UNITED STATES
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 2, 1994 or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File Number 0-11626
LOTUS DEVELOPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of
incorporation or organization)
04-2757702 (I.R.S. Employer Identification Number)
55 Cambridge Parkway, Cambridge, Massachusetts 02142
(Address of principal executive offices)
(Zip Code)
(617) 577-8500
(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
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the latest practicable date.
Outstanding at
Class April 30, 1994
------------- --------------
Common Stock, 45,931,026
$.01 par value shares
<PAGE> 1
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended
-----------------------------------
April 2, 1994 April 3, 1993
------------- -------------
Net sales $246,992 $227,004
Cost of sales 46,408 50,379
-------------- -------------
Gross margin 200,584 176,625
Expenses:
Research and development 34,484 31,820
Sales and marketing 117,820 106,112
General and administrative 16,248 17,970
Other (income) / expense,
net (Note D) (1,314) (68)
------------- -------------
Total expenses 167,238 155,834
Income before provision for
income taxes 33,346 20,791
Provision for income taxes 12,005 8,524
------------- -------------
Net income $21,341 $12,267
============= =============
Net income per share $0.45 $0.29
============= =============
Weighted average common
and common equivalent
shares outstanding 47,707 42,598
============= ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 2
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
April 2, 1994 December 31,1993
(unaudited)
-------------- ----------------
Current assets:
Cash and short-term
investments (Note B) $476,889 $416,693
Accounts receivable,
net of allowances of $28,014 and $30,002 189,838 217,336
Inventory (Note C) 17,102 21,220
Other current assets 27,715 20,817
-------------- --------------
Total current assets 711,544 676,066
-------------- --------------
Property and equipment,
net of accumulated depreciation
and amortization of $158,024 and $153,768 124,298 127,437
Software and other intangibles,
net of accumulated amortization
of $135,140 and $123,016 84,538 88,625
Investments and other assets 13,541 13,217
------------- -------------
Total assets $933,921 $905,345
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 1,526 $ --
Current portion of long-term debt 28,480 28,480
Accounts payable and accrued expenses 183,965 199,926
Accrued and deferred income taxes 51,555 49,017
------------- -------------
Total current liabilities 265,526 277,423
------------- -------------
Deferred income taxes 49,524 49,531
Long-term debt 50,000 50,000
Stockholders' equity:
Preferred stock, $1.00 par value,
5,000 shares authorized, none issued -- --
Common stock, $.01 par value,
100,000 shares authorized;
62,152 shares issued;
45,736 and 44,928 shares outstanding 622 622
Additional paid-in capital 258,228 251,414
Retained earnings 547,895 526,554
Treasury stock, 16,416 and
17,224 shares at an average
cost of $14.44 per share (237,067) (248,728)
Translation adjustment (807) (1,471)
-------------- -------------
Total stockholders' equity 568,871 528,391
-------------- -------------
Total liabilities and
stockholders' equity $933,921 $905,345
============== =============
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 3
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
April 2, 1994 April 3, 1993
------------- -------------
Cash flows from operating activities:
Net income $21,341 $12,267
Depreciation and amortization 21,413 21,631
Decrease in accounts receivable 28,879 6,366
Decrease in inventory 4,459 4,552
Decrease in accounts payable and
accrued expenses (16,533) (11,147)
Increase in accrued and deferred
income taxes 2,472 4,867
Net change in other working capital items (7,597) (737)
------------- -------------
Net cash provided by operating activities 54,434 37,799
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (5,871) (4,918)
Payments for software and other intangibles (8,177) (11,636)
Purchases of short-term investments, net (8,168) (6,483)
Other (141) 1,797
-------------- --------------
Net cash used for investing activities (22,357) (21,240)
-------------- --------------
Cash flows from financing activities:
Issuance of common stock 18,475 4,250
Increase (decrease) in short-term borrowings 1,476 (819)
------------- --------------
Net cash provided by financing activities 19,951 3,431
------------- --------------
Net increase in cash and cash equivalents 52,028 19,990
Cash and cash equivalents, beginning of year 164,849 121,133
------------- --------------
Cash and cash equivalents, end of first quarter $216,877 $141,123
============= ==============
Supplemental Cash Flow Information Three Months Ended
April 2, 1994 April 3, 1993
------------- -------------
Interest received $3,238 $946
Interest paid $887 $1,224
Income taxes paid $9,474 $3,959
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE> 4
LOTUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
A) Basis of Presentation
The accompanying unaudited consolidated balance sheets,
statements of operations, and statements of cash flows reflect
all adjustments (consisting only of normal recurring items) which
are, in the opinion of management, necessary for a fair statement
of the consolidated financial position at April 2, 1994, and of
consolidated operations and cash flows for the interim periods
ended April 2, 1994 and April 3, 1993.
