SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended April 4, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
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Commission File Number 0-24918
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SHIVA CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2889151
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
28 Crosby Drive, Bedford, MA 01730
(Address of principal executive offices, including Zip Code)
(781) 687-1000
(Registrant's telephone number, including area code)
---------------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES /x/ NO
--- ---
The number of shares outstanding of the registrant's Common Stock as
of April 4, 1998 was 30,301,804.
SHIVA CORPORATION
INDEX
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Part I Financial Information
Item 1 Consolidated Financial Statements
Consolidated Balance Sheet
April 4, 1998 and January 3, 1998
Consolidated Statement of Operations
Three months ended April 4, 1998 and
March 29, 1997
Consolidated Statement of Cash Flows
Three months ended April 4, 1998 and
March 29, 1997
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II Other Information
Item 1 Legal Proceedings
Item 6 Exhibits and Reports on Form 8-K
Signature
SHIVA CORPORATION
Consolidated Balance Sheet
(in thousands, except share related data)
April 4, January 3,
1998 1998
--------- ---------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 23,942 $ 58,915
Short-term investments 46,040 36,868
Accounts receivable, net of allowances
of $9,203 at April 4, 1998 and $8,037
at January 3, 1998 20,012 23,169
Inventories 10,844 14,058
Deferred income taxes 8,683 8,683
Prepaid expenses and other current assets 2,139 2,369
-------- --------
Total current assets 111,660 144,062
Property, plant and equipment, net 25,644 26,093
Deferred income taxes 20,456 8,840
Other assets 7,409 3,251
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Total assets $165,169 $182,246
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt and
capital lease obligations $ 8 $ 118
Accounts payable 8,129 9,258
Accrued expenses 23,914 22,304
Deferred revenue 10,729 4,068
-------- --------
Total current liabilities 42,780 35,748
Deferred income taxes 561 554
-------- --------
Total liabilities 43,341 36,302
======== ========
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized at April 4, 1998 and
January 3, 1998, none issued - -
Common stock, $.01 par value; 100,000,000
shares authorized, 30,301,804 and 29,605,848
shares issued and outstanding at April 4,
1998 and January 3, 1998, respectively 303 296
Additional paid-in capital 153,949 153,036
Treasury stock at cost (1,307) -
Unrealized gain on investments 89 110
Cumulative translation adjustment (139) (308)
Retained earnings (accumulated deficit) (31,067) (7,190)
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Total stockholders' equity 121,828 145,944
-------- --------
Total liabilities and stockholders'
equity $165,169 $182,246
======== ========
<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)
(unaudited)
Three months ended
------------------------
April 4, March 29,
1998 1997
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Revenues:
Product $ 29,816 $ 25,368
Service 8,174 1,541
Royalty 41 4,250
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Total revenues 38,031 31,159
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Cost of revenues:
Product 13,355 20,087
Service 5,194 1,552
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Total cost of revenues 18,549 21,639
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Gross profit 19,482 9,520
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Operating expenses:
Research and development 4,580 5,961
Selling, general and administrative 14,808 17,898
In-process research and development 34,500 -
Restructuring expenses 1,630 -
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Total operating expenses 55,518 23,859
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Loss from operations (36,036) (14,339)
Interest income 1,123 962
Interest and other expense (200) (122)
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Loss before income taxes (35,113) (13,499)
Income tax benefit (11,236) (5,129)
-------- --------
Net loss $(23,877) $ (8,370)
======== ========
Net loss per share -
basic and diluted $ (0.80) $ (0.29)
======== ========
Shares used in computing net loss
per share - basic and diluted 29,854 28,972
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
SHIVA CORPORATION
Consolidated Statement of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
(in thousands)
Three Months Ended
------------------------
April 4, March 29,
1998 1997
-------- ---------
Cash flows from operating activities
Net loss $(23,877) $ (8,370)
Adjustments to reconcile net
loss to net cash provided (used)
by operating activities:
In-process research and development 34,500 -
Depreciation and amortization 2,937 2,235
Deferred income taxes (11,248) -
Changes in assets and liabilities,
net of effects of acquisition:
Accounts receivable 3,496 14,901
Inventories 3,305 1,302
Prepaid expenses and other current
assets 301 (5,277)
Accounts payable (1,814) (3,389)
Accrued expenses 1,364 (3,044)
Deferred revenue 6,656 119
Other long term liabilities - (10)
-------- --------
Net cash provided (used)
by operating activities 15,620 (1,533)
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Cash flows from investing activities
Purchases of property, plant and
