inventories 17,958 7,846
Prepaid expenses and other current assets 6,022 2,351
-------- --------
Total current assets 170,986 135,507
Property, plant and equipment, net 23,855 12,965
Deferred income taxes 1,372 548
Other assets 1,837 1,103
-------- --------
Total assets $198,050 $150,123
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt and capital
lease obligations $ 367 $ 700
Accounts payable 17,130 9,032
Accrued compensation and benefits 5,871 5,367
Accrued expenses 13,748 7,509
Deferred revenue 3,406 3,523
-------- --------
Total current liabilities 40,522 26,131
Long-term debt and capital lease obligations 122 452
Other long-term liabilities -- 401
Deferred income taxes 572 235
-------- --------
Total liabilities 41,216 27,219
-------- --------
Commitments and Contingencies (Notes 13 and 14)
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized at December 28, 1996 and December 30,
1995, none issued -- --
Common stock, $.01 par value; 100,000,000 and
50,000,000 shares authorized, 28,891,216 and
27,960,580 shares issued and outstanding at
December 28, 1996 and December 30, 1995,
respectively 289 280
Additional paid-in capital 149,564 133,457
Unrealized gain on investments 175 137
Cumulative translation adjustment 349 (586)
Retained earnings (accumulated deficit) 6,457 (10,384)
-------- --------
Total stockholders' equity 156,834 122,904
-------- --------
Total liabilities and stockholders' equity $198,050 $150,123
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
26
Shiva Corporation
Consolidated Statement of Operations
(In thousands, except per share data)
Year Ended
December 28, December 30, December 31,
1996 1995 1994
------------ ----------- ------------
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
------------ ----------- ------------
Revenues $200,119 $118,581 $81,058
Cost of revenues 83,177 49,186 34,800
------------ ----------- ------------
Gross profit 116,942 69,395 46,258
------------ ----------- ------------
Operating expenses:
Research and development 23,186 14,787 9,972
Selling, general and administrative 69,087 44,662 32,427
Merger expenses 1,987 13,986 ---
------------ ----------- ------------
Total operating expenses 94,260 73,435 42,399
------------ ----------- ------------
Income (loss) from operations 22,682 (4,040) 3,859
Interest income 4,139 2,279 224
Interest and other expense (795) (705) (1,122)
------------ ----------- ------------
Income (loss) before income taxes 26,026 (2,466) 2,961
Income tax provision 9,185 2,386 921
------------ ----------- ------------
Net income (loss) $ 16,841 $ (4,852) $ 2,040
============ =========== ============
Net income (loss) per share $ 0.54 $ (0.18) $ 0.09
============ =========== ============
Shares used in computing net income
(loss) per share 31,459 27,337 22,945
============ =========== ============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
27
Shiva Corporation
Consolidated Statement of Changes in Stockholders Equity
(In thousands, except share related data)
Convertible Preferred
Stock Common Stock
--------------------- -----------------
Number of Number of Par
Shares Amount Shares Value
--------- ------ --------- -----
Balance At January 1, 1994 4,621,294 $6,174 11,268,265 $113
Exercise of Class C convertible
preferred stock warrants 409,836 2,000 -- --
Issuance of common stock to officer -- -- 177,778 2
Issuance of common stock -- -- 396,608 4
Initial public offering, net of
stock issuance costs of $1,032 -- -- 4,130,266 41
Conversion of preferred stock (5,031,130) (8,174) 7,719,536 77
Exercise of stock options -- -- 785,634 8
ESOP transactions, net -- -- -- --
Tax benefit related to stock options -- -- -- --
Currency translation adjustments -- -- -- --
Net income -- -- -- --
Dividends paid -- -- -- --
--------- ------ --------- -----
Balance at December 31, 1994 -- -- 24,478,087 245
Exercise of stock options -- -- 1,117,557 11
Issuance of common stock in
settlement of dividend payable -- -- 20,014 --
Issuance of common stock in
settlement of phantom stock plan -- -- 31,462 1
Issuance of common stock under
employee stock purchase plan -- -- 21,582 --
Secondary public offering, net of
stock issuance costs of $583 -- -- 2,291,878 23
Tax benefit related to stock options -- -- -- --
Unrealized gain on investments -- -- -- --
Currency translation adjustments -- -- -- --
Net loss -- -- -- --
Elimination of Spider net income for the
three-month period ended March 31, 1995 -- -- -- --
--------- ------ --------- -----
Balance at December 30, 1995 -- -- 27,960,580 280
Exercise of stock options -- -- 899,048 9
Issuance of common stock under employee
stock purchase plan -- -- 31,588 --
Tax benefit related to stock options -- -- -- --
Unrealized gain on investments -- -- -- --
Currency translation adjustments -- -- -- --
Net income -- -- -- --
--------- ------ --------- -----
Balance at December 28, 1996 -- $ -- 28,891,216 $289
========= ====== ========= =====
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share related data)
Additional Unrealized Cumulative
Paid-In gain on translation
capital investments adjustment
---------- ----------- -----------
Balance At January 1, 1994 $ 6,804 $ -- $ (897)
Exercise of Class C convertible
preferred stock warrants -- -- --
Issuance of common stock to
officer 998 -- --
Issuance of common stock 4,547 -- --
Initial public offering, net of
stock issuance costs of $1,032 27,737 -- --
Conversion of preferred stock 8,097 -- --
Exercise of stock options 644 -- --
ESOP transactions, net -- -- --
Tax benefit related to stock options 448 -- --
Currency translation adjustments -- -- 429
Net income -- -- --
Dividends paid -- -- --
---------- ----------- -----------
Balance at December 31, 1994 49,275 -- (468)
Exercise of stock options 1,736 -- --
Issuance of common stock in
settlement of dividend payable 406 -- --
Issuance of common stock in
settlement of phantom stock plan 2,283 -- --
Issuance of common stock under
employee stock purchase plan 314 -- --
