Exhibit 13.1
Shiva Corporation Financial Highlights
Fiscal Year
(In thousands, except
per share data) 1997 1996 1995 1994 1993
Statement of Operations Data
Remote Access Revenues $130,413 $174,084 $ 83,924 $ 44,825 $ 20,510
Total Revenues 144,329 200,119 118,581 81,058 61,262
Operating Income (Loss)
before Merger Expenses (25,535) 24,669 9,946 3,859 1,764
Merger Expenses -- 1,987 13,986 -- --
Income (Loss) before Income
Taxes (22,013) 26,026 (2,466) 2,961 716
Income Tax Provision (Benefit) (8,366) 9,185 2,386 921 300
Net Income (Loss) (13,647) 16,841* (4,852)** 2,040 416
Net Income (Loss) per Share
Basic (0.47) 0.59* (0.19)** 0.16 0.04
Net Income (Loss) per Share
Diluted (0.47) 0.54* (0.19)** 0.10 0.03
Balance Sheet Data
Total Assets 182,246 198,050 150,123 72,559 29,514
Working Capital 108,314 130,464 109,376 38,307 1,252
Long-term Obligations -- 122 452 4,037 3,418
Stockholders' Equity 145,944 156,834 122,904 44,114 6,072
<FN>
*In the absence of merger expenses incurred in FY96, net income and net income
per diluted share would have been $18.8 million and $0.60, respectively.
**In the absence of merger expenses incurred in FY95, net income and net income
per diluted share would have been $8.5 million and $0.30, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results
of operations of the Company should be read in conjunction with
the Company's Consolidated Financial Statements and Notes
thereto.
OVERVIEW
Shiva Corporation (the "Company") is a leading global provider of
remote access solutions for business. The Company's products connect
employees, customers and business partners to networks with
industry-leading remote access solutions. The Company was founded
in 1985, and is based in Bedford, Massachusetts, with offices
worldwide. The Company derives its revenues from remote access
products and other communications products and services. Remote
access products include the LanRover(R), LanRover Access
Switch(R), Shiva AccessPort(TM), ShivaIntegrator(R) and the
NetModem(R) product lines. Other communications products and
services include communications servers, AppleTalk products and
communications software. The Company also provides a wide range of
service offerings which include consulting, training and maintenance
services. The Company markets its products worldwide primarily
through distributors, systems integrators, resellers and an
original equipment manufacturer ("OEM") relationship with Northern
Telecom Limited ("Nortel").
In August 1995, the Company acquired Spider Systems Limited
("Spider"), a leading digital internetworking company based in
Edinburgh, UK, through the issuance of approximately 3,923,606
shares of its common stock (the "Spider Acquisition"). In June
1996, the Company issued approximately 691,587 shares of its
common stock in exchange for all the outstanding shares of
AirSoft, Inc. (the "AirSoft Acquisition"). AirSoft, Inc.
("AirSoft") designs, manufactures and sells performance
enhancement software products. These products include
Powerburst(R), a remote node accelerator designed to improve the
performance of file-system-based applications such as electronic
mail, spreadsheets and word processors. The Spider and AirSoft
acquisitions have been accounted for as poolings of interests,
and therefore the consolidated financial information contained
herein has been retroactively combined for all periods presented.
See Notes 1 and 2 of Notes to Consolidated Financial Statements.
On February 19, 1998 the Company entered into a definitive
agreement to acquire substantially all the assets and liabilities
of Isolation Systems Limited (the "Isolation Acquisition") for
approximately $37 million in cash, subject to closing
adjustments. Isolation Systems is a leading developer of virtual
private networking hardware and software solutions based in
Toronto, Ontario. The Isolation Acquisition is expected to close
by March 31, 1998 and will be accounted for as a purchase.
Accordingly, the purchase price will be allocated to the underlying
assets and liabilities based on their respective fair values at the
date of closing. The Company expects to recognize a substantial
charge for purchased in-process research and development in the
first quarter of fiscal 1998.
On February 27, 1998 the Company signed a new multi-year
agreement with Nortel. The Company and Nortel have been working
together to provide remote access equipment to service providers
since 1995. Under the new agreement, Nortel will purchase minimum
quarterly amounts of the Company's products for resale, replacing
the minimum royalty arrangement with the Company that was in
effect during fiscal 1997. In addition, the Company will receive
professional services revenue during the first two quarters of
fiscal 1998 from Nortel related to the development of carrier
class remote access technology. The OEM purchases and
professional services are expected to result in higher revenues
from Nortel in fiscal 1998 which will carry lower gross margins.
Gross margins on sales to Nortel are expected to decline in fiscal
1998 primarily due to the fact that a significant portion of the
revenues from Nortel in fiscal 1997 consisted of royalty revenues,
with little or no associated direct cost, related to the Rapport
112, an OEM version of the LanRover Access Switch.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of
operations data of the Company expressed as a percentage of
revenues for the periods indicated:
Fiscal Year Percentage Change
1997 1996 1995 1997 to 1996 1996 to 1995
---- ---- ---- ------------ ------------
Product and other
revenues 88% 99% 100% (36%) 67%
Royalty revenues 12 1 - 602 *
-- -- --- --- --
Total revenues 100% 100% 100% (28) 69
Cost of revenues 49 42 41 (14) 69
-- -- -- ---- --
Gross profit 51 58 59 (38) 69
Operating expenses:
Research and
development 18 12 12 10 57
Selling,
general and
administra-
tive 50 34 38 6 55
Merger expenses 0 1 12 * (86)
- - -- - ----
Total
operating
expenses 68 47 62 4 28
-- -- -- - --
Income (loss)
from operations (17) 11 (3) (213) *
Interest income (2) (2) (1) 5 112
--- --- --- - ---
Income (loss)
before income
taxes (15) 13 (2) (185) *
---- -- --- ----- -
Income tax
provision
(benefit) (6) 5 2 (191) 285
--- - - ----- ---
Net income (loss) (9)% 8% (4)% (181)% *%
=== == ==== ====== ==
<FN>
* Percentages not meaningful.
FISCAL 1997, 1996 and 1995
REVENUES.
Revenues totaled $144,329,000, $200,119,000 and $118,581,000 in
fiscal 1997, 1996 and 1995, respectively. Remote access revenues
represented 90%, 87% and 71% of revenues in fiscal 1997, 1996 and
1995, respectively. Revenues from LanRover products were
$50,138,000, $89,588,000 and $62,892,000 in fiscal 1997, 1996 and
1995, respectively. The decline in LanRover revenues in fiscal
1997 was primarily due to lower volume shipments and price
reductions which became effective in the second quarter. LanRover
revenues were also impacted by price protection provisions of
$3,900,000 recorded in the first quarter of fiscal 1997. The
price protection provisions related to the LanRover were recorded
to account for pricing actions which became effective in the
second quarter and were in response to increased price
competition. The increase in LanRover revenues in fiscal 1996
over fiscal 1995 was primarily due to increased volume shipments.
Revenues from the LanRover Access Switch were $65,163,000 in fiscal
1997, compared to $59,015,000 in fiscal 1996. The increase in
revenues from the LanRover Access Switch in fiscal 1997 over fiscal
1996 was primarily due to the timing of the introduction of the
product into the marketplace in the second quarter of fiscal 1996.
Revenues from the LanRover Access Switch in fiscal 1997 include
royalty revenues attributable to an agreement with Northern
Telecom Limited (the"Nortel Agreement"), under which the Company
earned royalties, subject to quarterly minimums in fiscal 1997,
based on sales of the Nortel Rapport 112, an OEM version of the
LanRover Access Switch. In fiscal 1997, the Company transitioned
its relationship with Nortel from an OEM relationship where Nortel
purchased certain products from the Company for resale, to a
predominantly royalty-based arrangement, which resulted in lower
revenues that carried higher gross margins. In addition, revenues
from the LanRover Access Switch in fiscal 1997 were negatively
impacted by weakness in the mid-tier Internet Service Provider
("ISP") market in North America, which resulted in a decline in
sales through the Company's premium value-added reseller ("PVAR")
channel, and by price protection provisions of $2,800,000
recorded in the first quarter. The price protection provisions
were recorded to account for pricing actions, effective in the
second quarter of fiscal 1997, taken in response to increased
price competition and price reductions on V.34 modem cards due
in part to the availability of 56K modem technology in the access
concentrator market.
Revenues from other remote access products were $15,112,000,
$25,479,000 and $21,031,000 in fiscal 1997, 1996 and 1995,
respectively. The decline in other remote access products in
fiscal 1997 was primarily due to lower volume shipments of the
Integrator product line, while the increase in fiscal 1996
relative to fiscal 1995 was primarily due to the introduction
of the Shiva AccessPort product for the small office and home
office market. Revenues from other communications products were
$6,805,000, $16,847,000 and $24,061,000 in fiscal 1997, fiscal
1996 and fiscal 1995, respectively. The declines in revenues
from other communications products were primarily due to lower
volume shipments. The Company anticipates that revenues from
other communications products will continue to decline and will
account for a decreasing percentage of revenue in future periods.
International revenues accounted for 49%, 37% and 47% of total
revenues in fiscal 1997, 1996 and 1995, respectively. In fiscal
1997, international revenues, which declined on an absolute basis
from fiscal 1996, represented a higher proportion of total revenues
due to decreased revenues in North America. This decrease in
revenues in North America was due to several factors discussed
above, including lower revenues from Nortel and other OEM partners,
the decline in sales through the PVAR channel and the price
protection reserves recorded in the first quarter of fiscal 1997.
International revenues descreased as a perecentage of revenues
in fiscal 1996 compared to fiscal 1995 primarily due to increased
revenues to the OEM channel which are classified as domestic.
Revenues from OEM customers accounted for 24% of revenues in
fiscal 1997, compared with 22% in 1996 and 10% in 1995. Revenues
from Nortel accounted for 16% and 14% of revenues in fiscal 1997
and fiscal 1996, respectively.