equipment (1,617) (3,015)
Payments for acquisition (38,821) -
Capitalized software development costs (88) (155)
Purchases of short-term investments (19,688) (5,333)
Proceeds from maturity and sales of
short-term investments 10,495 6,525
Change in other assets (36) (101)
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Net cash used by investing
activities (49,755) (2,079)
-------- --------
Cash flows from financing activities
Principal payments on long-term
debt and capital lease
obligations (111) (118)
Purchases of treasury stock (1,307) -
Proceeds from exercise of stock
options and warrants 553 487
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Net cash provided (used) by
financing activities (865) 369
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Effects of exchange rate changes
on cash and cash equivalents 27 385
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Net decrease in cash and cash
equivalents (34,973) (2,858)
Cash and cash equivalents,
beginning of period 58,915 72,067
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Cash and cash equivalents, end
of period $ 23,942 $ 69,209
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
SHIVA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements
include the accounts of the Company and its wholly-owned
subsidiaries, and have been prepared by the Company in accordance
with generally accepted accounting principles. In the opinion of
management, these unaudited consolidated financial statements
contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows
at the dates and for the periods indicated. While the Company
believes that the disclosures presented are adequate to make the
information not misleading, these consolidated financial
statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 3,
1998.
The results of operations for the three-month period ended April
4, 1998 are not necessarily indicative of the results expected for
the full fiscal year.
2. EARNINGS PER SHARE:
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share," and has
restated earnings per share amounts for all periods presented herein.
Three months Three months
ended April 4, ended March 29,
1998 1997
-------------- ---------------
Net loss ($23,877,000) ($8,370,000)
============= ============
Weighted average
shares outstanding 29,853,766 28,971,621
Common-equivalent shares
shares outstanding - -
------------ -----------
Weighted average and common
equivalent shares outstanding 29,853,766 28,971,621
Basic and diluted net loss per share ($0.80) ($0.29)
======= =======
3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
At April 4, 1998, the Company had cash and cash equivalents of
$23,942,000 and $46,040,000 of short-term investments,including
an unrealized gain of $89,000 recorded as a separate component of
stockholders' equity. The Company's short-term investments at
April 4, 1998, classified as available-for-sale, consist of municipal
securities, corporate debt securities, certificates of deposit,
high-grade commercial paper and U.S. Treasury securities, with
various maturity dates through February 2000.
4. INVENTORIES:
Inventories consist of the following:
April 4, January 3,
(in thousands) 1998 1998
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Raw materials $ 5,707 $ 7,199
Work-in-process 111 57
Finished goods 5,026 6,802
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$10,844 $14,058
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5. COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." The Company adopted SFAS 130
on January 4, 1998, which establishes standards for reporting
comprehensive income and its components in the consolidated
financial statements. Comprehensive loss for the three months
ended April 4, 1998 was $23,777,000 and includes after-tax
foreign currency translation adjustments and unrealized holding
losses arising during the period.
6. ACQUISITION:
On March 26, 1998, the Company completed its acquisition of
Isolation Systems, Limited , a leading developer of virtual
private networking ("VPN") hardware and software solutions based
in Toronto, Ontario in exchange for cash paid by the Company from
its existing cash and short-term investment balances. The
acquisition was accounted for as a purchase. Accordingly, the
purchase price of approximately $39,724,000 was allocated to the
underlying assets and liabilities based on their respective fair
values at the date of closing. The estimated fair value of the
net assets acquired was $743,000, and $34,500,000 of the purchase
price was allocated to in-process research and development. The
amount allocated to in-process research and development was
determined through established valuation techniques in the high-
technology communications industry and were expensed upon acquisition,
as it was determined that technological feasibility had not been
established and no alternative uses existed. The excess of the
purchase price over the net assets acquired and the in-process
research and development,recorded as goodwill, will be amortized
on a straight-line basis over three years. Goodwill approximated
$4,481,000, and consisted of developed technology of $2,000,000,
an assembled workforce of $300,000 and $2,181,000 in other intangible
assets. Pursuant to an indemnification agreement, upon the occurrence
of certain events, the Company may also pay an amount not to exceed
$6,500,000, which would be recorded as additional goodwill and amortized
over the remaining useful life of the asset.