Secondary public offering, net of
stock issuance costs of $583 76,115 -- --
Tax benefit related to stock options 3,328 -- --
Unrealized gain on investments -- 137 --
Currency translation adjustments -- -- (118)
Net loss -- -- --
Elimination of Spider net income
for the three-month period ended
March 31, 1995 -- -- --
---------- ----------- -----------
Balance at December 30, 1995 133,457 137 (586)
Exercise of stock options 3,516 -- --
Issuance of common stock under
employee stock purchase plan 772 -- --
Tax benefit related to stock options 11,819 -- --
Unrealized gain on investments -- 38 --
Currency translation adjustments -- -- 935
Net income -- -- --
---------- ----------- -----------
Balance at December 28, 1996 $149,564 $175 $ 349
========== =========== ===========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share related data)
Retained
Unearned earnings Total
ESOP (accumulated stockholders'
compensation deficit) equity
------------ ------------- -------------
Balance At January 1, 1994 $ -- $(6,122) $ 6,072
Exercise of Class C convertible
preferred stock warrants -- -- 2,000
Issuance of common stock to officer -- -- 1,000
Issuance of common stock -- -- 4,551
Initial public offering, net of
stock issuance costs of $1,032 -- -- 27,778
Conversion of preferred stock -- -- --
Exercise of stock options -- -- 652
ESOP transactions, net (305) -- (305)
Tax benefit related to stock options -- -- 448
Currency translation adjustments -- -- 429
Net income -- 2,040 2,040
Dividends paid -- (551) (551)
------------ ------------- -------------
Balance at December 31, 1994 (305) (4,633) 44,114
Exercise of stock options -- -- 1,747
Issuance of common stock in
settlement of dividend payable -- -- 406
Issuance of common stock in
settlement of phantom stock plan 305 -- 2,589
Issuance of common stock under
employee stock purchase plan -- -- 314
Secondary public offering, net of
stock issuance costs of $583 -- -- 76,138
Tax benefit related to stock options -- -- 3,328
Unrealized gain on investments -- -- 137
Currency translation adjustments -- -- (118)
Net loss -- (4,852) (4,852)
Elimination of Spider net income
for the three-month period ended
March 31, 1995 -- (899) (899)
------------ ------------- -------------
Balance at December 30, 1995 -- (10,384) 122,904
Exercise of stock options -- -- 3,525
Issuance of common stock under
employee stock purchase plan -- -- 772
Tax benefit related to stock options -- -- 11,819
Unrealized gain on investments -- -- 38
Currency translation adjustments -- -- 935
Net income -- 16,841 16,841
------------ ------------- -------------
Balance at December 28, 1996 $ -- $ 6,457 $156,834
============ ============= =============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
28
Shiva Corporation
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
Year Ended
---------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------ -----------
(Fiscal 1996) (Fiscal 1995)(Fiscal 1994)
Cash flows from operating activities
Net income (loss) $16,841 $(4,852) $2,040
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Merger expenses -- 3,766 --
Depreciation and amortization 6,968 3,756 2,716
Deferred income taxes (2) (811) (336)
Changes in assets and liabilities:
Accounts receivable (15,675) (7,906) (3,496)
Inventories (9,804) (2,023) (865)
Prepaid expenses and other current assets 391 (67) (330)
Accounts payable 7,585 122 1,750
Accrued compensation and benefits 360 2,444 601
Accrued expenses 13,434 6,548 2,011
Deferred revenue (134) 1,846 804
Other long-term liabilities (412) (24) (23)
------------ ------------ -----------
Net cash provided by operating
activities 19,552 2,799 4,872
------------ ------------ -----------
Cash flows from investing activities
Purchase of property, plant and
equipment (16,089) (7,031) (3,300)
Capitalized software development costs (1,183) (827) (293)
Purchases of short-term investments (34,136) (11,188) --
Proceeds from maturities of short-term
investments 8,264 2,200 --
Change in other assets (373) (147) (173)
---------- ------------ ---------
Net cash used by investing
activities (43,517) (16,993) (3,766)
------------ ------------ -----------
Cash flows from financing activities
Net repayments under short-term debt -- (1,885) (1,213)
Proceeds from long-term debt -- -- 615
Principal payments on long-term
debt and capital lease obligations (702) (4,075) (1,080)
Proceeds from issuance of convertible
preferred stock, net -- -- 2,000
Proceeds from issuance of common
stock, net -- 76,138 33,328
Proceeds from exercise of stock options 4,297 2,054 652
Dividends paid -- (58) (235)
------------ ------------ ---------
Net cash provided by financing
activities 3,595 72,174 34,067
--------- ------------ ---------
Effects of exchange rate changes on cash
and cash equivalents (766) 153 72
------------ ------------ ---------
Net increase (decrease) in cash and
cash equivalents (21,136) 58,133 35,245
Cash and cash equivalents, beginning
of period 93,203 36,068 823
Elimination of Spider net cash activity
for the three months ended March
31, 1995 -- (998) --
------------ ------------ ---------
Cash and cash equivalents, end of period $72,067 $93,203 $36,068
============ ============ =========
Supplemental disclosure of cash flow
information
Interest paid $ 195 $ 748 $ 1,127
Income taxes paid $ 471 $ 143 $ 366
Supplemental disclosure of noncash
financing activities
Issuance of common stock in
settlement of dividend payable $ -- $ 406 $ --
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
29
SHIVA CORPORATION
Notes to Consolidated Financial Statements
1. Nature of Business And Summary of Significant Accounting Policies
Shiva Corporation (the "Company") is a leading provider of mission-critical
remote access solutions that enable users to connect with corporate
information resources, on-line services, and the Internet. The Company
markets its products worldwide primarily through distributors, systems
integrators, resellers and original equipment manufacturers.