The Company provides its distributors and resellers with product
return rights for stock balancing and product evaluation. Revenues
were reduced by provisions for product returns of $16,088,000,
$13,421,000 and $7,410,000 in fiscal 1997, fiscal 1996 and fiscal
1995, respectively. These provisions represented 10% of gross
revenues in fiscal 1997, and 6% of revenues in both fiscal 1996
and fiscal 1995. The increase in the provision for product returns
in fiscal 1997 was to account for estimated returns of slow-moving
and discontinued products in the Company's North American
distribution channels.
GROSS PROFIT. Gross profit decreased as a percentage of revenues
to 51% in fiscal 1997, compared to 58% and 59% in fiscal 1996 and
1995, respectively. Gross profit as a percentage of revenues
decreased in fiscal 1997 from fiscal 1996 primarily due to the
price decreases on the LanRover and LanRover Access Switch products,
the previously mentioned price protection reserves totaling
$6,700,000 and provisions for slow-moving inventories of $6,463,000
and $2,605,000 recorded in the first and fourth quarters,
respectively. The impact of these price decreases and reserves
was partially offset by the 100% gross margin royalty revenues
from Nortel, and cost reductions on several components. The
provisions for slow-moving inventories, which increased cost of
revenues, related primarily to V.34 modem cards, for which demand
has slowed due to the availability of 56K modem technology, and
certain other products. In addition, gross profit was negatively
impacted in fiscal 1997 by an increase in manufacturing overhead
costs as a percentage of revenue due to the lower revenue base.
The decrease in gross profit as a percentage of revenues in
fiscal 1996 from fiscal 1995 was primarily attributable to
increased revenues of remote access products to the OEM channel,
which typically result in lower gross margins than the Company's
other sales channels. This decrease was partially offset by a
change in product mix towards the LanRover and the LanRover
Access Switch, which carry higher gross margins than the
Company's other products. In the future, gross margins are
likely to decrease due to the new multi-year OEM and professional
services agreement with Nortel which replaced the royalty
arrangement in effect during fiscal 1997 as previously discussed,
and continued price competition. The Company's gross margins may
also be affected by several factors, including, but not limited
to, product mix, the distribution channels used, changes in
component costs and the introduction of new products.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$25,545,000, $23,186,000 and $14,787,000 in fiscal 1997, 1996 and
1995, respectively, and represented 18% of revenues in fiscal
1997 compared to 12% of revenues in both fiscal 1996 and 1995.
Research and development expenditures in fiscal 1997 related to
the development of new and existing remote access products,
including the LanRover D/56, the LanRover XP16, and 56K modules
for the LanRover Access Switch. In addition, the Company also
continued to work with Nortel on the development of products and
product features specific to the service provider markets,
including the VantagePath(TM) Access Concentrator, a 256-port carrier
class product. The increase in these expenses in fiscal 1997
from 1996 was primarily due to increased costs of prototype
materials, increased personnel and associated overhead costs, and
temporary help. The increase in expenses in fiscal 1996 from
1995 related primarily to the hiring of additional research and
development staff and associated overhead costs. Customer-funded
development costs reimbursed to the Company, which are reflected
as an offset to research and development expenses, were
$6,664,000 in fiscal 1997, compared to $1,718,000 and $955,000 in
fiscal 1996 and 1995, respectively. The increase in customer-
funded development costs in fiscal 1997 was due to the cost
sharing arrangements with Nortel, under which Nortel funds certain
costs associated with the development of products and product
features specific to the carrier and service provider markets.
Capitalized software development costs were $923,000, $1,186,000
and $827,000 in fiscal 1997, 1996 and 1995, respectively. The
Company anticipates continued significant investment in research
and development.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses were $72,903,000, $69,087,000 and
$44,662,000 in fiscal 1997, 1996 and 1995, respectively. The
increase in gross expenses during fiscal 1997 was primarily due
to increased costs incurred for advertising, trade shows, sales
incentives, and facilities. Selling, general and administrative
expenses in 1997 are net of expenses reimbursed by Nortel of
$5,186,000 related to Shiva's Service Provider Group ("SPG"),
a worldwide business unit comprised of technical sales and
support personnel which marketed Nortel's remote access
equipment to carriers and service providers. The new agreement
with Nortel signed on February 27, 1998 extended the funding by
Nortel of the SPG unit through the first quarter of fiscal 1998.
The increase in selling, general and administrative expenses
in fiscal 1996 over fiscal 1995 was primarily due to worldwide
expansion of the Company's sales, marketing and administrative
operations necessary to support the Company's growth.
MERGER EXPENSES. In fiscal 1996, merger related expenses of
$1,987,000 were recorded in connection with the AirSoft
Acquisition. Merger-related expenses included $1,675,000 of
transaction costs for financial advisor, legal, regulatory and
accounting fees and other related expenses, and $312,000 of
employee severance payments and other costs. In fiscal 1995,
merger-related expenses of $13,986,000 were recorded in
connection with the Spider Acquisition. Merger-related expenses
included $6,275,000 of transaction costs for financial advisor,
legal, regulatory, and accounting fees and other related
expenses, $1,482,000 of employee severance payments, $2,644,000
of phantom stock compensation and $3,585,000 of integration
costs, including elimination of duplicative assets, employee
relocation and travel, and marketing costs related to the
introduction of the combined entity.
INTEREST INCOME AND EXPENSE. Interest income, net of interest
expense, increased to $3,522,000 in fiscal 1997 from $3,344,000
and $1,574,000 in fiscal 1996 and 1995, respectively. The
increase in fiscal 1997 was primarily due to lower interest and
other expense. The increase in fiscal 1996 was primarily due to
increased interest income due to higher average investment
balances in fiscal 1996 as a result of the funds generated by the
Company's secondary public offering in November 1995.
INCOME TAX PROVISION. The Company's effective tax rate was 38%
in fiscal 1997 which differs from the combined federal and state
statutory rate primarily due to restrictions on the use of
various state net operating loss carryforwards. The Company recorded
a deferred income tax benefit in fiscal 1997 reflecting the benefit
of future deductible temporary differences and net operating loss
and credit carryforwards expected to be realized. Realization of
the associated deferred tax asset is dependent upon generating
sufficient taxable income and, although not assured, management
believes that it is more likely than not that the deferred tax
asset will be realized. In fiscal 1996, the Company's effective
tax rate was 35%, which differs from the combined federal and
state statutory rates primarily due to the utilization of net
operating loss carryforwards and the impact of tax-exempt interest
income, partially offset by non-deductible merger expenses. In
fiscal 1995 the Company had an income tax provision of $2,386,000,
despite a pre-tax loss, primarily due to non-deductible merger
costs incurred in connection with the Spider Acquisition.
FOREIGN CURRENCY FLUCTUATIONS
Foreign currency fluctuations did not have a significant impact
on the comparison of the results of operations for the periods
presented. However, the Company's international operations will
continue to be exposed to adverse movements in foreign currency
exchange rates which may have a material adverse impact on the
Company's financial results. The Company enters into forward
exchange contracts to hedge those currency exposures related to
certain assets and liabilities denominated in non-functional
currencies and does not generally hedge anticipated foreign
currency cash flows.
YEAR 2000
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software
failures (the "Year 2000 issue") which can arise in time-
sensitive software applications that utilize a field of two
digits to define the applicable year. In such applications, a
date using "00" as the year may be recognized as the year 1900
rather than the year 2000. The Company believes that all of its
products are currently Year 2000 compliant, with the exception of
the SpiderManager product, which will display the year number in
the activity log date field as three digits. The Company believes
that this characteristic does not have any system operational
implications for the product. Therefore, the Company does not
anticipate having to undertake additional research and development
efforts in this regard. In addition, the Company is in the process
of replacing many of its business and operating computer systems
with software which, when upgraded, will be Year 2000 compliant.
The Company is planning to complete all necessary Year 2000 upgrades
of its major systems in 1998, and is currently identifying and
developing conversion strategies for its remaining systems that
may be impacted by the Year 2000 issue. While the Company does
not believe the Year 2000 issue will have a material impact on
the Company, there can be no assurance that unanticipated problems
will not arise that will have a material adverse effect on the
Company's business and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
As of January 3, 1998, the Company had $58,915,000 of cash and
cash equivalents and $36,868,000 of short-term investments.
Working capital decreased to $108,314,000 at January 3, 1998 from
$130,464,000 at December 28, 1996. As a result of the Isolation
Acquisition which is expected to be completed in the first quarter
of fiscal 1998, the Company's cash and short-term investment balances
will be reduced by approximately $37,000,000.
Net cash provided by operations totaled $1,445,000 in fiscal
1997. Net cash provided by operations in fiscal 1997 resulted
primarily from the decrease in accounts receivable, partially
offset by the net loss adjusted for non-cash expenses and the
increase in deferred income taxes. The decrease in accounts
receivable was due to lower revenue levels and lower days sales
outstanding as a result of improved collection activities. Net
cash provided by operations was $19,552,000 in fiscal 1996, which
consisted primarily of net income adjusted for non-cash expenses
and increased current liabilities, partially offset by increased
accounts receivable and inventories. The increase in accounts
receivable was due to higher revenue levels and days sales
outstanding due in part to changes in the timing of product
shipments where shipments occurred late in the fourth quarter of
fiscal 1996. The increase in inventories was in anticipation of
fourth quarter sales that did not materialize and to support
increased revenue levels over the prior year.
Net cash used by investing activities totaled $16,385,000 in
fiscal 1997 compared to $43,517,000 in fiscal 1996. Investment
activities in fiscal 1997 and fiscal 1996 consisted primarily of
purchases of property, plant and equipment and short-term
investments, partially offset by proceeds from short-term
investments upon maturity or sale. The decrease in cash used by
investing activities was primarily due to net purchases of short-
term investments of $1,884,000 in fiscal 1997, compared to
$25,872,000 in fiscal 1996.
Net cash provided by financing activities totaled $1,785,000 and
$3,595,000 in fiscal 1997 and 1996, respectively, and consisted
of proceeds from stock option exercises and purchases of stock
under the Company's stock purchase plan, partially offset by
principal payments on long-term debt and capital lease
obligations.