The following summary, prepared on an unaudited pro forma basis,
combines the results of operations as if Isolation Systems,
Limited had been acquired as of December 29, 1996; however the
one-time charge of $34,500,000 as a result of the purchase price
allocated to in-process research and development has been excluded
due to its non-recurring nature. The pro forma results have been
adjusted in each of the periods presented below to reflect the
loss of interest income as a result of the cash used in the
acquisition as well as the amortization of goodwill resulting from
the transaction.
Three-months ended Three-months ended
(in thousands) April 4, 1998 March 29, 1997
------------- --------------
Total revenues $ 39,289 $ 31,386
Operating loss (1,556) (15,223)
Net loss ( 914) ( 9,377)
======== ========
Net loss per share -
basic and diluted $ ( 0.03) $ ( 0.32)
======== ========
The unaudited pro forma results are not necessarily indicative of
what actually would have occurred if the acquisition had been in
effect for the entire periods presented. In addition, they are
not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined
operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Nortel Agreement. On February 27, 1998 the Company signed a new multi-
year agreement (the "1998 Agreement") with Northern Telecom Inc.
("Nortel"). The Company and Nortel have been working together to
provide remote access equipment to service providers since 1995. Under
the new agreement, Nortel will issue purchase orders for a minimum of
$5,000,000 per quarter to purchase the Company's products within a
minimum aggregate amount of $40,000,000 over the term of the contract
which began in the three-month period ended April 4, 1998. The Company's
ability to recognize revenue related to these purchase orders, however,
may be impacted by several factors including, but not limited to, the
timing of the orders placed, the ability of the Company to ship products
in a timely fashion, and product availability. These OEM purchases from
Nortel will replace the minimum royalty arrangement with the Company that
was in effect during fiscal 1997. In addition, the Company will receive
total professional services revenue of $12,000,000 during the first two
quarters of fiscal 1998 from Nortel related to the development of carrier
class remote access technology. The OEM purchases and professional services
are expected to result in higher revenues from Nortel in fiscal 1998 which
will carry lower gross margins. Gross margins on sales to Nortel are
expected to decline in fiscal 1998 primarily due to the fact that a
significant portion of the revenues from Nortel in fiscal 1997 consisted
of royalty revenues, with little or no direct cost, related to the Rapport
112, an OEM version of the LanRover Access Switch.
On April 23, 1998, Nortel exercised its option to license certain Shiva
technology. This option was part of the 1998 Agreement. Pursuant to
the terms of the agreement, Shiva will record a total of $26,000,000
ratably over ten quarters beginning in the second quarter of fiscal 1998,
for the license and other items related to intellectual property.
Revenues. Revenues increased by 22%, to $38,031,000, in the three-
month period ended April 4, 1998 from $31,159,000 in the comparable
period in fiscal 1997. This increase was principally due to higher
service revenues, which increased to $8,174,000 in the three-month
period ended April 4, 1998 from $1,541,000 during the comparable
period in fiscal 1997. This increase was primarily due to $6,000,000
in professional services revenue from Nortel related to the development
of carrier class remote access technology as outlined in the 1998
Agreement.
Remote access revenues increased by 2% to $28,236,000 in the three-
month period ended April 4, 1998 from $27,692,000 in the comparable
period in fiscal 1997. Revenues from the LanRover Access Switch in
the three-month period ended April 4, 1998 increased by 28% to
$14,539,000 from $11,366,000 during the same period in fiscal 1997,
primarily due to higher volume shipments. Revenues from the LanRover
Access Switch in the first quarter of fiscal 1997 included minimum
royalty revenues from Nortel that were based on sales of the Nortel
Rapport 112, an OEM version of the LanRover Access Switch. These
royalty revenues, which will not recur in fiscal 1998 as outlined
above, were partially offset by price protection provisions of
$2,800,000 in the three-month period ended March 29, 1997. Price
protection rights require the Company to grant retroactive price
adjustments for inventories of the Company's products held by
distribution partners if the Company lowers its prices for such
products. The price protection provisions were recorded to account
for pricing actions effective in the second quarter of fiscal 1997 due
to increased price competition and price reductions on V.34 modem
cards due to the availability of 56K modem technology in the access
concentrator market.