A summary of the Company's significant accounting policies follows:
Fiscal Year
The Company's fiscal year ends on the Saturday closest to December 31.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. The consolidated financial information
contained herein include the accounts of Spider Systems Limited ("Spider") and
AirSoft, Inc. ("AirSoft") for all periods presented (see Note 2).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized upon shipment provided that no
significant Company obligations remain and collection of the related
receivable is probable. The Company provides most of its distributors and
resellers with price protection rights and return rights for stock rotation or
product evaluation. An allowance for estimated future returns is recorded at
the time revenue is recognized based on the Company's return policies and
historical experience. Although the Company believes it has adequate
reserves to cover product returns and price protection rights, there can be no
assurance that the Company will not experience significant returns or price
protection adjustments in the future or that such reserves will be adequate to
cover such returns and price protection rights. Revenue from technical
support and product maintenance contracts is deferred and recognized ratably
over the period the services are performed.
The Company provides a one-year warranty on hardware products and a ninety-day
warranty on software media. A provision is made at the time of sale for
product warranty costs. The Company has historically provided customers with
a variety of technical support services, including free services which it is
not contractually obligated to provide. A provision is made at the time of
sale for the cost of such free services.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company invests
its excess cash in U.S. Treasury securities, municipal securities, money
market funds of major financial institutions, high-grade commercial paper and
time deposits that are subject to minimal credit and market risk.
All of the Company's cash equivalents and short-term investments are recorded
at fair value and classified as available-for-sale in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's investments at
December 28, 1996 and December 30, 1995 include unrealized gains of $175,000
and $137,000,
30
respectively, recorded as a separate component of stockholders' equity. The
Company's short-term investments at December 28, 1996 have various maturity
dates through 1998. Realized gains or losses on the sale of securities are
calculated using the specific identification method. There were no such
realized gains or losses in fiscal 1996 or 1995.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk include accounts receivable which are primarily due from
distributors, resellers and OEM customers throughout North America and
Europe. The Company performs ongoing evaluations of customers' financial
condition and, generally, does not require collateral. In addition, the
Company maintains reserves for potential credit losses, and such losses, in
the aggregate, have not exceeded management expectations. At December 28,
1996, one customer accounted for 19% of the accounts receivable balance.
Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash, cash equivalents and short-term investments, accounts receivable,
accounts payable, long-term debt and capital lease obligations approximate
their fair value at December 28, 1996, and December 30, 1995.
Forward Foreign Exchange Contracts
The Company enters into forward foreign exchange contracts as a hedge against
exposure to fluctuations in exchange rates associated with certain
transactions denominated in foreign currencies, including intercompany and
trade accounts receivable and payable, and does not use them for trading
purposes. The contracts are marked to market with gains and losses, not
material in amount, recognized currently in interest and other expense in
the accompanying financial statements and generally offset exchange gains or
losses on the related transactions. Cash flows from the contracts are
classified as cash flows from operating activities. Exposure to credit risk
for these contracts is minimal since the counterparties are major financial
institutions, and is generally limited to the unrealized gains on such
contracts should any counterparties fail to perform as contracted. Exposure
to market risk is limited to movements in currency rates. At December 28,
1996, the Company had outstanding forward exchange contracts to purchase
$575,000 and to sell $8,380,000 in various foreign currencies which matured
and settled on January 15, 1997. The fair value of outstanding forward
exchange contracts approximates the original value due to the relatively
short terms, generally less than three months.
Inventories
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out method.
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent new product
introductions. There can be no assurance that products or technologies
developed by others will not make the Company's inventories obsolete.
The Company is currently dependent on two subcontractors for the manufacture
of significant portions of its products. Although the Company believes that
there are a limited number of other qualified subcontract manufacturers for
its products, a change in subcontractors could result in delays or reductions
in product shipments. In addition, certain components of the Company's
products are only available from a limited number of suppliers. The inability
to obtain sufficient key components as required could also result in delays or
reductions in product shipments. Such delays or reductions could have an
adverse effect on the Company's results of operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Equipment held under capital leases is stated at the lower of the fair market
value of the equipment or the present value of the minimum lease payments at
31
the inception of the leases and is amortized on a straight-line basis over the
shorter of the lives of the related assets or the term of the leases.
Maintenance and repair costs are expensed as incurred. Upon sale or retire-
ment of property, plant and equipment, the applicable cost of the disposed
asset and the related accumulated depreciation are eliminated. Any resulting
gains or losses are reflected in results of operations.
Research and Development and Capitalized Software Development Costs
Research and development costs, other than certain software development costs,
are charged to expense as incurred. Software development costs incurred
subsequent to the establishment of technological feasibility, and prior to
general release of the product to the public, are capitalized and amortized to
cost of sales on a straight-line basis over the estimated useful lives of the
related products, generally eighteen to thirty-six months. It is reasonably
possible that the remaining estimated useful lives of the related products
could be reduced in the future due to competitive pressures. Unamortized
software development costs of $1,134,000 and $703,000 are included in other
assets at December 28, 1996 and December 30, 1995, respectively.
Amortization expense was $777,000, $370,000 and $310,000 in fiscal 1996, 1995
and 1994, respectively.