The Company has a $5,000,000 unsecured revolving credit facility
with a bank which expires in September 1998. The terms of the
credit facility require the Company to comply with certain
restrictive financial covenants. Borrowings under this facility
bear interest at the bank's prime rate. At January 3, 1998,
available borrowings were reduced by outstanding letters of
credit of $838,000 which expire at various dates in 1998. The
Company had no borrowings outstanding under this line at January
3, 1998. The Company also has a foreign credit facility of
approximately $2,625,000 of which approximately $2,523,000 was
available at January 3, 1998. Available borrowings under this
facility are decreased by the value of the outstanding debt
payable to the European Coal and Steel Community Fund and
guarantees on certain foreign currency transactions. The terms
of the foreign credit facility require the Company to comply with
certain restrictive financial covenants. There were no
borrowings outstanding under this foreign credit facility at
January 3, 1998.
The Company enters into forward exchange contracts to hedge
against certain foreign currency transactions for periods
consistent with the terms of the underlying transactions. The
forward exchange contracts have maturities that do not exceed one
year. At January 3, 1998, the company had outstanding foreign
exchange contracts to purchase $2,490,000 and to sell $638,000 in
various foreign currencies which matured and settled on January
21, 1998.
The Company believes that its existing cash and short-term
investment balances, together with borrowings available under
the Company's bank credit facilities,are sufficient to meet the
Company's cash requirements for at least the next twelve months.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." In October 1997, the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 97-2, "Software
Revenue Recognition". The Company does not expect that these
statements, which the Company will implement in fiscal 1998 as
required, will have a material effect on the Company's financial
statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain information contained herein, and information provided
by the Company or statements made by its employees may, from
time to time, contain "forward-looking" information which
involve risks and uncertainties. Any statements contained in
the Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere herein that are not
historical facts may be "forward-looking" statements. Certain
information contained herein concerning the Company's anticipated
plans and strategies for its business, available cash and cash
equivalents and sources of financing, expenditures, ability to
achieve Year 2000 compliance, effects of the new agreement with
Nortel and completion of the Isolation Acquisition consists of
forward-looking statements. Without limiting the foregoing, the
words, "believes," "expects," "anticipates," "plans," and similar
expressions are intended to identify forward-looking statements.
The Company's actual future results may differ significantly
from those stated in any forward-looking statements. Factors
that may cause such differences include, but are not limited to,
the factors discussed below.
The Company's quarterly operating results may vary significantly
from quarter to quarter depending on factors such as the timing
of significant orders and shipments of its products, changes and
delays in product development, new product introductions by the
Company and its competitors, the mix of distribution channels
through which the Company's products are sold and seasonal
customer buying patterns. There can be no assurance that the
Company will be able to achieve future revenue growth and
profitability on a quarterly or annual basis. Revenues can be
difficult to forecast due to the fact that the Company's sales
cycle varies substantially depending upon market, distribution
mechanism and end user customer. The Company's expense levels
are based, in part, on its expectations as to future revenues.
If revenue levels are below expectations, operating results may
be adversely affected. In addition, the Company's distribution
partners typically stock significant levels of inventory, and the
Company's revenues may fluctuate based on the level of partner
inventories in any particular quarter.
The Company has been party to a strategic relationship with
Nortel since 1995 which has evolved over time. Under the terms of
a new agreement with Nortel signed on February 27, 1998, Nortel
will purchase minimum quarterly amounts of the Company's products
within a minimum aggregate amount that will be $40,000,000 or
$55,000,000, depending upon the occurrence of certain contract
conditions. There can be no assurance that Nortel will purchase
in excess of the minimum amount or that the Company will be able
to fulfill such orders from Nortel and thus recognize the revenue
associated with such orders, in a linear fashion over the
contract term. Non-linear order patterns from Nortel could cause
material fluctuations in the Company's quarterly financial
results. In addition, the Company will receive professional
services revenue during the first two quarters of fiscal 1998
related to the development of carrier class remote access
technology. There is no obligation on the part of Nortel to
contract for additional such development or for the Company to
provide such services beyond the second quarter of fiscal 1998.
Revenues from Nortel accounted for 16% and 14% of revenues in
fiscal 1997 and 1996, respectively.
The Company's LanRover and LanRover Access Switch products are
experiencing increased market competition which has caused the
Company to take pricing actions and may require the Company to
take future pricing actions. The Company provides most of its
distribution partners with product return rights for stock
balancing or product evaluation and price protection rights.
Stock balancing rights permit a return of products to the Company
for credit against future product purchases, within specified
limits. Product evaluation rights permit end-users to return
products to the Company through the distribution partner from
whom such products were purchased, within 30 days of purchase if
such end-user is not fully satisfied. Price protection rights
require the Company to grant retroactive price adjustments for
inventories of the Company's products held by distribution
partners if the Company lowers its prices for such products.
These price protection provisions have adversely affected and may
continue to adversely affect revenues and profitability in the
future. There can be no assurance that the Company will not
experience significant returns or price protection adjustments in
the future or that the Company's reserves will be adequate to
cover such returns and price reductions.
The Company increasingly relies on sales of the LanRover Access
Switch to achieve its revenue and profitability objectives.
Sales of other communications products and other remote access
products, including the LanRover product, decreased in fiscal
1997, due in part to increased competition. There can be no
assurance that the Company will be successful in modifying
current product offerings to increase sales of its products.
The Company depends on third party distributors and value-added
resellers for a significant portion of the Company's revenues.
The loss of certain of these distributors and resellers could
have a material adverse impact on the Company's results of
operations. Moreover, many of these distributors and resellers
also act as resellers of competitive products. Therefore, there
is risk that these distributors and resellers may focus their
efforts on marketing products other than those sold by the
Company. This may require the Company to offer various
incentives to such distributors and resellers, which may
adversely impact the Company's results of operations.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. The Company's future success will depend
on its ability to enhance its existing products and to introduce
new products and services to meet and adapt to changing customer
requirements and emerging technologies, such as 56K, virtual
private networking ("VPN") and other technologies. The
introduction of new products requires the Company to manage the
transition from its older product offerings in order to mimize
the impact on customer ordering patterns, avoid excessive levels
of obsolete inventories and to ensure that adequate supplies of
new products are available to meet customer demand.
The Company's success in accomplishing development objectives
depends in large part upon its ability to attract and retain
highly skilled technical personnel including, in particular,
management personnel in the areas of research and development and
technical support. Competition for such personnel is intense.
There can be no assurance that the Company will be successful in
attracting and retaining the personnel it requires to accomplish
its objectives. Delays in new product development or the failure
of new products to achieve market acceptance, could have a
material adverse effect on the Company's operating results. In
addition, there can be no assurance that the Company will be
successful in identifying, developing, manufacturing or marketing
new product or service offerings or enhancing its existing
offerings.
The Company operates in a highly competitive market that is
characterized by an increasing number of well-funded competitors
from diverse industry sectors, including but not limited to
suppliers of software, modems, terminal servers, routers, hubs,
data communications products and companies offering remote access
solutions based on emerging technologies, such as switched
digital telephone services, remote access service offerings by
telephony providers via telephone networks and other providers
through public networks such as the Internet. Increased
competition could result in price reductions and loss of market
share which would adversely affect the Company's revenues and
profitability. There can be no assurance that the Company will
be able to continue to compete successfully with new or existing
competitors.
The Company does business worldwide, both directly and via sales
to United States-based original equipment manufacturers, who sell
such products internationally. The Company expects that
international revenues will continue to account for a significant
portion of its total revenues. Although most of the Company's
sales are denominated in US Dollars, exchange rate fluctuations
could cause the Company's products to become relatively more
expensive to customers in a particular country, causing a decline
in revenues and profitablility in that country. In addition,
international sales, particularly in Europe, are typically
adversely affected in the third quarter due to a reduction in
business activities during the summer months. Furthermore, global
and/or regional economic factors and potential changes in laws
and regulations affecting the Company's business, including
without limitation, communications regulatory standards, safety
and emissions control standards, difficulty in staffing and
managing foreign operations, longer payment cycles and difficulty
in collecting foreign receivables, currency exchange rate
fluctuations, changes in monetary and tax policies, tariffs,
difficulties in enforcement of intellectual property rights and
political uncertainties, could have an adverse impact on the
Company's financial condition or future results of operations.
The market price of the Company's securities could be subject
to wide fluctuations in response to quarter-to-quarter variations
in operating results, changes in earnings estimates by analysts,
and market conditions in the industry, as well as general economic
conditions and other factors external to the Company.
The Company is exposed to potential credit risks as a result of
accounts receivable from distributors, resellers, OEM and direct
customers, with respect to which the Company does not generally
require collateral. At January 3, 1998 and December 28, 1996,
one customer accounted for 31% and 19% of the accounts receivable
balance, respectively.
The Company is currently dependent on three subcontractors for
the manufacture of significant portions of its products.
Although the Company believes that there are a limited number of
other qualified subcontract manufacturers for its products, a
change in subcontractors could result in delays or reductions in
product shipments. In addition, certain components of the
Company's products are only available from a limited number of
suppliers. The inability to obtain sufficient key components as
required could also result in delays or reductions in product
shipments. Such delays or reductions could have an adverse
effect on the Company's results of operations.
Other factors that may affect future results include the accuracy
of the Company's internal estimates of revenues and operating expense
levels, the outcome of the litigation discussed below under
"Legal Proceedings," the Company's ability to complete all necessary
Year 2000 upgrades in a timely and cost-effective manner, the
realization of the intended benefits of the Isolation Acquisition
and the ability of the Company to integrate the acquired business
into the Company's existing operations, and material changes in
the level of customer-funded research and development activities.
Because of the foregoing factors, the Company believes that period-
to-period comparisons of its financial results are not necessarily
meaningful and expects that its results of operations may fluctuate
from period to period in the future.
