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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
X Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1993 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 04-2757702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Share Purchase Rights
(Titles of classes)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 26, 1994 was $3,027,666,709.
The number of shares outstanding of the registrant's common stock as of
February 26, 1994 was 45,468,282.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1993 Annual Report to Shareholders are incorporated by reference
in Parts II and IV. Portions of the definitive Proxy Statement to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be
held May 25, 1994 are incorporated by reference into Part III.
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LOTUS DEVELOPMENT CORPORATION
1993 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
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Item 1. Business........................................... 1
Item 2. Properties......................................... 12
Item 3. Legal Proceedings.................................. 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholders Matters....................... 14
Item 6. Selected Financial Data............................ 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 15
Item 8. Financial Statements and Supplementary Data........ 21
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............. 21
PART III
Item 10. Directors and Executive Officers of the Registrant. 22
Item 11. Executive Compensation............................. 23
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 23
Item 13. Certain Relationships and Related Transactions..... 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 24
Signatures .................................................... 27
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PART I
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Item 1. Business
GENERAL
Lotus Development Corporation (the "Company" or "Lotus") was incorporated in
Delaware in April 1982. The Company and its subsidiaries are engaged in the
development, manufacturing, marketing and support of applications software and
services that meet the evolving technology and business application requirements
of individuals, work groups, and entire organizations.
The Company's products and services consist primarily of desktop
applications, which include spreadsheets, word processing, graphics, end-user
database and personal information management software, and communications
products and services, which include Lotus Notes, cc:Mail and consulting
services. These products and services comprise the Company's "Working Together
strategy"; that strategy is defined by products which have common user
interfaces, which are integrated with each other, which work across multiple
platforms, and which help people work together more productively. The
centerpiece of this strategy is communications products which facilitate
workgroup computing and make the Company's desktop applications more productive
through group-enabling and ease-of-use features. The Company markets its
products in more than 80 countries worldwide and provides support services
through its consulting services group and its worldwide support centers.
Lotus' initial product, Lotus 1-2-3, was shipped in January 1983. 1-2-3 is
a software product which combines spreadsheet, database and graphing
capabilities into a single program for use with most personal computers.
According to industry reports, soon after its introduction, 1-2-3 became the
personal computer software industry's best selling business applications
software product. Since its release in 1983, 1-2-3 has been continually updated
to incorporate new technological advances, increased functionality, ease-of-use,
and compatibility with major operating system and hardware platforms. By the end
of 1993, the Company had shipped approximately 15 million units of 1-2-3.
The Company has added to its established spreadsheet products in an effort
to build a strong presence in each of the predominant desktop applications
categories. Lotus has developed or acquired presentation graphics (Freelance
Graphics), word processing (Ami Pro), end-user database (Lotus Approach) and
personal information management software (Lotus Organizer) products. In 1992,
the Company introduced SmartSuite, an integrated suite of the Company's desktop
applications.
The Company introduced Lotus Notes in 1990 and acquired cc:Mail, Inc. in
1991 to position itself to capitalize on the trend toward networked computing,
information sharing and organizational computing. Lotus Notes has been widely
acclaimed for its ability to enable workgroups to access, track, share, route
and organize information across diverse computing platforms and geographical
boundaries. Notes is the preeminent client-server product for developing and
deploying groupware applications, including those found in customer service,
sales and account management and product development. Since its introduction,
the Company has shipped approximately 600,000 seats of Notes. The combination of
Notes and cc:Mail, the leading LAN (Local Area Network)-based electronic mail
product, has established the Company as a leader in PC-based communications
software. The Company has also integrated Notes with its desktop products to
enable them to take advantage of workgroup computing environments.
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The Company's aim is to develop and market the best desktop applications
in the industry and to play a leadership role in the rapidly growing
communications market. Improving organizational productivity for its customers
in today's networked computing environment is a primary objective.