The accompanying unaudited condensed financial statements
have been prepared in accordance with the instructions for Form
10-Q and therefore do not include all information and footnotes
necessary for a complete presentation of operations, the
financial position, and cash flows of the Company, in conformity
with generally accepted accounting principles. The Company filed
audited consolidated financial statements which included all
information and footnotes necessary for such presentation for the
years ended December 31, 1993 and December 31, 1992 in
conjunction with its 1993 Annual Report on Form 10-K.
The results of operations for the interim period ended
April 2, 1994 are not necessarily indicative of the results to
be expected for the year.
B) Cash and Short-term Investments
Cash and short-term investments consist of the following:
April 2, 1994 December 31, 1993
------------- -----------------
Cash and cash equivalents $216,877 $164,849
Short-term investments 260,012 251,844
------------- -----------------
Cash and short-term investments $476,899 $416,693
============= =================
The Company's investment portfolio is diversified and
consists of cash equivalents and investments placed with high
credit qualified institutions. The Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("FAS 115") at the beginning of 1994.
The Company has the intent and ability to hold until maturity all
securities that mature in less than one year. Accordingly, these
"held-to-maturity" securities have been recorded at amortized cost.
The Company has categorized all other securities as "available-for-sale",
since the Company may liquidate these investments currently. FAS 115
requires that unrealized gains and losses on "available-for-sale" securities
be excluded from earnings and reported in a separate component of
stockholders' equity. In the first quarter of 1994, the unrealized
loss was immaterial.
<PAGE> 5
LOTUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
B) Cash and Short-term Investments (continued)
The amortized cost of securities, which approximates fair value,
consists of the following at April 2, 1994:
<TABLE>
<CAPTION>
Maturity Maturity
Type of security Less than one year One to five years Total
- - ---------------------- ------------------ ----------------- --------
<S> <C> <C> <C>
Corporate bonds and Eurobonds $97,099 $36,031 $133,130
Commercial Paper 77,760 -- 77,760
Collateralized Mortgage
Obligations 25,643 8,295 33,938
----------------- ----------------- --------
$200,502 $44,326 244,828
================= =================
Cash and other cash equivalents 232,071
--------
Total cash and short-term investments $476,899
========
</TABLE>
C) Inventory
Inventory consists of the following:
April 2, 1994 December 31, 1993
------------- -----------------
Finished goods $11,066 $13,962
Raw materials 6,036 7,258
------------- -----------------
Total $17,102 $21,220
============= =================
D) Other (income) / expense , net
Other (income) / expense consists of the following:
Three Months Ended
April 2, 1994 April 3, 1993
------------- -------------
Interest income ($3,773) ($ 2,900)
Interest expense 1,762 2,831
Other, net 697 1
------------- -------------
Total ($1,314) ($ 68)
============= =============
<PAGE> 6
ITEM 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Revenue for the first quarter of 1994 increased 9% over the
comparable period in 1993. The Company's revenues are derived
primarily from desktop applications and communications products
and services. Lotus' desktop applications include spreadsheets,
word processing, graphics, end-user database and personal
information management software products. Lotus' communications
products and services include Notes, cc:Mail and consulting
services. Worldwide revenue from desktop applications was
essentially unchanged in the first quarter of 1994 compared to
the prior year period. Revenue from the Company's Windows
desktop applications grew significantly compared to the prior
year period, while revenue from DOS desktop applications
continued to decline, but at a rate slower than that experienced
in the prior year. Sales of SmartSuite, the Company's
comprehensive suite of Windows desktop applications, more than
quadrupled from the prior year period and represented 44% of
total Windows desktop applications revenue in the first quarter
of 1994, compared to 13% in the first quarter of 1993. This
substantial increase reflects the market shift from standalone
desktop applications to integrated suites. Prices for Windows
desktop applications decreased compared to the same quarter in
the prior year as competition for Windows desktop applications
intensified. The Company anticipates that downward pressure on
pricing for Windows desktop applications will continue in 1994.