The Company receives fees under product development contracts with certain
customers. Product development fees are recorded as a reduction of research
and development costs as work is performed pursuant to the related contracts
and defined milestones are attained. Losses, if any, are provided for at the
time that management determines that development costs will exceed related
fees. Payments received under product development contracts prior to the
completion of the related work and attainment of milestones are recorded as
deferred liabilities. In fiscal 1996, 1995 and 1994 the Company recorded
product development fees of $1,718,000, $955,000 and $766,000, respectively,
and incurred development costs of $922,000, $1,135,000 and $820,000,
respectively, under such contracts.
Advertising Costs
Advertising costs, other than certain direct-response advertising costs, are
charged to expense as incurred. The Company has not incurred significant
costs associated with direct-response advertising in fiscal 1996, 1995, and
1994, and there were no capitalized advertising costs at December 28, 1996, or
December 30, 1995. Advertising costs were $3,177,000, $3,042,000, and
$2,589,000 in fiscal 1996, 1995, and 1994, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
is an asset and liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences, utilizing current tax rates, of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Deferred tax assets are recognized, net of any valuation allowance, for the
estimated future tax effects of deductible temporary differences and tax
operating loss and credit carryforwards. Deferred income tax expense
represents the change in the net deferred tax asset and liability balances.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees." Since it is the Company's policy to grant options
with an exercise price equal to the quoted market price of the underlying
stock on the grant date, no compensation cost has been recognized for its
stock option and employee stock purchase plans. In January 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation."
(See Note 10).
32
Foreign Currency Translation
Financial statements of international subsidiaries, where the local currency
is the functional currency, are translated using period-end exchange rates for
assets and liabilities and at average rates during the period for results of
operations. The resulting foreign currency translation adjustments are
included as a separate component of stockholders' equity. For international
subsidiaries where the functional currency is other than the local currency,
monetary assets and liabilities are translated using period-end exchange
rates, non-monetary assets and liabilities are translated at historical rates
and results of operations are translated at average rates for the period. The
resulting foreign currency translation adjustments are included in interest
and other expense in the accompanying financial statements. Gains or losses
resulting from foreign currency translation were immaterial in fiscal 1996,
1995, and 1994.
Net Income (Loss) Per Share
Net income per share is calculated based on the weighted average number of
common shares and common equivalent shares assumed outstanding during the
period. Net loss per share excludes common equivalent shares because the
effect is antidilutive. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, certain common and common equivalent shares issued
by the Company during the twelve months immediately preceding the initial
filing of the registration statement relating to the Company's initial public
offering have been included in the calculation of weighted average shares,
using the treasury stock method and the initial public offering price, as if
these shares were outstanding for all periods prior to the initial public
offering.
2. Business Combinations
In June 1996, the Company issued approximately 691,587 shares of common stock
in exchange for all outstanding shares of AirSoft (the "AirSoft Acquisition")
in a business combination accounted for as a pooling of interests. AirSoft
designs, develops, manufactures and sells performance enhancement software
products. The consolidated financial statements for all periods presented have
been retroactively combined to reflect the AirSoft Acquisition. No adjustments
to conform accounting methods were required; however, certain amounts have
been reclassified with regard to the presentation of the financial information
of the companies.
The following information shows revenue and net income (loss) for the separate
companies for the periods preceding the AirSoft Acquisition:
Year Ended Three Months Ended
-------------------------------------------------------
December 30, December 31, March 30,
1995 1994 1996
------------ ----------- ------------------
(Fiscal 1995) (Fiscal 1994) (unaudited)
Revenues:
Shiva $117,721 $80,971 $42,513
AirSoft 860 87 796
------------ ----------- ------------------
$118,581 $81,058 $43,309
Net income (loss):
Shiva ($2,879) $3,881 $ 4,366
AirSoft (1,973) (1,841) (27)
------------ ----------- ------------------
($4,852) $2,040 $ 4,339
============ =========== ==================
Merger-related expenses of $1,987,000 were expensed upon consummation of the
AirSoft Acquisition in the quarter ended June 29, 1996. Merger-related
expenses include $1,675,000 of transaction costs for financial advisor, legal,
regulatory, and accounting fees and other related expenses, and $312,000 of
employee severance payments and other costs.
33
In August 1995, the Company issued approximately 3,923,606 shares of common
stock in exchange for all outstanding shares of Spider (the "Spider
Acquisition") in a business combination accounted for as a pooling of
interests. Spider is a digital internetworking company based in Edinburgh,
UK which designs, develops, manufactures and sells advanced network access
hardware and software products. The consolidated financial statements for all
periods presented have been retroactively combined to reflect the Spider
Acquisition.
Spider's fiscal year end of March 31 has been changed to conform to the
Company's fiscal year end. Spider's results of operations for the year ended
March 31, 1995 have been combined with the Company's results of operations for
the year ended December 31, 1994. The results of operations for fiscal 1995
are for the twelve months ended December 30, 1995, for both Shiva and Spider.
Spider's unaudited results of operations for the three months ended March 31,
1995 (including revenues, operating income, and net income of $12,592,000,
$1,350,000 and $899,000 respectively) have been included in the combined
results of operations for fiscal 1994 and 1995. Therefore, Spider's net
income for the three-month period ended March 31, 1995 has been eliminated
from stockholders' equity.
Merger-related expenses of $13,986,000 were expensed upon consummation of the
Spider Acquisition in the quarter ended September 30, 1995. Merger-related
expenses include $6,275,000 of transaction costs for financial advisor, legal,
regulatory and accounting fees and other related expenses, $1,482,000 of
employee severance payments, $2,644,000 of phantom stock compensation and
$3,585,000 of integration costs, including elimination of duplicative assets,
employee relocation and travel, and marketing costs related to the
introduction of the combined entity.