The Company has developed and adopted cross-product standards for most
Lotus products that enhance user value in areas such as user interface design,
database access methods, international character sets, networking, mail
enabling, customization and extensibility. When appropriate, the Company has
worked with other major software and hardware companies to develop these
standards. Furthermore, as networked computing environments become more
prevalent, the Company has focused on providing customers with communications
products capable of being used across a broad range of hardware systems and
operating environments. This provides customers with the ability to easily share
information among users, to more readily move users between computing platforms,
and to exercise greater flexibility in selecting computing environments. The
Company believes this approach is of significant value to customers because it
preserves their existing investment while allowing them to take advantage of new
technologies. The Company also believes this approach is necessary to
maintain its competitive position. See "Competition".
PRODUCTS AND SERVICES
Desktop Products
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SmartSuite
SmartSuite is the Company's suite of desktop applications. Each of the
applications in SmartSuite is closely integrated and shares common user
interface elements, including consistent menu structure, common Lotus
SmartIcons, a live status bar, consistent right mouse button access to product
functions and one click access to Help. SmartSuite was the first group-enabled
suite, which includes features that are mail-enabled and facilitate
collaborative work.
In September 1993, the Company shipped SmartSuite for Windows Release 2.1
which comprises Lotus' award-winning desktop applications, including Lotus
1-2-3, Lotus Ami Pro, Freelance Graphics, Lotus Approach and Lotus Organizer.
In November 1993, Lotus shipped SmartSuite for OS/2, the first complete
desktop suite of applications for IBM's OS/2 operating system. This suite
comprises 32-bit versions of 1-2-3, Ami Pro, Freelance Graphics and cc:Mail,
which exploit IBM's OS/2 Workplace Shell graphical environment and 32-bit
technology.
Products Under Development - The Company is currently developing enhanced
versions of SmartSuite for Windows and OS/2.
Spreadsheet Products
Lotus 1-2-3 is the Company's best selling product and the world's most
widely used spreadsheet. The Company's spreadsheets are designed to deliver
performance, usability, innovation, integration with other Lotus applications,
and workgroup enabling features. 1-2-3 is currently available across all of the
most popular hardware and operating platforms, including Windows, OS/2, DOS,
UNIX and Macintosh operating systems. As of December 31, 1993, versions of 1-2-3
were available in approximately 27 different languages.
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In June 1993, the Company shipped 1-2-3 for Windows Release 4.0, an
award-winning version that provides users with exceptional usability, increased
productivity and advanced workgroup capabilities. Lotus has designed this
product with intuitive access to all its functions and features to make it
easier to create, present and maintain spreadsheets. Some of these features
include in-cell editing, intelligent chart composition, drag-and-drop editing,
worksheet tabs and fill-by-example functionality. 1-2-3 for Windows Release 4.0
incorporates an array of powerful data analysis and programming tools to
maximize users' productivity. There are more than 120 new formula functions to
perform calendar, database, engineering, financial, logical, information lookup,
mathematical and statistical calculations. The product also features a
significantly improved cell engine, the computational foundation of the
spreadsheet, resulting in improved recalculation performance, and three-
dimensional worksheet capabilities. The new spreadsheet also includes a unique
Version Manager which allows individuals and workgroups to better manage what-if
analysis, track modifications to spreadsheets and effectively share spreadsheet
data.
1-2-3 for Windows Release 4.0 is the first Notes-enabled spreadsheet that
permits users to collaborate while working within the product. 1-2-3 for Windows
Release 4.0 has a common appearance and behavior with Lotus' other Windows
applications by sharing components such as SmartIcons, Smart Status bar and a
common user interface.
In February 1993, the Company shipped Improv for Windows, the first spread-
sheet for Windows that provides powerful ways to dynamically view and analyze
spreadsheet data, giving users the ability to examine business information in
many different ways not practical with conventional Windows spreadsheets. Improv
for Windows combines familiar spreadsheet components, such as cells and
formulas, what-if analysis, and business graphics with a multidimensional
structure and natural language formulas that are easy to understand. In June
1993, the Company shipped Improv for Windows Release 2.1, an upgrade which
delivers network-ready installation, external data access capabilities and
compatibility with the 1-2-3 for Windows Release 4.0 file format.