Revenue from communications products and services more than
doubled compared with the first quarter of 1993 and represented
29% of total revenue in the first quarter of 1994 compared to 14%
in the first quarter of 1993. Increased sales of communications
products and services reflect the growing momentum behind
workgroup and networked computing. Revenue outside the U.S.
accounted for 55% of worldwide revenue and compared with 51% for
the same period in 1993. The impact of foreign currency
fluctuations on international revenues was insignificant.
The gross margin percentage of 81% for the first quarter of
1994 compares with 78% for the same period in 1993. The rate was
favorably affected by the achievement of manufacturing
efficiencies resulting from higher production volumes, the
closing of the Puerto Rican manufacturing plant in mid-1993, and
material cost reductions. The margin improvement was also
attributable to a greater proportion of higher margin
communication products in the sales mix and to reduced
manufacturing and delivery costs resulting from an increase in
license sales.
The 8% increase in research and development reflects a
constant level of desktop development spending quarter over
quarter and significantly higher spending associated with the
development and enhancement of the Company's communications
products and Working Together technology. To a lesser degree,
higher spending was driven by development efforts to translate
and localize products for international markets. Capitalized
software costs for the first quarter of 1994 were $7.0 million
compared with $6.0 million for the same period in 1993.
<PAGE> 7
ITEM 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations (continued)
Sales and marketing expenses grew 11% in the first quarter
of 1994 compared with the same 1993 period. The growth was
driven by the Company's investment in its communications business
and in SmartSuite. Increased spending on advertising and
marketing programs for SmartSuite reflects the market shift from
standalone applications to integrated suites. In addition, the
Company has continued its efforts to attract users transitioning
from DOS to Windows, to expand the worldwide support
organization, and to grow the consulting services business.
Other income and expense consists primarily of interest
income and interest expense. Despite declining interest rates,
interest income was higher in the first quarter of 1994 compared
with the first quarter of 1993 because of higher average cash and
short-term investment balances. Interest expense declined
primarily due to scheduled repayments of long-term debt
obligations.
The estimated tax rate for 1994 of 36% compares with 41% for
the first quarter of 1993. The decrease in the rate reflects the
benefit from the reinstatement of the research and development
credit in the second half of 1993 and benefits derived from
the Company's manufacturing operations in Dublin, Ireland.
Financial Condition
Cash and short-term investments increased $60 million to
$477 million at April 2, 1994. The two primary sources of cash
flow in the first quarter of 1994 were $54 million of cash
generated by operations and $18 million in proceeds from the
issuance of common stock under the Company's employee stock
plans. The Company used a portion of the cash for investing
activities, including $6 million for the purchase of property and
equipment and $8 million for payments for software and other
intangibles.
A substantial portion of the Company's cash and short-term
investments are either deposited in financial institutions
located in Puerto Rico or held by subsidiaries outside the United
States. These investments can be readily transferred to the
United States as required, subject to income and/or withholding
taxes upon repatriation. Taxes have already been provided for
the tax liability which would result.
The Company's financial reserves are represented by cash,
short-term investments and unused portions of credit facilities.
The Company believes its financial reserves and funds provided by
ongoing operations are adequate to meet future liquidity
requirements.
<PAGE> 8
PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
The Company commenced an action on July 2, 1990 in the U.S.