3. Cash, Cash Equivalents and Short-Term Investments
Cash, cash equivalents and short-term investments consist of the following:
(In thousands)
December 28, 1996 Amortized Unrealized
Cost Gain 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
======== ========== ============
Amortized Unrealized
December 30, 1995 Cost Gain Market Value
--------- ---------- ------------
Cash and cash equivalents:
Money market funds $ 75,382 $ -- $ 75,382
Cash held in banks 16,825 -- 16,825
Commercial paper 996 -- 996
Total cash and cash equivalents 93,203 -- 93,203
Short-term investments:
U.S. Treasury securities 8,988 137 9,125
Total cash, cash equivalents and
short-term investments $ 102,191 $ 137 $ 102,328
========= ======== =========
34
4. Inventories
Inventories consist of the following:
(In thousands) December 29, 1996 December 30, 1995
----------------- -----------------
Raw materials $ 6,218 $3,137
Work-in-process 1,506 1,037
Finished goods 10,234 3,672
----------------- -----------------
$17,958 $7,846
================= =================
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
Useful life December 28, December 30,
(In thousands) (in years) 1996 1995
----------- ----------- ------------
Land $ 339 $ 310
Buildings 50 4,301 3,801
Furniture and fixtures 5 3,589 2,395
Machinery and equipment 3-5 25,288 17,009
Leasehold improvements Lease Term 2,461 494
----------- ------------
35,978 24,009
Less - Accumulated depreciation
and amortization 12,123 11,044
----------- ------------
$23,855 $12,965
=========== ============
Furniture and fixtures include equipment under capital leases of $170,000 at
December 30, 1995. Machinery and equipment include equipment under capital
leases of $206,000 at December 28, 1996 and $2,004,000 at December 30, 1995.
Accumulated amortization related to equipment under capital leases totals
$153,000 and $1,889,000 at December 28, 1996, and December 30, 1995,
respectively. Amortization of equipment under capital leases is included in
depreciation expense. In fiscal 1996, the Company disposed of approximately
$5,474,000 in property and equipment. The resulting loss on these disposals
was not material.
6. Accrued Expenses
Accrued expenses consist of the following:
December 28, December 30,
(In thousands) 1996 1995
------------ ------------
Accrued sales and marketing expenses $ 6,360 $2,265
Other accrued expenses 7,388 5,244
------------ ------------
$13,748 $7,509
============ ============
7. Debt
Short-term Debt
Under the terms of a credit agreement (the "Credit Agreement") with a U.S.
bank, the Company has a $5,000,000 unsecured revolving credit facility (the
"Revolver") which bears interest at the bank's prime rate. At December 28,
1996, available borrowings were reduced by outstanding letters of credit of
$843,000 related to certain office leases. These letters of credit expire at
various dates through 1997. While the Company may repay all or a portion of
35
the Revolver borrowings at any time, any outstanding principal must be repaid
in full by June 1997. The terms of the Credit Agreement require the Company
to maintain a minimum level of profitability and specified financial ratios.
There were no borrowings outstanding under the Revolver at December 28, 1996
or December 30, 1995.
The Company also has a foreign credit facility secured by all assets of Shiva
Europe Limited of approximately $1,695,000, of which $1,259,000 was available
at December 28, 1996. Available borrowings under this facility are decreased
by the value of the outstanding debt payable to the European Coal and Steel
Community Fund and guarantees on certain foreign currency and other
transactions. Borrowings under the foreign credit facility bear interest at
the bank's prime rate plus 2.5% (8.5% at December 28, 1996). The terms of the
foreign credit facility require the Company to maintain a minimum level of
profitability and specified financial ratios. There were no borrowings
outstanding under the foreign credit facility at December 28, 1996.
Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following:
December 28, December 30,
(In thousands) 1996 1995
----------- ------------
Capital lease obligations at rates of 11.4% to
14.3%, secured by certain equipment; expiring
at various dates through July 1998 $ 65 $378
Mortgage loans:
European Coal and Steel Community Fund ("ECSC")
Loan A payable in semi-annual installments
of $97 plus interest at 8.5%, due March 1997 106 290
Loan C payable in semi-annual installments of
$97 plus interest at 10.0%, due January 1998 318 484
----------- ------------
489 1,152
Less - Current portion 367 700
----------- ------------
$122 $452
=========== ============
The ECSC mortgage loans are secured by the Company's European headquarters
property in Edinburgh, U.K.