Revenues from the LanRover product line decreased by 21% to $9,746,000
in the three-month period ended April 4, 1998 from $12,330,000 in the
comparable period in fiscal 1997. This decrease was due to lower
volume shipments. LanRover revenues in the first quarter of 1997 were
impacted by price protection provisions of $3,900,000, which were
recorded to account for pricing actions which became effective in the
second quarter of fiscal 1997 and were in response to increased price
competition.
The Company provides its distributors and resellers with product
return rights for stock balancing and product evaluation. Revenues
were reduced by provisions for product returns of $3,323,000 and
$10,619,000 in the three-month periods ended April 4, 1998 and March
29, 1997, respectively, representing 8% and 22% of gross revenues,
respectively. The decline in the provision for product returns was
primarily the result of increased provisions recorded in the three-
month period ended March 29, 1997 to account for slow-moving and
discontinued products in the Company's North American distribution
channels.
Revenues from OEM customers were essentially flat and represented 28%
of revenues in the three-month period ended April 4, 1998 compared to
33% in the comparable period in fiscal 1997. International revenues
accounted for 39% and 62% of revenues in the three-month periods ended
April 4, 1998 and March 29, 1997, respectively. International
revenues represented a higher proportion of total revenues in the
three-month period ended March 29, 1997 primarily due to the impact of
the return provisions and price protection provisions that
significantly reduced revenues from the Company's North American
distribution channels.
Gross Profit. Gross profit increased by 105%, to $19,482,000, or 51%
of revenues, in the three-month period ended April 4, 1998, compared to
$9,520,000, or 31% of revenues,in the comparable period in fiscal 1997.
Gross profit in the three-month period ended March 29, 1997 included the
negative impact of price protection provisions of $6,700,000, as discussed
above, and provisions for slow-moving inventories. The provisions for slow-
moving inventories increased cost of revenues by $6,463,000, and
related to V.34 modem cards, for which demand had decreased due to the
availability of 56K modem technology, and certain other products.
Excluding the impact of these provisions, gross profit as a percentage
of revenues would have been 60% in the three-month period ended March
29, 1997. Gross profit in the three-month period ended April 4, 1998
included $6,000,000 in professional services revenue, as well as OEM
product revenues from Nortel. Each of these revenue streams from
Nortel carried lower gross profit percentages than the Company's non-
Nortel product revenues, and significantly lower gross profit
percentages than the Nortel royalty revenues recorded in the year
earlier period. In the future, the Company's gross margins may be
affected by several factors, including but not limited to product mix,
the distribution channels used, changes in component costs and the
introduction of new products.
Research and Development. Research and development expenses during the
three-month period ended April 4, 1998 related to the development of
new and existing remote access products, including products which
incorporate technology to support virtual private networking.
Research and development expenses decreased 23%, to $4,580,000, or 12% of
revenues, in the three-month period ended April 4, 1998 from
$5,961,000, or 19% of revenues, during the comparable period in fiscal
1997. The decrease in these expenses was primarily due to the
restructuring of the Nortel arrangement in fiscal 1998 under which
Nortel contracted with the Company for the development of carrier class
remote access technology. Under the terms of the 1998 Agreement, the
Company will recognized $6,000,000 in professional services revenue in
each of the first two quarters of fiscal 1998 as work is performed.
Accordingly, expenses related to these development efforts of $3,711,000
in the three-month period ended April 4, 1998 have been included in cost of
service revenues in the accompanying statement of operations. Customer
funded development fees under cost sharing relationships (including those
with Nortel in fiscal 1997), are reflected as an offset to research and
development expenses, and were $1,636,000 in the three-month period ended
March 29, 1997. There were no such fees recorded in the three-month period
ended April 4, 1998. Capitalized software development costs were $88,000
in the three-month period ended April 4, 1998, compared with $155,000
in the comparable period in fiscal 1997. Gross research and development
expenses increased by $627,000 to $8,379,000 in the three month period
ended April 4, 1998 from $7,752,000 in the comparable period in fiscal 1997.
The Company anticipates continued significant investment in research and
development primarily focused on providing remote access solutions for
the business access market.