SHIVA CORPORATION
Consolidated Balance Sheet
(In thousands, except share-related data)
January 3, December 28,
1998 1996
-------------------------
Assets
Current assets:
Cash and cash equivalents $ 58,915 $ 72,067
Short-term investments 36,868 35,035
Accounts receivable, net of
allowances of $8,037 at
January 3, 1998 and $10,347
at December 28, 1996 23,169 39,904
Inventories 14,058 17,958
Deferred income taxes 8,683 4,420
Prepaid expenses and other
current assets 2,369 1,602
----- -----
Total current assets 144,062 170,986
------- -------
Property, plant and equipment 26,093 23,855
Deferred income taxes 8,840 1,372
Other assets 3,251 1,837
----- -----
Total assets $182,246 $198,050
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 118 $ 367
Accounts payable 9,258 17,130
Accrued expenses 22,304 19,619
Deferred revenue 4,068 3,406
----- -----
Total current liabilities 35,748 40,522
------ ------
Long-term debt and capital lease
obligations -- 122
Deferred income taxes 554 572
--- ---
Total liabilities $ 36,302 $ 41,216
-------- --------
Commitments and contingencies
(Notes 13 and 14)
Stockholders' equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value;
100,000,000 shares authorized,
29,605,848 and 28,891,216 shares
issued and outstanding at
January 3, 1998 and December 28,
1996, respectively 296 289
Additional paid-in capital 153,036 149,564
Unrealized gain on investments 110 175
Cumulative translation adjustment (308) 349
Retained earnings (accumulated deficit) (7,190) 6,457
------- -----
Total stockholders' equity 145,944 156,834
------- -------
Total liabilities and stockholders'
equity $182,246 $198,050
======== ========
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
Shiva Corporation
Consolidated Statement of Operations
(In thousands, except per share data)
Year Ended
----------------------------------------
January 3, December 28, December 30,
1998 1996 1995
----------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
Product and other
revenues $126,757 $197,615 $118,581
Royalty revenues 17,572 2,504 --
------ ----- --
Total revenues 144,329 200,119 118,581
Cost of revenues 71,416 83,177 49,186
------ ------ ------
Gross profit 72,913 116,942 69,395
------ ------- ------
Operating expenses:
Research and dev-
elopment 25,545 23,186 14,787
Selling, general and
administrative 72,903 69,087 44,662
Merger expenses -- 1,987 13,986
-- ----- ------
Total operating
expenses 98,448 94,260 73,435
------ ------ ------
Income (loss) from
operations (25,535) 22,682 (4,040)
-------- ------ -------
Interest income 4,003 4,139 2,279
Interest and other
expense (481) (795) (705)
----- ----- -----
Income (loss) before
income taxes (22,013) 26,026 (2,466)
Income tax provision
(benefit) (8,366) 9,185 2,386
------- ----- -----
Net income (loss) $(13,647) $ 16,841 $ (4,852)
========= ======== =========
Net income (loss) per
share - basic $( 0.47) $ 0.59 $ (0.19)
========= ======== =========
Net income (loss) per
share - diluted $( 0.47) $ 0.54 $ (0.19)
========= ======== =========
Shares used in comput-
ing net income (loss)
per share - basic 29,266 28,425 25,080
====== ====== ======
Shares used in comput-
ing net income (loss)
per share - diluted 29,266 31,459 25,080
====== ====== ======
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share-related data)
Common Stock
-------------------- Additional
Number of Par paid-in
shares Value capital
----------------------------------
Balance at December 31, 1994 24,478,087 245 49,275
Exercise of stock options 1,117,557 11 1,736
Issuance of common stock in
settlement of dividend
payable 20,014 -- 406
Issuance of common stock in
settlement of phantom stock
plan 31,462 1 2,283
Issuance of common stock under
employee stock purchase plan 21,582 -- 314
Secondary public offering, net
of stock issuance costs of
$583 2,291,878 23 76,115
Tax benefit related to stock
options -- -- 3,328
Unrealized gain on investments -- -- --
Currency translation adjustments -- -- --
Net loss -- -- --
Elimination of Spider net
income for the three-month
period ended March 31, 1995 -- -- --
----------------------------------
Balance at December 30, 1995 27,960,580 280 133,457
Exercise of stock options 899,048 9 3,516
Issuance of common stock
under employee stock
purchase plan 31,588 -- 772
Tax benefit related to
stock options -- -- 11,819
Unrealized gain on investments -- -- --
Currency translation adjustments -- -- --
Net income -- -- --
----------------------------------
Balance at December 28, 1996 28,891,216 289 149,564
Exercise of stock options 628,838 6 1,254
Issuance of common stock
under employee stock
purchase plan 85,794 1 881
Tax benefit related to
stock options -- -- 1,337
Unrealized loss on investments -- -- --
Currency translation adjustments -- -- --
Net loss -- -- --
-----------------------------------
Balance at January 3, 1998 29,605,848 $296 $153,036
===================================
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share-related data)
Unrealized Cumulative Unearned
gain(loss) on translation ESOP
investments adjustment compensation
---------------------------------------
Balance at December 31, 1994 -- (468) (305)
Exercise of stock options -- -- --
Issuance of common stock in
settlement of dividend
payable -- -- --
Issuance of common stock in
settlement of phantom stock
plan -- -- 305
Issuance of common stock under
employee stock purchase plan -- -- --
Secondary public offering, net
of stock issuance costs of
$583 -- -- --
Tax benefit related to stock
options -- -- --
Unrealized gain on investments 137 -- --
Currency translation adjustments -- (118) --
Net loss -- -- --
Elimination of Spider net
income for the three-month
period ended March 31, 1995 -- -- --
-------------------------------
Balance at December 30, 1995 137 (586) --
Exercise of stock options -- -- --
Issuance of common stock
under employee stock
purchase plan -- -- --
Tax benefit related to
stock options -- -- --
Unrealized gain on investments 38 -- --
Currency translation adjustments -- 935 --
Net income -- -- --
-----------------------------
Balance at December 28, 1996 175 349 --
Exercise of stock options -- -- --
Issuance of common stock
under employee stock
purchase plan -- -- --
Tax benefit related to
stock options -- -- --
Unrealized loss on investments (65) -- --
Currency translation adjustments -- (657) --
Net loss -- -- --
-----------------------------
Balance at January 3, 1998 $110 $(308) $--
=============================
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
Shiva Corporation
Consolidated Statement of Changes in Stockholders' Equity
(In thousands, except share-related data)
Retained earnings
Total
(accumulated stockholders'
deficit) equity
------------------------------------
Balance at December 31, 1994 (4,633) 44,114
Exercise of stock options -- 1,737
Issuance of common stock in
settlement of dividend
payable -- 406
Issuance of common stock in
settlement of phantom stock
plan -- 2,589
Issuance of common stock under
employee stock purchase plan -- 314
Secondary public offering, net
of stock issuance costs of
$583 -- 76,138
Tax benefit related to stock
options -- 3,328
Unrealized gain on investments -- 137
Currency translation adjustments -- (118)
Net loss (4,852) (4,852)
Elimination of Spider net
income for the three-month
period ended March 31, 1995 (899) (899)
----------------------------------
Balance at December 30, 1995 (10,384) 122,904
Exercise of stock options -- 3,525
Issuance of common stock
under employee stock
purchase plan -- 772
Tax benefit related to
stock options -- 11,819
Unrealized gain on investments -- 38
Currency translation adjustments -- 935
Net income 16,841 16,841
----------------------------------
Balance at December 28, 1996 6,457 156,834
Exercise of stock options -- 1,260
Issuance of common stock
under employee stock
purchase plan -- 882
Tax benefit related to
stock options -- 1,337
Unrealized loss on investments -- (65)
Currency translation adjustments -- (657)
Net loss (13,647) (13,647)
-----------------------------------
Balance at January 3, 1998 $ (7,190) $145,944
===================================
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
Shiva Corporation
Consolidated Statement of Cash Flows
Year Ended
------------------------------------------
Increase (decrease) in January 3, December 28, December 30,
cash and cash equivalents 1998 1996 1995
(In thousands) ------------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
Cash flows from
operating activities
Net income (loss) $(13,647) $16,841 $(4,852)
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Merger expenses -- -- 3,766
Depreciation and
amortization 10,363 6,968 3,756
Deferred income taxes (10,991) (2) (811)
Changes in assets and
liabilities:
Accounts receivable 16,121 (15,675) (7,906)
Inventories 3,726 (9,804) (2,023)
Prepaid expenses and
other current assets (742) 391 (67)
Accounts payable (7,645) 7,585 122
Accrued compensation
and benefits (80) 360 2,444
Accrued expenses 3,678 13,434 6,548
Deferred revenue 679 (134) 1,846
Other long-term
liabilities (17) (412) (24)
------------------------------------
Net cash provided by
operating activities 1,445 19,552 2,799
------------------------------------
Cash flows from investing
activities
Purchase of property,
plant and equipment (11,295) (16,089) (7,031)
Capitalized software
development costs (829) (1,183) (827)
Purchases of short-term
investments (50,177) (34,136) (11,188)
Proceeds from maturities
of short-term
investments 48,293 8,264 2,200
Change in other assets (2,377) (373) (147)
------------------------------------
Net cash used by
investing activities (16,385) (43,517) (16,993)
------------------------------------
Cash flows from financing
activities
Net repayments under
short-term debt -- -- (1,885)
Principal payments on
long-term debt and
capital lease obliga-
tions (357) (702) (4,075)
Proceeds from issuance of
common stock, net -- -- 76,138
Proceeds from exercise of
stock options and
employee stock purchase
plan 2,142 4,297 2,054
Dividends paid -- -- (58)
------------------------------------
Net cash provided by
financing activities 1,785 3,595 72,174
------------------------------------
Effects of exchange rate
changes on cash and cash
equivalents 3 (766) 153
------------------------------------
Net increase (decrease)
in cash and cash
equivalents (13,152) (21,136) 58,133
Cash and cash equivalents,
beginning of period 72,067 93,203 36,068
Elimination of Spider net
cash activity for the
three months ended March
31, 1995 -- -- (998)
------------------------------------
Cash and cash equivalents,
end of period $58,915 $72,067 $93,203
====================================
Supplemental disclosure
of cash flow information
Interest paid $ 236 $ 195 $ 748
Income taxes paid $ 2,430 $ 471 $ 143
Supplemental disclosure
of noncash financing
activities
Issuance of common stock
in settlement of dividend
payable $ -- $ -- $ 406
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
SHIVA CORPORATION
Notes to Consolidated Financial Statements
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Shiva Corporation (the "Company") is a leading global provider of
remote access solutions for business. The Company's products connect
employees, customers and business partners to networks with
industry-leading remote access solutions. The Company was founded
in 1985, and is based in Bedford, Massachusetts, with offices
worldwide. The Company markets its products worldwide primarily
through distributors, systems integrators, resellers and original
equipment manufacturers.