8. Income Taxes
The components of income (loss) before income taxes are as follows:
Year Ended
---------------------------------------------
December 28, December 30, December 31,
(In thousands) 1996 1995 1994
------------ ------------ ------------
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
------------ ------------ ------------
Domestic $22,906 $ 2,387 $1,113
Foreign 3,120 (4,853) 1,848
------------ ------------ ------------
$26,026 $(2,466) $2,961
============ ============ ============
36
The components of the income tax provision are as follows:
(In thousands) Year Ended
--------------------------------------------
December 28, December 30, December 31,
1996 1995 1994
------------ ------------- -------------
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
------------- ------------- ------------
Current:
Federal $7,561 $3,401 $725
State 1,013 186 (39)
Foreign 613 (390) 571
------------- ------------- ------------
9,187 3,197 1,257
Deferred:
Federal (1,244) (333) (34)
State 923 (75) (192)
Foreign 319 (403) (110)
------------- ------------- ------------
(2) (811) (336)
------------- ------------- ------------
$9,185 $2,386 $921
============= ============= ============
The significant components of the net deferred tax asset (liability) are as
follows:
December 28, December 30,
(In thousands) 1996 1995
------------ ------------
Deferred tax assets:
Reserves not currently deductible $4,275 $2,675
Net operating loss carryforwards 2,381 4,635
Tax credit carryforwards 597 891
Other 58 424
------------ ------------
Gross deferred tax assets 7,311 8,625
============ ============
Deferred tax liabilities:
Capitalized software development costs (406) (245)
Depreciation (736) (832)
Other (91) (244)
------------ ------------
Gross deferred tax liabilities (1,233) (1,321)
Deferred tax asset valuation allowance (858) (6,531)
------------ ------------
$5,220 $ 773
============ ============
The difference between the income tax provision and income taxes computed
using the applicable U.S. statutory federal tax rate are as follows:
Year Ended
---------------------------------------------
December 28, December 30, December 31
1996 1995 1994
------------ ----------- -----------
(Fiscal 1996) (Fiscal 1995) (Fiscal 1994)
------------ ----------- -----------
Taxes computed at federal
statutory rate 35% 35% 35%
State income taxes, net of federal
tax benefit 5 (16) (1)
Foreign income taxed at different rates -- (2) --
Research and development tax credits -- 3 (9)
Change in valuation allowance (6) 27 (6)
Non-deductible merger expenses 3 (127) --
Tax exempt interest (3) -- --
Other 1 (17) 12
Effective income tax rate 35% (97)% 31%
</TABLE
37
At December 28, 1996, the Company had federal and state net operating loss
carryforwards of approximately $4,352,000 which expire at various dates
through 2011. The Company also had federal and state research and development
tax credit carryforwards of $597,000, which expire at various dates through
2011. Ownership changes, as defined by the Internal Revenue Code, may limit
the amount of net operating loss and tax credit carryforwards that can be
utilized to offset future taxable income or tax liability.
The deferred tax valuation allowance decreased by $5,673,000 due to the
realization of deferred tax assets related to employee stock options and the
change in the amount of AirSoft's net operating losses and tax credits
expected to be utilized in the carryforward period. Of this amount,
$3,976,000 related to employee stock options and was therefore recorded as a
credit to stockholders' equity. The Company has recorded a valuation
allowance for the tax benefit of certain net operating loss carryforwards with
substantial limitations since realization of these future benefits is not
sufficiently assured at December 28, 1996. The deferred tax asset recognized
reflects the benefit of future deductible temporary differences and net
operating loss and credit carryforwards expected to be realized. Realization
of the asset is dependent on generating sufficient taxable income and,
although not assured, management believes that it is more likely than not that
the deferred tax asset will be realized.
9. Stockholders' Equity
Stockholder Rights Plan
On September 20, 1995 the Company's Board of Directors adopted a Stockholder
Rights Plan and pursuant thereto declared a dividend of one preferred stock
purchase right for each outstanding share of common stock to stockholders of
record at the close of business on October 13, 1995. Each right entitles
holders of the Company's common stock to purchase one one-hundredth of a share
(a "Unit") of a new series of junior participating preferred stock, $.01 par
value per share, at an exercise price of $300.00 per unit, subject to
adjustment. The rights are exercisable and become exercisable for common
stock only under certain circumstances and in the event of particular events
relating to a change in control of the Company. The rights may be redeemed by
the Company under certain circumstances pursuant to the plan. The rights
expire on October 13, 2005, unless earlier redeemed or exchanged. The rights
have certain anti-takeover effects, in that they would cause substantial
dilution to a person or group that attempts to acquire a significant interest
in the Company on terms not approved by the Board of Directors.
Common Stock
On October 21, 1994, the stockholders approved a 1-for-1.5 reverse split
(effective upon the closing of the Company's initial public offering) of the
Company's common stock. On April 2, 1996, the Company's Board of Directors
declared a two-for-one split of the Company's common stock which was effective
on April 22, 1996. All shares and per share amounts included in the
accompanying consolidated financial statements have been adjusted to give
retroactive effect to such stock splits for all periods presented. On
November 30, 1995, the stockholders approved an increase in the authorized
shares of common stock from 25,000,000 shares to 50,000,000 shares. On May
15, 1996, the stockholders approved an increase in the authorized shares of
common stock from 50,000,000 to 100,000,000 shares.
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of the Company's stockholders. Common stockholders are
entitled to receive dividends, if any, as may be declared by the Board of
Directors, subject to any preferential dividend rights of any preferred
stockholders.
38
10. Stock Plans
1988 Stock Plan
The 1988 Stock Plan (the "1988 Plan") provides for the grant of incentive
stock options, stock awards, and stock purchase rights for the purchase of up
to an aggregate of 8,200,000 shares of the Company's common stock by officers,
employees, consultants and directors of the Company. In May 1996, the
stockholders approved an increase in the number of shares issuable under the
1988 Plan from 8,200,000 to 9,700,000 and extended the expiration date of the
1998 Plan from December 31, 1997 to December 31, 2000. The Compensation
Committee of the Board of Directors is responsible for administration of the
1988 Plan. The Compensation Committee determines the term of each option, the
option exercise price, the number of shares for which each option is granted
and the rate at which each option is exercisable. Options generally vest
ratably over four years. The Company may not grant an employee incentive
stock options with fair value in excess of $100,000 that are first exercisable
during any one calendar year.
Incentive stock options may be granted to any officer or employee at an
exercise price per share of not less than the fair value per common share on
the date of the grant (not less than 110% of the fair value in the case of
holders of more than 10% of the Company's voting stock). Nonqualified stock
options may be granted to an officer, employee, consultant, or director at an
exercise price per share of not less than either the book value per common
share or 50% of the fair value per common share on the date of grant.