Selling, General and Administrative. Selling, general and
administrative expenses decreased by 17%, to $14,808,000 in the three-month
period ended April 4, 1998 from $17,898,000 in the comparable period
in fiscal 1997. These expenses represented 39% and 57% of revenues in
the three-month periods ended April 4, 1998 and March 29, 1997,
respectively. The decrease in gross expenses was due to several
factors, including lower personnel costs due to the restructuring of
the Company's sales and marketing organization as discussed below, as
well as decreased costs incurred for travel, channel and marketing
programs, trade shows and various facilities related expenses. These
decreases were partially offset by increased depreciation and bad debt
expense. Selling, general and administrative expenses in the three-
month periods ended April 4, 1998 and March 29, 1997 are net of
expenses reimbursed by Nortel of $1,018,000 and $676,000, respectively,
related to Shiva's Service Provider Group (SPG), a worldwide business unit
comprised of technical sales and support personnel dedicated to marketing
Nortel's remote access equipment to carriers and service providers.
Nortel will no longer fund the SPG unit beginning in the second quarter
of fiscal 1998.
Restructuring Expenses. The Company recorded restructuring expenses
of $1,630,000 in the three-month period ended April 4, 1998. These
expenses, comprised primarily of severance costs, were the result of the
restructuring of the Company's sales and marketing operations in order
to support the Company's strategic focus on providing remote access
solutions for the business access market.
In addition to the restructuring action discussed above, on April 15,
1998, the Company announced a worldwide restructuring to align its
financial model with the recently announced strategic focus on
providing remote access solutions for business. As a result of this
restructuring, Shiva expects to recognize a pre-tax charge in the
second quarter of fiscal 1998 of approximately $9,000,000 to
$12,000,000. It is anticipated that these actions will yield
approximately $10,000,000 to $15,000,000 in annualized savings, the
impact of which is expected to begin in the third quarter of fiscal 1998.
This restructuring will result in the elimination of approximately 125
positions worldwide, during the next several months. Specifically,
Shiva will close operations at the Edinburgh, Scotland, facility and
will relocate certain technical support staff to the Wokingham, United
Kingdom, facility. The Edinburgh facility was primarily focused on
jointly funded engineering activities with Nortel.
Interest Income and Expense. Interest income increased during the
three-month period ended April 4, 1998 over the corresponding period
in fiscal 1997 due to the Company's shift from federal tax-exempt
securities into taxable securities which resulted in a higher overall
yield on its investments. In the future, the Company expects net
interest income and expense to decline due to the amortization of
goodwill and the loss of interest income as a result of the cash used
in the acquisition of Isolation Systems, Limited.
Income Tax Benefit. The Company's effective tax rate in the three
month period ended April 4, 1998 was 32%, down from 38% in the three-
month period ended March 29, 1997, primarily due to the impact of
nondeductible restructuring charges.
Foreign Currency Fluctuations
Foreign currency fluctuations did not have a significant impact on the
comparison of the results of operations in the three-month period
ended April 4, 1998 with those of the comparable period in fiscal
1997. However, the Company's international operations will continue
to be exposed to adverse movements in foreign currency exchange rates
which may have a material adverse impact on the Company's financial
results. The Company enters into forward exchange contracts to hedge
those currency exposures related to certain assets and liabilities
denominated in non-functional currencies and does not generally hedge
anticipated foreign currency cash flows.
Year 2000
The Company recognizes that it must ensure that its products and
operations will not be adversely impacted by Year 2000 software
failures (the "Year 2000 issue") which can arise in time-sensitive
software applications which utilize a field of two digits to define
the applicable year. In such applications, a date using "00" as the
year may be recognized as the year 1900 rather than the year 2000.
The Company believes that all of its products are currently Year 2000
compliant with the exception of the SpiderManager product, which will
display the year number in the activity log date field as three
digits. The Company believes that this characteristic does not have
any system operational implications for the product. Therefore, the
Company does not anticipate having to undertake additional research
and development efforts in this regard. In addition, the Company is
in the process of replacing many of its business and operating
computer systems with software which, when upgraded, will be Year 2000
compatible. The Company is planning to complete all necessary Year
2000 upgrades of its major systems in 1998, and is currently
identifying and developing conversion strategies for its remaining
systems that may be impacted by the Year 2000 issue. While the
Company does not believe that the Year 2000 issue will have a material
impact on the Company, there can be no assurance that unanticipated
problems will not arise that will have a material adverse effect on
the Company's business and results of operations.