District Court in Boston against Borland International, Inc.
("Borland") (Civ. Action No. 90-11662-K), alleging infringement
of its copyrights in the Lotus 1-2-3 software program by
Borland's "Quattro" and "Quattro Pro" software products. The
action against Borland alleges that the "1-2-3 compatible modes"
of Quattro and Quattro Pro identically recreate substantial and
significant elements of 1-2-3's user interface, including its
menu structure and command choices. The action sought an
injunction preventing further sale of the infringing products and
seeks an award of damages, attorney's fees and costs. On July
31, 1992, the Court found that Borland has infringed the
Company's copyrights by copying the menu commands, menu command
structure, macro language and keystroke sequences of Lotus 1-2-3.
On June 30, 1993, the Court ruled in the Company's favor on all
of the remaining copyright issues in the case except the
Company's claim that the macro key reader for Quattro Pro for
DOS and Quattro Pro for Windows infringes the Company's
copyrights in 1-2-3. On August 19, 1993, the Court found that
the macro key reader for the Quattro Pro products has infringed
the Company's copyrights. On August 19, 1993, the Court enjoined
permanently Borland from developing, manufacturing or selling
versions of Quattro Pro, Quattro Pro SE and Quattro Pro for
Windows that include Borland's "1-2-3 emulation" interface
and/or its "Key Reader" facility and set a date in October of
1994 for a trial by jury to determine the amount of damages
Borland owes the Company because of its infringements. On
September 10, 1993, Borland appealed the Court's decisions that
it has infringed the Company's copyrights and the permanent
injunction pertaining to such products to the United States Court
of Appeals for the First Circuit. This appeal was argued before
the Court of Appeals on April 6, 1994.
A suit was filed against the Company on July 27, 1989, in
the U.S. District Court in New York City by REFAC International,
Ltd. ("REFAC"). The suit alleges that the Company has committed
patent infringement with respect to a U.S. patent issued in 1983
entitled "A Process and Apparatus for Converting A Source Program
Into An Object Program". The Court has determined to resolve
issues concerning validity of the patent before addressing the
alleged infringement. In July 1993, a trial was held on one of
those issues, the Company's claim that the patent is
unenforceable by reason of inequitable conduct in front of the
Patent Office. That issue is pending the judge's decision. If
the Company prevails on this issue, judgment will be entered on
its behalf. If it does not prevail, the Company intends to file
one or more motions for summary judgment on other grounds
claiming that the subject patent is invalid or unenforceable.
The Company believes that the claim of infringement is without
merit.
<PAGE> 9
ITEM 6:
Exhibits and Reports on Form 8-K
(a) Exhibits
Part I:
Exhibit 11* - Computation of Primary and Fully
Diluted Earnings per Share - page 10
Part II:
None.
(b) Reports on Form 8-K
None.
___________________
*filed herewith
SIGNATURES
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.
LOTUS DEVELOPMENT CORPORATION
(Registrant)
By /s/ Edwin J. Gillis
Edwin J. Gillis, Senior Vice
President of Finance and Operations
(Chief Financial Officer)
By /s/ Lyn L. Benton
Lyn L. Benton, Vice President
of Finance and Corporate Services
and Corporate Controller
(Principal Accounting Officer)
Date: May 16, 1994
<PAGE> 10
EXHIBIT 11
LOTUS DEVELOPMENT CORPORATION
COMPUTATION OF PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE
(in thousands, except per share data)
Three Months Ended
April 2, 1994 April 3, 1993
------------- -------------
Net income $21,341 $12,267
============= =============
Weighted average shares outstanding
during the period 45,290 41,963
Common stock equivalent shares 2,417 635
------------- -------------
Common and common stock equivalent shares
outstanding for purpose of calculating
primary net income per share 47,707 42,598
Incremental shares to reflect full dilution 156 --
------------- -------------
Total shares for purpose of calculating
fully diluted net income per share 47,863 42,598
============= =============
Primary net income per share $0.45 $0.29
============= =============
Fully diluted net income per share $0.45 $0.29
============= =============