Options granted under the 1988 Plan generally expire ten years from the date
of the grant (five years for incentive stock options granted to holders of
more than 10% of the Company's voting stock). The Compensation Committee, at
the request of any optionee, may convert incentive stock options that have not
been exercised at the date of conversion into nonqualified stock options.
In connection with the AirSoft Acquisition, the Company assumed 119,076
options in June 1996. These assumed options were granted at prices equal to
the fair market value at the date of grant, become exercisable in installments
(generally ratably over four years), and expire ten years from the date of
grant. The Company does not intend to issue any additional options under the
AirSoft stock option plan.
1994 Director Stock Option Plan
On October 21, 1994, stockholders approved the 1994 Director Stock Option Plan
(the "1994 Director Option Plan") under which options to purchase up to an
aggregate of 550,000 shares of the Company's common stock may be granted to
nonemployee directors at an exercise price per share equal to the fair value
per common share on the date of grant. Under the 1994 Director Option Plan,
each nonemployee director was granted an option to purchase 33,000 common
shares (the "initial shares") on July 17, 1995, and an option to purchase an
additional 7,000 common shares on the third Monday in July of each year
thereafter, through December 31, 1999. Eligible directors who were previously
granted stock options under the 1988 Plan were not granted an option to
purchase the initial shares. Twenty-five percent of the options granted under
the 1994 Director Option Plan are exercisable one year from the date of grant
and every year thereafter, provided that the optionee remains a director.
Options generally expire ten years from the date of grant.
39
Transactions under the 1988 Plan and the 1994 Director Option Plan during
fiscal 1996 and 1995 are summarized as follows:
Fiscal 1996 Fiscal 1995
-------------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------------- ----------------
Outstanding at beginning
of period 4,056,159 $11.06 3,709,354 $ 1.88
Granted 2,325,422 38.98 1,581,848 27.32
Exercised 899,048 3.94 1,100,059 1.35
Canceled 396,350 25.08 134,984 14.42
-------------------- ----------------
Outstanding at end of period 5,086,183 $24.86 4,056,159 $11.06
Options exercisable at end
of period 1,258,216 683,814
========= ======= ========= =======
Weighted average fair value
of options granted during
the period 24.73 16.25
Options available for future
grant 2,148,746 2,583,793
The following table summarizes information about options outstanding at
December 28, 1996 for both the 1988 Plan and the 1994 Director Option Plan:
Options Outstanding Option Exerciseable
-------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/28/96 Life (in years) Price at 12/28/96 Price
- ---------- ----------- --------------- -------- ----------- ---------
$ .75- 1.88 1,208,012 6.7 $ 1.00 604,469 $ .89
3.00- 6.80 544,316 7.5 4.38 215,926 4.12
16.75-31.25 1,051,412 8.6 27.69 202,296 28.62
31.63-40.50 1,384,693 9.0 33.38 235,525 32.53
41.00-51.75 606,650 9.5 45.71 - -
$57.38-80.00 291,100 9.5 67.94 - -
--------- --- ------- --------- ------
5,086,183 8.3 $ 24.86 1,258,216 $11.65
The fair value of each option grant under the 1998 Plan and the 1994 Director
Option Plan is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
Fiscal 1996 Fiscal 1995
----------- -----------
Expected life (years) 5 5
Risk-free interest rate 6.19% 6.02%
Volatility 64.00% 61.00%
Dividend yield 0.00% 0.00%
40
Employee Stock Purchase Plan
On October 21, 1994, the stockholders approved the 1994 Employee Stock
Purchase Plan (the "1994 Stock Purchase Plan") which enables eligible
employees to purchase shares of common stock. Under the 1994 Stock Purchase
Plan, eligible employees may purchase up to an aggregate of 700,000 shares of
common stock during six-month plan periods commencing on February 1 and August
1 of each year at a price per share of 85% of the lower of the market price
per share on the first or last business day of the six-month plan period. An
employee's rights terminate upon voluntary withdrawal from the 1994 Stock
Purchase Plan or upon termination of employment. At December 28, 1996 and
December 30, 1995, 646,830 and 678,418 shares were available for issuance. In
fiscal 1996 and 1995, employees purchased 31,588 and 21,582 shares of stock,
respectively. The weighted average fair value of shares granted during 1996
and 1995 were $24.73 and $16.25 per share, respectively.
The fair value of shares issued under the 1994 Stock Purchase Plan is
estimated using the Black-Scholes option pricing model with the following
assumptions:
Fiscal 1996 Fiscal 1995
----------- -----------
Expected life (years) 5 5
Risk-free interest rate 6.19% 6.02%
Volatility 64.00% 61.00%
Dividend yield 0.00% 0.00%
Fair Value Disclosures
Had compensation cost for the Company's Stock Plans been determined based on
the fair value at the grant dates, as prescribed in SFAS 123, the Company's
net income (loss) and net income (loss) per share would have been as follows
(In thousands, except per share information):
Fiscal 1996 Fiscal 1995
----------- -----------
Pro forma net income (loss): $4,814 $(6,277)
Pro forma net income (loss) per share $ .15 $ (.23)
11. Retirement Plans
The Company sponsors a 401(k) retirement savings plan covering all domestic
employees of the Company who meet minimum age and service requirements. The
plan allows participants to defer a portion of their annual compensation on a
pre-tax basis. The Company matches 50% of the first 3% of each participating
employee's contributions, subject to certain limitations and may, at its
discretion, make additional contributions to the plan. The Company made
matching contributions of $230,000, $150,000 and $119,000, to the plan in
fiscal 1996, 1995 and 1994, respectively.
The Company also sponsors a defined contribution plan for all eligible
European employees of the Company. Participation in the plan is available to
substantially all salaried employees and to certain groups of hourly paid
employees. Company contributions are based on a percentage of the employees'
base salaries. The Company made contributions of $437,000, $318,000 and
$267,000 to the plan in fiscal 1996, 1995 and 1994, respectively.