Liquidity and Capital Resources
As of April 4, 1998, the Company had $23,942,000 of cash and cash
equivalents and $46,040,000 of short-term investments. Working
capital decreased by 36% to $68,880,000 at April 4, 1998 from
$108,314,000 at January 3, 1998.
Net cash provided by operations totaled $15,620,000 for the three-
month period ended April 4, 1998 compared with net cash used by
operations of $1,533,000 during the comparable period in fiscal 1997.
Net cash provided by operations in the three-month period ended April
4, 1998 resulted primarily from net income adjusted non-cash expenses
including in-process research and development, as well as the decrease
in accounts receivable and inventories and an increase in deferred
revenue. The decrease in accounts receivable is primarily due to
increased collection activities, and the decrease in inventories is
due to better inventory management. The increase in deferred revenue
is primarily due to cash payments received from Nortel during the
quarter that relate to professional services that will be provided
during the second quarter of fiscal 1998. Net cash used by operations
in the three-month period ended March 29, 1997 resulted primarily from
the net loss and decreased current liabilities, partially offset by
decreased accounts receivable. The decrease in accounts receivable
was due to decreased revenue levels and the previously mentioned
increase in product return and price protection provisions.
Net cash used by investing activities totaled $49,755,000 for the
three-month period ended April 4, 1998, compared to $2,079,000 during
the comparable period in fiscal 1997. Investment activity in the
three-month period ended April 4, 1998 consisted primarily of payments
related to the purchase of Isolation Systems Limited, as well as the
purchase of short-term investments and fixed assets. Investment activity
in the three-month period ended March 29, 1997 consisted primarily of
purchases of fixed assets, partially offset by proceeds from short-term
investments upon maturity or sale.
Net cash used by financing activities totaled $865,000 for the three-
month period ended April 4, 1998, compared to net cash provided of
$369,000 in the comparable period in fiscal 1997. Net cash used
by financing activities for the three-month period ended April 4, 1998
primarily consisted of the purchase of treasury stock, partially
offset by proceeds from stock option exercises. Net cash provided by
financing activities in the three-month periods ended March 29, 1997
consisted of proceeds from stock option exercises, partially offset by
principal payments on long-term debt and capital lease obligations.
The Company has a $5,000,000 unsecured revolving credit facility with
a bank which expires in September 1998. The terms of the credit
facility require the Company to comply with certain restrictive
financial covenants. Borrowings under this facility bear interest at
the bank's prime rate. At April 4, 1998, available borrowings were
reduced by outstanding letters of credit of $834,000 which expire at
various dates in 1998. The Company had no borrowings outstanding under
this line at April 4, 1998. The Company also has a foreign credit
facility of approximately $2,666,000, all of which was available at
April 4, 1998. Available borrowings under this facility are decreased
by guarantees on certain foreign currency transactions. The terms of
the foreign credit facility require the Company to comply with certain
restrictive financial covenants. There were no borrowings outstanding
under this foreign credit facility at April 4, 1998.
The Company enters into forward exchange contracts to hedge against
certain foreign currency transactions for periods consistent with the
terms of the underlying transactions. The forward exchange contracts
have maturities that do not exceed one year. At April 4, 1998, the
Company had outstanding forward exchange contracts to purchase
$495,000 and to sell $261,000 in various currencies which will mature
by July 23, 1998.
The Company believes that its existing cash and short-term investment
balances, together with borrowings available under the Company's bank
credit facilities, will be sufficient to meet the Company's cash
requirements for at least the next twelve months.
Factors That May Affect Future Results
Certain information contained herein, and information provided by the
Company or statements made by its employees may, from time to time,
contain "forward-looking" information which involve risks and
uncertainties. Any statements contained in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere herein that are not historical facts may be
"forward-looking" statements. Certain information contained herein
concerning the Company's anticipated plans and strategies for its
business, available cash and cash equivalents and sources of
financing, expenditures, ability to achieve Year 2000 compliance, and
effects of the new agreement with Nortel consists of forward-looking
statements. Without limiting the foregoing, the words "believes,"
"expects," "anticipates," "plans," and similar expressions are intended
to identify forward-looking statements. The Company's actual future
results may differ significantly from those stated in any forward-
looking statements. Factors that may cause such differences include,
but are not limited to, the factors discussed below.