A summary of the Company's significant accounting policies
follows:
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to
December 31.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The
consolidated financial information contained herein include the
accounts of Spider Systems Limited ("Spider") and AirSoft, Inc.
("AirSoft") for all periods presented (see Note 2).
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment provided
that no significant Company obligations remain and collection of
the related receivable is probable. The Company provides most
of its distributors and resellers with price protection rights
and return rights for stock rotation or product evaluation. An
allowance for estimated future returns is recorded at the time
revenue is recognized based on the Company's return policies and
historical experience. Although the Company believes it has
adequate reserves to cover product returns and price protection
rights, there can be no assurance that the Company will not
experience significant returns or price protection adjustments in
the future or that such reserves will be adequate to cover such
returns and price protection rights. Revenue from technical
support and product maintenance contracts is deferred and
recognized ratably over the period the services are performed.
The Company provides a one-year warranty on hardware products and
a ninety-day warranty on software media. A provision is made at
the time of sale for product warranty costs. The Company has
historically provided customers with a variety of technical
support services, including free services which it is not
contractually obligated to provide. A provision is made at the
time of sale for the cost of such free services.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents. The Company invests its excess cash in U.S.
Treasury securities, municipal securities, corporate debt
securities, money market funds of major financial institutions,
high-grade commercial paper and time deposits that are subject to
minimal credit and market risk.
All of the Company's cash equivalents and short-term investments
are recorded at fair value and classified as available-for-sale
in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's investments at January 3, 1998 and
December 28, 1996 include unrealized gains of $110,000 and
$175,000, respectively, recorded as a separate component of
stockholders' equity. The Company's short-term investments at
January 3, 1998 have various maturity dates through 1999.
Realized gains or losses on the sale of securities are calculated
using the specific identification method. Realized gains or
losses in fiscal 1997 and 1996 were not significant.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk include accounts receivable which
are primarily due from distributors, resellers and OEM customers
throughout the world. The Company performs ongoing evaluations
of customers' financial condition and, generally, does not
require collateral. In addition, the Company maintains reserves
for potential credit losses, and such losses, in the aggregate,
have not exceeded management expectations. At January 3, 1998
and December 28, 1996, one customer accounted for 31% and 19% of
the accounts receivable balance, respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments,
which include cash, cash equivalents and short-term investments,
accounts receivable, other assets, accounts payable, long-term
debt and capital lease obligations, approximate their fair value
at January 3, 1998 and December 28, 1996.
FORWARD FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts as a
hedge against exposure to fluctuations in exchange rates
associated with certain transactions denominated in foreign
currencies, including intercompany and trade accounts receivable
and payable, and does not use them for trading purposes. The
contracts are marked to market with gains and losses, not
material in amount, recognized currently in interest and other
expense in the accompanying financial statements and generally
offset exchange gains or losses on the related transactions. Cash
flows from the contracts are classified as cash flows from
operating activities. Exposure to credit risk for these
contracts is minimal since the counterparties are major financial
institutions, and is generally limited to the unrealized gains on
such contracts should any counterparties fail to perform as
contracted. Exposure to market risk is limited to movements in
currency rates. At January 3, 1998, the Company had outstanding
forward exchange contracts to purchase $2,490,000 and to sell
$638,000 in various foreign currencies which matured and settled
on January 21, 1998. The fair value of outstanding forward
exchange contracts approximates the original value due to the
relatively short terms, generally less than three months.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. There can be no assurance that products or
technologies developed by others will not make the Company's
inventories obsolete.
The Company is currently dependent on three subcontractors for
the manufacture of significant portions of its products.
Although the Company believes that there are a limited number of
other qualified subcontract manufacturers for its products, a
change in subcontractors could result in delays or reductions in
product shipments. In addition, certain components of the
Company's products are only available from a limited number of
suppliers. The inability to obtain sufficient key components as
required could also result in delays or reductions in product
shipments. Such delays or reductions could have an adverse
effect on the Company's results of operations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of
the related assets. Equipment held under capital leases is
stated at the lower of the fair market value of the equipment or
the present value of the minimum lease payments at the inception
of the leases and is amortized on a straight-line basis over the
shorter of the lives of the related assets or the term of the
leases. Maintenance and repair costs are expensed as incurred.
Upon sale or retirement of property, plant and equipment, the
applicable cost of the disposed asset and the related accumulated
depreciation are eliminated. Any resulting gains or losses are
reflected in results of operations.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT
COSTS
Research and development costs, other than certain software
development costs, are charged to expense as incurred. Software
development costs incurred subsequent to the establishment of
technological feasibility, and prior to general release of the
product to the public, are capitalized and amortized to cost of
revenues on a straight-line basis over the estimated useful lives
of the related products, generally eighteen to thirty-six months.
It is reasonably possible that the remaining estimated useful
lives of the related products could be reduced in the future due
to competitive pressures. Unamortized software development costs
of $761,000 and $1,134,000 are included in other assets at
January 3, 1998 and December 28, 1996, respectively.
Amortization expense was $1,206,000, $777,000 and $370,000 in
fiscal 1997, 1996 and 1995, respectively.
The Company receives fees under product development contracts
with certain customers. Product development fees are recorded
as a reduction of research and development costs as work is
performed pursuant to the related contracts and defined
milestones are attained. Losses, if any, are provided for at the
time that management determines that development costs will
exceed related fees. Payments received under product
development contracts prior to the completion of the related work
and attainment of milestones are recorded as deferred
liabilities. In fiscal 1997, 1996 and 1995 the Company recorded
product development fees related to customer-specific projects of
$1,464,000, $1,718,000 and $955,000, respectively, and incurred
development costs of $1,056,000, $922,000 and $1,135,000,
respectively, under such contracts. In addition, in fiscal 1997
the Company recorded product development fees of $5,200,000 from
Nortel to fund certain costs associated with the development of
products and product features specific to the carrier and service
provider markets. Nortel agreed to fund up to $5,200,000 of
costs in fiscal 1997 related to the development of such products,
provided that the Company incurred a minimum of $10,400,000 of
carrier-related development costs. The Company incurred costs
in excess of these levels on carrier related development in
fiscal 1997.
ADVERTISING COSTS
Advertising costs, other than certain direct-response advertising
costs, are charged to expense as incurred. The Company has not
incurred significant costs associated with direct-response
advertising in fiscal 1997, 1996, and 1995, and there were no
capitalized advertising costs at January 3, 1998 or December 28,
1996. Advertising costs were $5,268,000, $3,177,000, and
$3,042,000 in fiscal 1997, 1996 and 1995, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", which is an asset and liability method of
accounting for income taxes. Under this method, deferred tax
assets and liabilities are recognized for the expected future tax
consequences, utilizing current tax rates, of temporary
differences between the carrying amounts and the tax bases of
assets and liabilities. Deferred tax assets are recognized, net
of any valuation allowance, for the estimated future tax effects
of deductible temporary differences and tax operating loss and
credit carryforwards. Deferred income tax expense represents the
change in the net deferred tax asset and liability balances.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees. In January 1996, the
Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." (See Note 10).
FOREIGN CURRENCY TRANSLATION
Financial statements of international subsidiaries, where the
local currency is the functional currency, are translated using
period-end exchange rates for assets and liabilities and at
average rates during the period for results of operations. The
resulting foreign currency translation adjustments are included
as a separate component of stockholders' equity. For
international subsidiaries where the functional currency is other
than the local currency, monetary assets and liabilities are
translated using period-end exchange rates, nonmonetary assets
and liabilities are translated at historical rates and results of
operations are translated at average rates for the period. The
resulting foreign currency translation adjustments are included
in interest and other expense in the accompanying financial
statements. Gains or losses resulting from foreign currency
translation were not significant in fiscal 1997, 1996 and 1995.
NET INCOME (LOSS) PER SHARE
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128. This Statement requires the presentation
of basic and diluted earnings per share. Basic earnings per
common share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings
per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of stock options.
Dilutive common equivalent shares are excluded from the computation of
diluted earnings per share during periods of net loss because their
effect would be anti-dilutive. The Company has restated all prior
period per share data presented as required by SFAS No. 128
(See Note 16).
RECLASSIFICATIONS
Certain reclassifications have been made to amounts in the
financial statements of fiscal 1996 and 1995 in order to conform
to the current year presentation.
2. BUSINESS COMBINATIONS
In June 1996, the Company issued 691,587 shares of common stock
in exchange for all outstanding shares of AirSoft (the "Airsoft
Acquisition"), a developer of performance enhancement software
products, in a business combination accounted for as a pooling of
interests. The consolidated financial statements for all periods
presented have been retroactively combined to reflect the AirSoft
Acquisition. No adjustments to conform accounting methods were
required; however, certain amounts have been reclassified with
regard to the presentation of the financial information of the
companies.
Merger related expenses of $1,987,000 were expensed upon
consummation of the AirSoft Acquisition in the quarter ended June
29, 1996. Merger-related expenses include $1,675,000 of
transaction costs for financial advisor, legal, regulatory and
accounting fees and other related expenses, and $312,000 of
employee severance payments and other costs.
In August 1995, the Company issued approximately 3,923,606 shares
of common stock in exchange for all outstanding shares of Spider
(the "Spider Acquisition"), a digital internetworking company
based in Edinburgh, UK, in a business combination accounted for
as a pooling of interests. The consolidated financial statements
for all periods presented have been retroactively combined to reflect
the Spider Acquisition.
Spider's fiscal year end of March 31 was changed to conform to
the Company's fiscal year end. Spider's results of operations
for the year ended March 31, 1995 have been combined with the
Company's results of operations for the year ended December 31,
1994. The results of operations for fiscal 1995 are for the
twelve months ended December 30, 1995, for both Shiva and Spider.