12. Industry Segment and Geographic Information
The Company operates in a single industry segment: the development,
manufacture, sale and support of network communications products and services.
In fiscal 1996, one OEM customer accounted for $27,905,000 (14%) of revenues.
Intercompany sales and transfers between geographic areas are accounted for at
prices which are designed to be representative of unaffiliated party
transactions.
41
North
America Europe Eliminations Total
-------- ------ ------------ -----
1996
Revenues to unaffiliated customers $145,506 $54,613 $ -- $200,119
Intercompany revenue 10,269 4,443 (14,712) --
-------- ------ ------------ ------
Total revenues 155,775 59,056 (14,712) 200,119
-------- ------ ------------ ------
Income from operations 19,604 3,745 (667) 22,682
Identifiable assets 163,050 35,749 $ (749) 198,050
1995
Revenues to unaffiliated customers $ 70,083 $48,498 -- $118,581
Intercompany revenue -- 607 (607) --
-------- ------ ------------ ------
Total revenues 70,083 49,105 (607) 118,581
-------- ------ ------------ ------
Loss from operations (797) (3,243) -- (4,040)
Identifiable assets 140,006 24,581 (14,464) 150,123
1994
Revenues to unaffiliated customers $ 41,646 $39,412 $ -- $ 81,058
Intercompany revenue -- -- -- --
-------- ------ ------------ ------
Total revenues 41,646 39,412 -- 81,058
-------- ------ ------------ ------
Income from operations 1,285 2,574 -- 3,859
Identifiable assets 51,048 23,611 (2,099) 72,560
13. Commitments
Lease Commitments
The Company leases office and operating facilities and certain equipment under
operating and capital leases (See Notes 5 and 7) that expire through February,
2006. Future minimum lease payments under operating and capital leases with
initial or remaining noncancellable terms of one or more years are as follows
as of December 28, 1996:
(In thousands)
Operating Capital
Fiscal Leases Leases
- ------------- ---------- ----------
1997 $ 3,348 $54
1998 3,123 16
1999 2,793 --
2000 2,645 --
2001 2,650 --
Thereafter 8,973 --
--------- ----------
Total minimum lease payments $23,532 70
======= =====
Less - Amount representing interest 5
----------- ----------
Net present value of minimum lease payments $65
==========
Rental expenses under operating leases was $3,244,000, $1,934,000 and
$1,877,000 in fiscal 1996, 1995, and 1994, respectively.
14 Contingencies
On January 17, 1997, a complaint, Abraham Schwartz and Norman Marcus v. Shiva
Corporation, was filed against the Company in the Superior Court of the State
of California for the County of Los Angeles. The plaintiffs purport to bring
this action on behalf of a class of purchasers of the Company's common stock
between September 17, 1996 and January 7, 1997. The Complaint asserts that
the Company made false or misleading statements in violation of state and
federal law, including: state law negligent misrepresentation, fraud, and
deceit, California Corporation Code Chapters 1507, 25400, and 25500,
California Civil Code Chapters 1709-10, and Section 12(2) of the Securities
Act of 1933, 15 U.S.C. Chapter 771(2). On behalf of the purported class, the
plaintiffs seek compensatory damages, treble damages under California law,
punitive damages under California law, punitive damages, attorneys' fees,
costs and interest. On February 24, 1997, the Company filed a demurrer to the
complaint. The Company believes the claim to be without merit and intends to
vigorously defend against the action. The action is in its earliest stages
and the Company is unable to determine at this time the potential liability,
if any.
42
Report of Independent Accountants
To the Board of Directors and Stockholders of Shiva Corporation
In our opinion, based upon our audits and the reports of other auditors, the
accompanying consolidated balance sheet and related consolidated statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Shiva Corporation
and its subsidiaries at December 28, 1996 and December 30, 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 28, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of AirSoft, Inc., a wholly-owned subsidiary, which statements
reflect total assets of $3,285,000 at December 31, 1995, and total revenues
of $860,000 and $87,000 for the years ended December 31, 1995, and 1994
respectively. Those statements were audited by other auditors whose reports
thereon have been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for AirSoft, Inc. as of and for the
periods described above, is based solely on the reports of the other auditors.
We conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
January 23, 1997
43
Quarterly Financial Information (unaudited)
First Second Third Fourth
(In thousands, except per share data) 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 $ 0.14 $ 0.16 $ 0.19 $ 0.05
Common Stock Prices ----- High $ 48.13 $ 87.25 $ 85.88 $ 58.50
Low $ 25.13 $ 44.38 $ 41.25 $ 33.25
------- ------- ------- -------
Fiscal 1995
Revenues $25,737 $26,376 $30,033 $36,435
Gross profit 14,659 15,197 17,663 21,876
Merger Expenses -- -- 13,986 --
Net income (loss) 1,382 973 (11,552) 4,345
Net income (loss) per share $ 0.05 $ 0.04 $( 0.46) $ 0.15
Common Stock Prices ----- High $ 21.00 $ 22.25 $ 31.63 $ 38.75
Low $ 13.50 $ 14.13 $ 19.38 $ 21.13
------- ------- ------- -------
As of January 31, 1997 the closing price was $18.06 per share and as of that
same date there were 726 record holders of the Company's common stock. This
does not reflect persons or entities who hold their stock in nominee or
"street" name through various brokerage firms. The Company has never paid any
cash dividends on its common stock and does not anticipate paying any cash
dividends in the foreseeable future. The Company currently intends to retain
future earnings to fund the development and growth of its business.
44