The Company's quarterly operating results may vary significantly from
quarter to quarter depending on factors such as the timing of
significant orders and shipments of its products, changes and delays
in product development, new product introductions by the Company and
its competitors, the mix of distribution channels through which the
Company's products are sold and seasonal customer buying patterns.
There can be no assurance that the Company will be able to achieve
future revenue growth and profitability on a quarterly or annual
basis. Revenues can be difficult to forecast due to the fact that the
Company's sales cycle varies substantially depending upon market,
distribution mechanism and end user customer. The Company's expense
levels are based, in part, on its expectations as to future revenues.
If revenue levels are below expectations, operating results may be
adversely affected. In addition, the Company's distribution partners
typically stock significant levels of inventory, and the Company's
revenues may fluctuate based on the level of partner inventories in
any particular quarter.
The Company has been party to a strategic relationship with Nortel
since 1995 which has evolved over time. Under the terms of a new
agreement with Nortel signed on February 27, 1998, Nortel will
purchase minimum quarterly amounts of the Company's products within a
minimum aggregate amount of $40,000,000 over the term of the
contract which began in the three-month period ended April 4, 1998.
There can be no assurance that Nortel will purchase in excess of the
minimum amount or that the Company will be able to fulfill such orders
from Nortel and thus recognize the revenue associated with such
orders, in a linear fashion over the contract term. Non-linear order
patterns from Nortel could cause material fluctuations in the
Company's quarterly financial results. In addition, the Company has
received, and will continue to receive, professional services revenue
from Nortel through the second quarter of fiscal 1998 related to the
development of carrier class remote access technology. There is no
obligation on the part of Nortel to contract for additional such
development or for the Company to provide such services beyond the second
quarter of fiscal 1998. Revenues from Nortel accounted for 16% and 14% of
revenues in fiscal 1997 and 1996, respectively.
On March 26, 1998, the Company completed its acquisition of Isolation
Systems, Limited , a leading developer of VPN hardware and software
solutions based in Toronto, Ontario. Achieving the anticipated
benefits of this acquisition or any other acquisitions the Company
may undertake will depend in part upon whether the effective
integration of the acquired companies' research and development
organizations, products and technologies, and sales, marketing and
administrative organizations is accomplished in timely manner. There
can be can be no assurance that the Company will be successful in
integrating the operations of Isolation Systems, Limited. Moreover,
the integration process may temporarily divert management attention
from the day-to-day business of the Company. Failure to successfully
accomplish the integration of Isolation Systems could have a material
adverse effect on the Company's business, financial condition and/or
results of operations.
The Company's LanRover and LanRover Access Switch products are
experiencing increased market competition which has caused the Company
to take pricing actions and may require the Company to take future
pricing actions. The Company provides most of its distribution
partners with product return rights for stock balancing or product
evaluation and price protection rights. Stock balancing rights permit
a return of products to the Company for credit against future product
purchases, within specified limits. Product evaluation rights permit
end-users to return products to the Company through the distribution
partner from whom such products were purchased, within 30 days of
purchase if such end-user is not fully satisfied. Price protection
rights require the Company to grant retroactive price adjustments for
inventories of the Company's products held by distribution partners if
the Company lowers its prices for such products. These price
protection provisions have adversely affected and may continue to
adversely affect revenues and profitability in the future. There can
be no assurance that the Company will not experience significant
returns or price protection adjustments in the future or that the
Company's reserves will be adequate to cover such returns and price
reductions.
The Company increasingly relies on sales of the LanRover Access Switch
to achieve its revenue and profitability objectives. Sales of other
communications products and other remote access products, including
the LanRover product, decreased in the first quarter of fiscal 1998
and fiscal 1997, due in part to increased competition. There can be
no assurance that the Company will be successful in modifying current
product offerings to increase sales of its products.
The Company depends on third party distributors and value-added
resellers for a significant portion of the Company's revenues. The
loss of certain of these distributors and resellers could have a
material adverse impact on the Company's results of operations.