Spider's unaudited results of operations for the three months
ended March 31, 1995 (including revenues, operating income, and
net income of $12,592,000, $1,350,000 and $899,000 respectively)
have been included in the combined results of operations for both
fiscal 1994 and 1995. Therefore, Spider's net income for the
three month period ended March 31, 1995 has been eliminated from
stockholders' equity.
Merger related expenses of $13,986,000 were expensed upon
consummation of the Spider Acquisition in the quarter ended
September 30, 1995. Merger-related expenses include $6,275,000
of transaction costs for financial advisor, legal, regulatory,
and accounting fees and other related expenses, $1,482,000 of
employee severance payments, $2,644,000 of phantom stock
compensation and $3,585,000 of integration costs, including
elimination of duplicative assets, employee relocation and
travel, and marketing costs related to the introduction of the
combined entity.
3. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash, cash equivalents and short-term investments consist of the
following:
(In thousands)
Amortized Unrealized Fair
January 3, 1998 Cost Gain/(Loss) Market Value
---- ----------- ------------
Cash and cash equivalents:
Municipal securities $ 23,435 $ -- $ 23,435
Commercial paper 20,583 (9) 20,574
Certificates of deposit 2,010 -- 2,010
Corporate debt securities 2,510 91 2,601
Money market funds 2,459 -- 2,459
Cash held in banks 7,836 -- 7,836
----- -- -----
Total cash and cash
equivalents 58,833 82 58,915
------ -- ------
Short-term investments:
Municipal securities 12,543 17 12,560
Corporate debt securities 9,107 15 9,122
Certificates of deposit 7,077 -- 7,077
Treasury securities 8,113 (4) 8,109
----- --- -----
Total short-term
investments 36,840 28 36,868
------ -- ------
Total cash, cash
equivalents and
short-term investments $95,673 $110 $95,783
======= ==== =======
Amortized Unrealized Fair
December 28, 1996 Cost Gain/(Loss) Market Value
---- ----------- ------------
Cash and cash equivalents:
Municipal securities $ 48,204 $ 16 $48,220
Money market funds 6,921 -- 6,921
Cash held in banks 16,926 -- 16,926
------ -- ------
Total cash and cash
equivalents 72,051 16 72,067
------ -- ------
Short-term investments:
Municipal securities 34,876 159 35,035
------ --- ------
Total cash, cash
equivalents and
short-term investments $106,927 $175 $107,102
======== ==== ========
4. INVENTORIES
Inventories consist of the following:
(In thousands) January 3, December 28,
1998 1996
---- ----
Raw materials $ 7,199 $ 6,218
Work-in-process 57 1,506
Finished goods 6,802 10,234
------- ------
$14,058 $17,958
======= =======
In the first quarter of fiscal 1997, the Company recorded a
writedown of excess and obsolete inventory of $6,463,00. In
the fourth quarter of fiscal 1997, the Company recorded an
additional writedown for excess and obsolete inventory of
$2,605.000. The fourth quarter writedown resulted in a decrease
in net income of $1,615,000, or $0.05 per share. Both writedowns
are included in cost of revenues in the accompanying consolidated
statement of operations and resulted in a decrease in net income
of $5,622,000, or $0.19 per share, in fiscal 1997.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Useful life January 3, December 28,
(in years) 1998 1996
-----------------------------
(In thousands)
Land $ 328 $ 339
Buildings 50 4,210 4,301
Furniture and fixtures 5 4,110 3,589
Machinery and equipment 3 - 5 34,639 25,288
Leasehold improvements Lease Term 3,341 2,461
----- -----
46,628 35,978
Less - Accumulated
depreciation and amortization 20,535 12,123
------ ------
$26,093 $23,855
====== ======
Machinery and equipment include equipment under capital leases of
$206,000 at January 3, 1998 and December 28, 1996. Accumulated
amortization related to equipment under capital leases totals
$195,000 and $153,000 at January 3, 1998, and December 28, 1996,
respectively. Amortization of equipment under capital leases is
included in depreciation expense. In fiscal 1997 and fiscal
1996, the Company disposed of approximately $121,000 and
$5,474,000 in property and equipment, respectively. The
resulting loss on these disposals was not significant.
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
(In thousands)
January 3, December 28,
1998 1996
---------------------------
Research and development $ 1,986 $1,171
Selling, general and
administrative 10,281 9,112
Compensation and benefits 5,634 5,871
Income taxes 2,241 1,802
Other 2,162 1,663
----------------------
$22,304 $19,619
======================
7. BORROWINGS
CREDIT ARRANGEMENTS
Under the terms of a credit agreement (the "Credit Agreement")
with a U.S. bank, the Company has a $5,000,000 unsecured
revolving credit facility (the "Revolver") which bears interest
at the bank's prime rate (8.5% at January 3, 1998). At January 3,
1998, available borrowings were reduced by outstanding letters
of credit of $838,000 related to certain office leases. These
letters of credit expire at various dates through 1998. While
the Company may repay all or a portion of the Revolver borrowings
at any time, any outstanding principal must be repaid in full by
September 1998. The terms of the Credit Agreement require the
Company to comply with certain restrictive financial covenants.
There were no borrowings outstanding under the Revolver at
January 3, 1998 or December 28, 1996.
The Company also has a foreign credit facility secured by all
assets of Shiva Europe Limited of approximately $2,625,000, of
which $2,523,000 was available at January 3, 1998. Available
borrowings under this facility are decreased by the value of the
outstanding debt payable to the European Coal and Steel Community
Fund and guarantees on certain foreign currency and other
transactions. Borrowings under the foreign credit facility bear
interest at the bank's prime rate plus 1.25% (8.5% at January 3,
1998). The terms of the foreign credit facility require the
Company to comply with certain restrictive financial covenants.
There were no borrowings outstanding under the foreign credit
facility at January 3, 1998.
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt at January 3, 1998 consists of capital lease
obligations of $16,000 and mortgage loans payable to the European
Coal and Steel Community Fund ("ECSC") of $102,000 which are
related to the Company's facility in Edinburgh, UK. The capital
lease obligations, which are payable during fiscal 1998, bear
interest at rates varying from 11.4% to 14.3% and are secured by
the underlying equipment. The ECSC mortgage loans are payable in
semi-annual installments of $97,000 plus accrued interest at 10%.
The Company paid the outstanding balance of the mortgage loans
in January 1998.
8. INCOME TAXES
The components of income (loss) before income taxes are as
follows:
(In thousands)
Year Ended
------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
------------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
Domestic ($30,823) $22,906 $ 2,387
Foreign 8,810 3,120 4,853)
----- ----- -----
($22,013) $26,026 $(2,466)
========= ======= ========
The components of the income tax provision (benefit) are as follows:
(In thousands) Year Ended
------------------------------------------
January 3, December 28, December 30,
1998 1996 1995
------------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
Current:
Federal ($660) $7,561 $3,401
State -- 1,013 186
Foreign 1,948 613 (390)
----- --- -----
1,288 9,187 3,197
----- ----- -----
Deferred:
Federal (8,791) (1,244) (333)
State (811) 923 (75)
Foreign (52) 319 (403)
---- --- -----
(9,654) (2) (811)
------- --- -----
($8,366) $9,185 $2,386
======= ====== ======
The significant components of the net deferred tax asset
(liability) are as follows:
<CAPION>
January 3, December 28,
1998 1996
(In thousands) ---- ----
Deferred tax assets:
Reserves not currently
deductible $7,480 $4,275
Net operating loss
carryforwards 8,927 2,381
Tax credit carryforwards 1,287 597
Other 1,059 58
----- --
Gross deferred tax assets 18,753 7,311
------ -----
Deferred tax liabilities
Capitalized software development
costs (234) (406)
Depreciation (607) (736)
Other (85) (91)
---- ----
Gross deferred tax
liabilities (926) (1,233)
Deferred tax asset valuation
allowance (858) (858)
----- -----
$16,969 $5,220
======= ======
The difference between the income tax provision and income taxes
computed using the applicable U.S. statutory federal tax rate are
as follows:
(In thousands) Year Ended
----------------------------------------
January 3, December 28, December 30,
1998 1996 1995
-----------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
Taxes computed at
federal statutory rate (35)% 35% 35%
State income taxes, net
of federal tax benefit (3) 5 (16)
Foreign income taxed at
different rates -- -- (2)
Research and development
tax credits -- -- 3
Change in valuation
allowance -- (6) 27
Non-deductible merger
expenses -- 3 (127)
Tax exempt interest (2) (3) --
Other 2 1 (17)
- - ----
Effective income tax rate (38)% 35% (97)%
===== === =====
At January 3, 1998, the Company had federal and state net
operating loss carryforwards of approximately $23,756,000, which
expire at various dates through 2013. The Company also had
federal and state research and development tax credit
carryforwards of $1,197,000, which expire at various dates
through 2013. Ownership changes, as defined by the Internal
Revenue Code, may limit the amount of net operating loss and tax
credit carryforwards that can be utilized to offset future
taxable income or tax liability.
In fiscal 1996, the deferred tax valuation allowance decreased by
$5,673,000 due to the realization of deferred tax assets related
to employee stock options and the change in the amount of
AirSoft's net operating losses and tax credits expected to be
utilized in the carryforward period. Of this amount, $3,976,000
related to employee stock options and was therefore recorded as a
credit to stockholders' equity. The Company has recorded a
valuation allowance for the tax benefit of certain net operating
loss carryforwards with substantial limitations since realization
of these future benefits is not sufficiently assured at January
3, 1998. The deferred tax asset recognized reflects the benefit
of future deductible temporary differences and net operating loss
and credit carryforwards expected to be realized. Realization of
the asset is dependent on generating sufficient taxable income
and, although not assured, management believes that it is more
likely than not that the deferred tax asset will be realized.
9.STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN
On September 20, 1995 the Company's Board of Directors adopted a
Stockholder Rights Plan and pursuant thereto declared a dividend
of one preferred stock purchase right for each outstanding share
of common stock to stockholders of record at the close of
business on October 13, 1995. Each right entitles holders of the
Company's common stock to purchase one one-hundredth of a share
(a "Unit") of a new series of junior participating preferred
stock, $.01 par value per share, at an exercise price of $300.00
per unit, subject to adjustment. The rights are exercisable and
become exercisable for common stock only under certain
circumstances and in the event of particular events relating to a
change in control of the Company. The rights may be redeemed by
the Company under certain circumstances pursuant to the plan.