Lotus introduced 1-2-3 DOS Release 2.4 and Release 3.4 in 1992. These
upgrades of the leading DOS spreadsheet feature performance enhancements and
SmartIcons, while maintaining compatibility with earlier versions of 1-2-3. The
Company's DOS spreadsheets combine an interactive WYSIWYG ("what you see is what
you get") display and the ability to turn analyses into presentation quality
output with powerful analytic capabilities. In addition, these products feature
file viewing, Solver technology and spreadsheet auditing capabilities. 1-2-3 for
DOS Release 2.4 is designed to run on most IBM compatible PCs, while Release 3.4
is targeted for users with more powerful PCs and more advanced spreadsheet
requirements. Additional features offered with Release 3.4 include three-
dimensional spreadsheets, advanced relational database with access to external
data via the Company's DataLens product, and expanded memory support for
building larger spreadsheets.
In February 1993, Lotus shipped 1-2-3 for OS/2 Release 2.0. This version
of the spreadsheet allows users to exploit OS/2's Workplace Shell graphical
environment and 32-bit technology, providing users with significant usability
and productivity gains through features such as drag-and-drop editing,
faster navigation, quicker screen refresh and multi-threading. 1-2-3 for OS/2
delivers three-dimensional capabilities, Solver and BackSolver advanced goal-
seeking tools, and external data access capabilities through DataLens.
Products Under Development - Several enhanced spreadsheet products
for the Windows, DOS and OS/2 operating platforms are currently under
development and are expected to ship in 1994.
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Presentation Graphics Products
The Company's presentation graphics product, Freelance Graphics, is
designed to facilitate the creation and display of graphical information,
including display of data generated or manipulated by Lotus 1-2-3. Freelance
Graphics provides a comprehensive set of graphics capabilities including bullet
charts, flexible drawing and editing tools, powerful charting capability, and
the ability to quickly and easily create presentations. Lotus currently markets
Windows, OS/2 and DOS versions of Freelance Graphics.
In February 1993, the Company began shipping Freelance Graphics for Windows
Release 2.0. This major release enhances the product's overall usability and
builds on the success of the earlier version, which delivered such easy to use
and innovative features as an on-line tutorial, dozens of pre-designed
SmartMaster presentation templates and page layouts, and an unique fill-in-the
blank approach to creating presentations. Freelance Graphics for Windows Release
2.0 also delivers tight integration with other Lotus applications and innovative
new multimedia screenshow capabilities.
In February 1993, the Company also began shipping Freelance Graphics for
OS/2 Release 2.0. This version brings the features of Freelance Graphics for
Windows to the OS/2 operating platform. In addition to SmartMasters and other
presentation management features, Freelance Graphics for OS/2 provides complete
charting capabilities, extensive drawing and editing tools and seamless
integration with 1-2-3.
The Company also sells Freelance Graphics for DOS Release 4.0. Key features
include a graphical WYSIWYG working environment, a customized outliner, enhanced
presentation management tools, charting capabilities and master presentation
backgrounds.
In March 1992, the Company began shipping SmartPics for Windows, an
extensive clip-art library with browser for Windows applications. With more than
2,000 pieces of quality artwork, SmartPics is designed to provide users with the
easiest and fastest means for adding memorable visuals to Windows Documents and
presentation materials.
The Company offers versions of Freelance Graphics in 10 different
languages.
Products Under Development - The Company is currently developing enhanced
versions of its Windows and OS/2 based presentation graphics products.
Word Processing Products
The Company's principal product offering in the word processing market,
Lotus Ami Pro, provides desktop publishing functionality and graphics
incorporation for personal computers and area local networks.
Ami Pro for Windows Release 3.01, the Company's award-winning word
processing product, combines traditional features, such as a thesaurus and
interactive drawing and charting capability, with advanced functionality and
ease-of-use. Ami Pro pioneered the use of SmartIcons for single-click access to
menu commands and includes fast format, drag-and-drop text editing, automated
envelope printing, document and style sheet viewers, and a clean screen option.
Working from Ami Pro for Windows, users can fully realize the power of the Lotus
suite of Windows products, sharing and manipulating functionality and data
across applications.
In November 1993, Lotus introduced Ami Pro 3.0 for OS/2 which takes
advantage of OS/2's multi-threading power and delivers seamless integration with
the OS/2 Workplace Shell. Ami Pro 3.0 for OS/2 supports IBM's OS/2 programming
language and features integration between system and application macros.
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The Company offers 24 different language versions of its word processing
products.