Moreover, many of these distributors and resellers also act as
resellers of competitive products. Therefore, there is risk that
these distributors and resellers may focus their efforts on marketing
products other than those sold by the Company. This may require the
Company to offer various incentives to such distributors and
resellers, which may adversely impact the Company's results of
operations.
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent new
product introductions. The Company's future success will depend on
its ability to enhance its existing products and to introduce new
products and services to meet and adapt to changing customer
requirements and emerging technologies, such as VPN and other
technologies. The introduction of new products requires the Company
to manage the transition from its older product offerings in order to
minimize the impact on customer ordering patterns, avoid excessive
levels of obsolete inventories and to ensure that adequate supplies of
new products are available to meet customer demand.
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 Company is exposed to potential credit risks as a result of
accounts receivable from distributors, resellers, OEM and direct
customers, with respect to which the Company does not generally
require collateral.
The Company is currently dependent on three subcontractors for the
manufacture of significant portions of its products. Although the
Company believes that there are a limited number of other qualified
subcontract manufacturers for its products, a change in subcontractors
could result in delays or reductions in product shipments. In
addition, certain components of the Company's products are only
available from a limited number of suppliers. The inability to obtain
sufficient key components as required could also result in delays or
reductions in product shipments. Such delays or reductions could
have an adverse effect on the Company's results of operations.
The market price of the Company's securities could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating
results, changes in earnings estimates by analysts, and market
conditions in the industry, as well as general economic conditions and
other factors external to the Company.
Other factors that may affect future results include the accuracy of
the Company's internal estimates of revenues and operating expense
levels, the outcome of the litigation discussed below under "Legal
Proceedings," the Company's ability to complete all necessary Year
2000 upgrades in a timely and cost-effective manner, the realization
of the intended benefits of the Isolation Acquisition and the ability
of the Company to integrate the acquired business into the Company's
existing operations, and material changes in the level of customer-
funded research and development activities.
Because of the foregoing factors, the Company believes that period-to-
period comparisons of its financial results are not necessarily
meaningful and expects that its results of operations may fluctuate
from period to period in the future.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant in the following legal proceedings:
Lirette, et al. v. Shiva Corporation, et al., Civil Action No. 97-
11159-WGY, a purported class action complaint filed against the
Company, Frank Ingari, Cynthia Deysher and David Cole, in the United
States District Court for the District of Massachusetts on May 21,
1997 and Abraham Schwartz and Norman Marcus v. Shiva Corporation,
Case No. BC164278, a purported class action complaint filed against
the Company in the Superior Court of the State of California for the
County of Los Angeles on January 17, 1997. The federal court complaint
seeks damages, interest, fees and expenses. The state court complaint
seeks damages, interest, fees and expenses, including punitive damages
and treble damages. The federal matter is in the pre-discovery phase,
and a motion to dismiss has been filed and is being considered by the
court. The state matter is in discovery. The Company is unable to
determine at this time the potential liability, if any, of either of
these actions. Accordingly, no provision has been made in the
consolidated financial statements for these claims. It is possible
that the Company could incur a material loss related to these actions
in the future.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
Exhibit 10.1* Agreement by and between the Company and Northern
Telecom Limited dated February 27, 1998.
Exhibit 10.2* Amendment dated March 13, 1998 to the Agreement
by and between the Company and Northern Telecom
Limited dated February 27, 1998.
Exhibit 27 Financial Data Schedule
- ----------------------------------
* Confidential Treatment Requested.
(b) Reports on Form 8K
The Company filed a Current Report on Form 8-K dated February
20, 1998 pursuant to the Item 5 thereof, reporting the Company's
announcement of the execution of a definitive agreement to
acquire the majority of the assets of privately-held Isolation
Systems, Limited, an Ontario corporation, for approximately
$37,000,000 in cash, subject to closing adjustments.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
SHIVA CORPORATION
Date: May 19, 1998 by: /s/ Robert P. Cirrone
---------------------
Senior Vice President, Finance
and Administration, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
SHIVA CORPORATION
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ------------------------
Exhibit 10.1* Agreement by and between the Company and Northern
Telecom Limited dated February 27, 1998.
Exhibit 10.2* Amendment dated March 13, 1998 to the Agreement
by and between the Company and Northern Telecom
Limited dated February 27, 1998.
Exhibit 27 Financial Data Schedule
- ----------------------------------
* Confidential Treatment Requested.