The rights expire on October 13, 2005, unless earlier redeemed or
exchanged. The rights have certain antitakeover effects, in that
they would cause substantial dilution to a person or group that
attempts to acquire a significant interest in the Company on
terms not approved by the Board of Directors.
COMMON STOCK
On November 30, 1995, the stockholders approved an increase in
the authorized shares of common stock from 25,000,000 shares to
50,000,000 shares. On April 2, 1996, the Company's Board of
Directors declared a two-for-one split of the Company's common
stock which was effective on April 22, 1996. All shares and per
share amounts included in the accompanying consolidated financial
statements have been adjusted to give retroactive effect to this
stock split for all periods presented. On May 15, 1996, the
stockholders approved an increase in the authorized shares of
common stock from 50,000,000 to 100,000,000 shares.
Each share of common stock entitles the holder to one vote on all
matters submitted to a vote of the Company's stockholders.
Common stockholders are entitled to receive dividends, if any, as
may be declared by the Board of Directors, subject to any
preferential dividend rights of any preferred stockholders.
10. STOCK PLANS
Stock Option Plans
The 1988 Stock Plan (the "1988 Plan") provides for the grant of
incentive stock options, stock awards, and stock purchase rights
for the purchase of up to an aggregate of 8,200,000 shares of the
Company's common stock by officers, employees, consultants and
directors of the Company. In May 1996, the stockholders approved
an increase in the number of shares issuable under the 1988 Plan
from 8,200,000 to 9,700,000 and extended the expiration date of
the 1988 Plan from December 31, 1997 to December 31, 2000.
In March 1997, the Compensation Committee of the Board of
Directors approved a stock option repricing program pursuant to
which all employees of the Company (excluding executive officers)
could elect to exchange their outstanding options for new options
granted under the 1988 Plan. The Company repriced the options
because the exercise prices of such options were significantly
higher than the fair market value of the Company's common stock,
and therefore did not provide the desired incentive to employees.
Options to purchase 2,194,276 shares of common stock, with an
average exercise price per share of $38.08, were surrendered and
repriced at an exercise price of $15.13 per share, which
represented a 10% premium over the closing price of the Company's
common stock on March 7, 1997. The number of repriced options is
therefore included in the number of options granted and canceled
during fiscal 1997 in the table below. The repriced options were
not exercisable until September 5, 1997. All other terms and
conditions of the options remained unchanged.
In May 1997, the stockholders approved the 1997 Stock Incentive
Plan (the "1997 Incentive Plan") which expires on January 24,
2007. The 1997 Incentive Plan provides for the grant of up to an
aggregate of 1,400,000 options to purchase the Company's common
stock by all officers, employees, consultants and directors
of the Company. In October 1997, the Board of Directors approved
the 1997 Employee Stock Plan (the "1997 Employee Plan") which
expires on October 3, 2007. The 1997 Employee Plan provides
for the grant of stock options for the purchase of up to an
aggregate of 1,000,000 shares of the Company's common stock
by all employees of the Company, except those employees who
are also officers or directors of the Company.
The Compensation Committee of the Board of Directors is
responsible for administration of all of the Company's stock
plans. The Compensation Committee determines the term of each
option, the option exercise price, the number of shares for which
each option is granted and the rate at which each option is
exercisable. Options generally vest ratably over four years.
The Company may not grant an employee incentive stock options
with a fair value in excess of $100,000 that are first
exercisable during any one calendar year.
Under the Company's stock plans, incentive stock options may be
granted at an exercise price per share of not less than the fair
value per common share on the date of the grant (not less than
110% of the fair value in the case of holders of more than 10% of
the Company's voting stock). Nonqualified stock options may be
granted to an eligible officer, employee, consultant, or director
at an exercise price per share of not less than either the book
value per common share or 50% of the fair value per common share
on the date of grant.
Options granted under the Company's stock plans generally expire
ten years from the date of the grant (five years for incentive
stock options granted to holders of more than 10% of the
Company's voting stock). The Compensation Committee, at the
request of any optionee, may convert incentive stock options that
have not been exercised at the date of conversion into
nonqualified stock options.
In connection with the AirSoft acquisition, the Company assumed
119,076 options in June 1996. These assumed options were granted
at prices equal to the fair market value at the date of grant,
become exercisable in installments (generally ratably over four
years) and expire ten years from the date of grant. The Company
does not intend to issue any additional options under the AirSoft
stock option plan.
On October 21, 1994, the stockholders approved the 1994 Director
Stock Option Plan (the "1994 Director Option Plan") under which
options to purchase up to an aggregate of 550,000 shares of the
Company's common stock may be granted to nonemployee directors at
an exercise price per share equal to the fair value per common
share on the date of grant. Under the 1994 Director Option Plan,
each nonemployee director was granted an option to purchase
33,000 common shares (the "initial shares") on July 17, 1995, and
an option to purchase an additional 7,000 common shares on the
third Monday in July of each year thereafter, through December
31, 1999. Eligible directors who were previously granted stock
options under the 1988 Plan were not granted an option to
purchase the initial shares. Twenty-five percent of the options
granted under the 1994 Director Option Plan are exercisable one
year from the date of grant and every year thereafter, provided
that the optionee remains a director. Options generally expire
ten years from the date of grant.
Transactions under the Company's stock plans during fiscal 1997,
1996 and 1995 are summarized as follows:
Fiscal 1997 Fiscal 1996 Fiscal 1995
----------- ----------- -----------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------------- -------------- -------------
Outstanding at
beginning of
period 5,086,183 $24.86 4,056,159 $11.06 3,709,354 $1.88
Granted 6,994,834 12.61 2,325,422 38.98 1,581,848 27.32
Exercised 628,838 2.00 899,048 3.94 1,100,059 1.35
Canceled 3,748,063 31.87 396,350 25.08 134,984 14.42
--------------- ---------------- ---------------
Outstanding at
end of period 7,704,116 $12.20 5,086,183 $24.86 4,056,159 $11.06
========= ====== ========= ====== ========= ======
Options exercis-
able at end of
period 2,504,432 1,258,216 683,814
========= ========= =======
Weighted average
fair value of
options granted
during the
period $ 8.33 $ 24.73 $ 16.25
====== ======= =======
Options available
for future
grant 1,297,358 2,148,746 2,583,793
========= ========= =========
The following table summarizes information about options
outstanding at January 3, 1998 for all of the Company's stock
option plans:
Options Outstanding Options Exercisable
------------------------------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable Average
Prices at January Contractual Exercise at January Exercise
3, 1998 Life (in Price 3, 1998 Price
years)
- -----------------------------------------------------------------
$ .75-6.80 978,013 5.97 $1.93 845,090 $1.73
8.31-10.88 2,348,900 9.53 9.41 385,750 9.20
12.44-14.75 2,198,720 9.55 13.26 308,232 12.92
15.13-18.06 1,754,742 9.11 15.19 731,957 17.04
20.25-66.25 423,741 7.96 33.54 233,403 31.96
---------------------------------------------------
7,704,116 8.90 $12.20 2,504,432 $7.92
===================================================
The fair value of each option grant under the Company's stock
option plans is estimated on the date of grant using the Black-
Scholes option pricing model with the following assumptions:
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
Expected life (years) 5 5 5
Risk-free interest rate 6.26% 6.19% 6.02%
Volatility 81.35% 64.00% 61.00%
Dividend yield 0.00% 0.00% 0.00%
Employee Stock Purchase Plan
On October 21, 1994, the stockholders approved the 1994 Employee
Stock Purchase Plan (the "1994 Stock Purchase Plan") which
enables eligible employees to purchase shares of common stock.
Under the 1994 Stock Purchase Plan, eligible employees may
purchase up to an aggregate of 700,000 shares of common stock
during six-month plan periods commencing on February 1 and August
1 of each year at a price per share of 85% of the lower of the
market price per share on the first or last business day of the
six-month plan period. An employee's rights terminate upon
voluntary withdrawal from the 1994 Stock Purchase Plan or upon
termination of employment. At January 3, 1998 and December 28,
1996, 561,036 and 646,830 shares, respectively, were available
for issuance. In fiscal 1997 and 1996, employees purchased
85,794 and 31,588 shares of stock, respectively. The weighted-
average fair value of shares granted during 1997, 1996 and 1995
were $9.07, $24.73 and $16.25 per share, respectively.
The fair value of shares issued under the 1994 Stock Purchase
Plan is estimated using the Black-Scholes option pricing model
with the following assumptions:
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
Expected life (years) 0.5 0.5 0.5
Risk-free interest rate 6.26% 6.19% 6.02%
Volatility 81.35% 64.00% 61.00%
Dividend yield 0.00% 0.00% 0.00%
Fair Value Disclosures
No compensation expense has been recognized related to the Company's
stock plans under AFB No. 25, as the exercise price of the stock
options granted was equal to the market price of the underlying
common stock on the date of grant. Had compensation cost for
the Company's stock plans been determined based on the fair value
at the grant dates, as prescribed in SFAS 123, the Company's net
income (loss) and net income (loss) per share would have been as
follows (in thousands, except per share information):
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
Net income (loss) As reported $ (13,647) $16,841 $(4,852)
Pro forma (29,025) 4,814 (6,277)
Basic net income
(loss) per share As reported $ (.47) $ .59 $ (.19)
Pro forma (.99) .17 (.25)
Diluted net income
(loss) per share As reported $ (.47) .54 (.19)
Pro forma (.99) .15 (.25)
<FN>
Since options vest over several years and additional option
amounts are expected to be made each year, the above pro forma
disclosures are not necessarily representative of pro forma
effects of reported operations for future years.
11. RETIREMENT PLANS
The Company sponsors a 401(k) retirement savings plan covering
all domestic employees of the Company who meet minimum age and
service requirements. The plan allows participants to defer a
portion of their annual compensation on a pre-tax basis. The
Company matches 50% of the first 6% (3% in fiscal 1996 and fiscal
1995) of each participating employee's contributions, subject to
certain limitations and may, at its discretion, make additional
contributions to the plan. The Company made matching
contributions of $519,000, $230,000 and $150,000 to the plan in
fiscal 1997, 1996 and 1995, respectively.
The Company also sponsors a defined contribution plan for all
eligible European employees of the Company. Participation in the
plan is available to substantially all salaried employees and to
certain groups of hourly paid employees. Company contributions
are based on a percentage of the employees' base salaries and in
some cases, bonus compensation. The Company made contributions
of $409,000, $437,000 and $318,000 to the plan in fiscal 1997,
1996 and 1995, respectively.
12. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment: the
development, manufacture, sale and support of network
communications products and services.
In fiscal 1997 and 1996, Nortel accounted for $23,266,000 (16%)
of revenues and $27,905,000 (14%) of revenues, respectively. In
addition, the Company received customer-funded development fees
of $5,610,000 and $910,000 from Nortel in fiscal 1997 and 1996,
respectively, which are recorded as an offset to research and
development expenses in the accompanying consolidated statement
of operations.
International revenues totaled $70,146,000, $74,779,000 and
$55,197,000 in fiscal 1997, 1996 and 1995, respectively. Export
revenues, primarily to Europe and the Asia Pacific regions, were
$53,588,000, $20,166,000 and $6,699,000 in fiscal 1997, 1996 and
1995, respectively.
Intercompany sales and transfers between geographic areas are
accounted for at prices which are designed to be representative
of unaffiliated party transactions.
North
America Europe Eliminations Total
------- ------ ------------ -----
1997
Revenues to unaffiliated
customers $127,771 $16,558 $ -- $144,329
Intercompany revenue 7,687 2,966 (10,653) --
----- ----- -------- --------
Total revenues 135,458 19,524 (10,653) 144,329
------- ------ -------- -------
Income (loss) from
operations (31,875) 5,591 749 (25,535)
Identifiable assets 170,076 12,170 -- 182,246
1996
Revenues to unaffiliated
customers $145,506 $54,613 $ -- $200,119
Intercompany revenue 10,269 4,443 (14,712) --
------ ----- -------- -------
Total revenues 155,775 59,056 (14,712) 200,119
------- ------ -------- -------
Income from operations 19,604 3,745 (667) 22,682
Identifiable assets 163,050 35,749 (749) 198,050
1995
Revenues to unaffiliated
customers $ 70,083 $48,498 $ -- $118,581
Intercompany revenue -- 607 (607) --
------ ------ ----- --
Total revenues 70,083 49,105 (607) 118,581
------ ------ ----- -------
Loss from operations (797) (3,243) -- (4,040)
Identifiable Assets 140,006 24,581 (14,464) 150,123
13. COMMITMENTS
The Company leases office and operating facilities and certain
equipment under operating and capital leases (See Notes 5 and 7)
that expire through February 2006. Future minimum lease payments
under operating and capital leases with initial or remaining non-
cancelable terms of one or more years are as follows as of
January 3, 1998:
(In thousands)
Fiscal Operating Leases Capital
- ------ Leases
- ------ --------------------------------
1998 3,645 16
1999 3,211 --
2000 2,930 --
2001 2,743 --
2002 2,731 --
Thereafter 6,397 --
----- --
Total minimum lease payments $21,657 16
======= ==
Less - Amount representing interest --
--
Net present value of minimum lease payments $16
===
Rental expenses under operating leases was $4,223,000, $3,244,000
and $1,934,000 in fiscal 1997, 1996 and 1995, respectively.
14. CONTINGENCIES
The Company is a defendant in the following legal proceedings:
Lirette, et al. v. Shiva Corporation, et al., Civil Action
No. 97-11159-WGY, a purported class action complaint filed
against the Company, Frank Ingari, Cynthia Deysher and
David Cole, in the United States District Court for the
District of Massachusetts on May 21, 1997 and Abraham
Schwartz and Norman Marcus v. Shiva Corporation,
Case No. BC164278, a purported class action complaint filed
against the Company in the Superior Court of the State of
California for the County of Los Angeles on January 17,
1997. The federal court complaint seeks damages, interest,
fees and expenses. The state court complaint seeks damages,
interest, fees and expenses, including punitive damages and
treble damages. The federal matter is in the pre-discovery
phase and a motion to dismiss has been filed. The state
matter is in discovery. The Company is unable to determine
at this time the potential liability, if any, of either of
these actions. Accordingly, no provision has been made in
the consolidated financial statements for these claims. It
is possible that the Company could incur a material loss
related to these actions in the future.
15. RELATED PARTY TRANSACTIONS
In fiscal 1997, the Company made two non-interest bearing loans
to certain officers of the Company in the amounts of $700,000 and
$50,000 in the form of promissory notes. The notes receivable,
included in other assets at January 3, 1998, are unsecured. The
$700,000 note is due upon termination of employment of the
officer but no later than September 8, 2002, and the $50,000 note
is due on December 31, 2000.
16. NET INCOME (LOSS) PER SHARE
Year Ended
-----------------------------------------
January 3, December 28, December 30,
1998 1996 1995
-----------------------------------------
(Fiscal 1997) (Fiscal 1996) (Fiscal 1995)
Numerator:
Net income (loss) ($13,647,000) $16,841,000 ($ 4,852,000)
Denominator:
Denominator for basic
earnings per share-
weighted average shares
outstanding 29,266,263 28,424,797 25,079,951
Effect of dilutive
securities:
Stock options - 3,034,100 -
---------- ---------- ----------
Denominator for diluted
earnings per share 29,266,263 31,458,897 25,079,951
Basic net income (loss)
per share ($0.47) $0.59 ($0.19)
Diluted net income (loss)
per share ($0.47) $ 0.54 ($0.19)
<FN>
(1) Potential dilutive securities excluded from the 1997, 1996
and 1995 diluted net income (loss) per share computation
includes outstanding options to purchase 7,704,116, 35,000 and
4,056,159 shares of common stock, respectively.
17. SUBSEQUENT EVENT
On February 19, 1998,the Company entered into a definitive
agreement to acquire substantially all of the assets and liabilities
of Isolation Systems Limited for approximately $37 million in cash,
subject to closing adjustments. Isolation Systems is a leading
developer of virtual private networking hardware and software
solutions based in Toronto, Ontario. The Isolation Acquisition is
expected to close by March 31, 1998 and will be accounted for as
a purchase. Accordingly, the purchase price will be allocated to
the underlying assets and liabilities based on their respective
fair values at the date of closing. The Company expects to
recognize a substantial charge for in-process research and
development in the first quarter of fiscal 1998.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Shiva Corporation
In our opinion, based upon our audits and the report of other
auditors, the accompanying consolidated balance sheet and related
consolidated statements of operations, of changes in
stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Shiva Corporation
and its subsidiaries at January 3, 1998 and December 28, 1996,
and the results of their operations and their cash flows for each
of the three years in the period ended January 3, 1998, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the
financial statements of AirSoft, Inc., a wholly-owned subsidiary,
which statements reflect total revenues of $860,000 and a net
loss of $1,973,000 for the year ended December 31, 1995. Those
statements were audited by other auditors whose report thereon
has been furnished to us, and our opinion expressed herein, insofar
as it relates to the amounts included for AirSoft, Inc. as of and
for the period described above, is based solely on the report of
the other auditors. We conducted our audits of these statements
in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
January 27, 1998, except
as to Note 16 which is
as of February 19, 1998
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of AirSoft, Inc.:
We have audited the statements of operations, stockholders'
equity and cash flows of Airsoft, Inc., (the Company) for the
year ended December 31, 1995, (none of which are presented
herein). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statements presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements of Airsoft, Inc. present
fairly, in all material respects, the results of its operations
and its cash flows for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
March 28, 1996
(June 16, 1996 as to Note 8)
Quarterly Financial Information (unaudited) (1)
First Second Third Fourth
Quarter(2) Quarter Quarter Quarter(2)
------- ------- ------- -------
(In thousands, except per share
data)
Fiscal 1997
Revenues $31,159 $39,738 $35,581 $37,851
Gross profit 9,520 23,789 20,262 19,342
Net loss (8,370) (996) (2,130) (2,151)
Net loss per share - basic $ (0.29) $ (0.03) $ (0.07) $ (0.07)
Net loss per share - diluted $ (0.29) $ (0.03) $ (0.07) $ (0.07)
Common Stock Prices ----- High $ 36.75 $ 13.88 $ 16.44 $ 14.69
Low $ 11.88 $ 8.25 $ 10.06 $ 8.13
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Fiscal 1996
Revenues $43,309 $51,485 $57,109 $48,216
Gross profit 25,924 30,088 33,348 27,582
Merger expenses - 1,987 - -
Net income 4,339 4,975 6,027 1,500
Net income per share - basic $ 0.15 $ 0.17 $ 0.21 $ 0.05
Net income per share - diluted $ 0.14 $ 0.16 $ 0.19 $ 0.05
Common Stock Prices ----- High $ 48.13 $ 87.25 $ 85.88 $ 58.50
Low $ 25.13 $ 44.38 $ 41.25 $ 33.25
<FN>
(1) The Company has restated all quarterly net income (loss) per share data
as required by SFAS No. 128.
(2) In the first quarter of fiscal 1997, the Company recorded a writedown of
excess and obsolete inventory of $6,463,000. In the fourth quarter of fiscal
1997, the Company recorded an additional writedown for excess and obsolete
inventory of $2,605,000. The fourth quarter writedown resulted in a decrease
in net income of $1,615,000, or $0.05 per share. Both writedowns are included
in cost of revenues in the accompanying consolidated statement of operations
and resulted in a decrease in net income of $5,622,000, or $0.19 per share,
in fiscal 1997.
As of January 30, 1998 the closing price of the Company's common stock on
the Nasdaq National Market was $9.44 per share and as of that same date there
were 759 record holders of the Company's common stock. This does not reflect
persons or entities who hold their stock in nominee or "street" name through
various brokerage firms. The Company has never paid any cash dividends on
its common stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings
to fund the development and growth of its business.