Products Under Development - The Company is currently developing
enhanced versions of Ami Pro for the Windows and OS/2 operating environments.
Database Management Products
In June 1993, Lotus acquired Approach Software Corporation, a developer of
end-user relational database applications for the Windows environment. Lotus
Approach for Windows makes it easy to create stand-alone applications and manage
and report on information. The product, based on client/server technology,
comprises three components: a graphical user interface, a relational layer, and
a series of data-access engines called PowerKeys. PowerKeys enable users to
connect directly to Oracle SQL, Microsoft and Sybase SQL Server, DB2, FoxPro,
Paradox, dBase and ODBC compliant databases. This feature provides users with
quick access to data anywhere on a network without any conversion or
intermediary file, and the ability to mix data from multiple file formats into
single form or report.
Products Under Development - The Company is currently developing an enhanced
version of Approach for Windows, which is expected to ship during 1994.
Personal Information Management Products
Lotus Organizer is a Windows-based personal information management product
which employs Lotus' core Windows product features, such as SmartIcons and mail-
enabling. Lotus Organizer makes integrated calendaring, daily planning and
organization, time management, referencing and updating contact lists, and
random note taking easy. The Company offers 16 different language versions of
Lotus Organizer.
Organizer's intuitive personal calendaring is also the foundation of Lotus'
group calendaring and scheduling strategy. In August 1993, Lotus introduced
Organizer-based group scheduling for cc:Mail users. Group scheduling is designed
to allow workers in different groups, departments or locations to automate and
expedite the process of collaborative scheduling and communications, thereby
improving organizational productivity. Future versions will support Notes and
other mail systems.
Products Under Development - Enhanced versions of Lotus Organizer are currently
under development and are expected to ship in 1994.
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Communications Products and Services
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Lotus' communications products include Notes, the premier workgroup
computing product, and cc:Mail, the leading LAN-based electronic mail system.
Both Notes and cc:Mail products take advantage of network computing to boost
organizational effectiveness and improve communications across multiple network
operating systems, hardware platforms and operating systems. They also provide
the underlying messaging and shared document database layers for the deployment
of enterprise-wide, shared information applications. The Company's consulting
services group develops solutions and offers educational services to meet the
information management needs of its clients. These services are primarily
targeted at communications-based applications.
Lotus Notes
Notes enables users to create, store, route and access shared information
across networked personal computers. The product addresses the needs of
workgroups, such as those in corporate and government environments, to share
information simultaneously at different locations and across different
technologies. It is used for three basic categories of applications:
disseminating information, such as news or reference materials; routing
information, such as mail messages or forms; and interactive applications, such
as discussions, project control or tracking systems. Customer installations
range from multinational companies, installing several thousand copies of Notes,
to very small workgroups focused on solving a particular business problem.
In May 1993, the Company shipped Notes Release 3.0, a significantly updated
version of the industry standard workgroup computing platform. Notes Release
3.0, which is available on the Windows, OS/2 and Macintosh platforms, features
cross-platform support and new ease-of-use features, including full-text search,
Automatic Document Versioning, Lotus SmartIcons, and a graphical install
program. Notes Release 3.0 also provides improved integration with desktop
applications from Lotus and other software developers.
Notes Field Exchange (Notes/FX), an integrating technology developed by
Lotus, allows users to exchange data between Notes and desktop applications,
providing the ability to bidirectionally share field level information. This
integration offers the ability for Notes and desktop tools to function as if
they were designed to be part of the same application. Notes/FX allows desktop
applications to function as "alternative editors" within the Notes environment.
It improves organizational productivity through group collaboration and givers
users the ability to share information from applications with other users.
The Company has developed companion products with partner companies to
extend the capabilities of Notes. In April 1993, Lotus introduced Lotus Notes:
Document Imaging (LN:DI) Release 2.0, a product which allows users to scan
textual and graphical documents into Notes so that they may be searched and
edited. This release provides support for color and grayscale document images
and enables users to scan, view and print color images. Additional companion
products, including Lotus Notes Optical Character Recognition (OCR) server and
Lotus Notes In-bound Fax Gateway, shipped in 1992. These imaging, OCR and FAX
products allow users to integrate into Notes the vast amount of business
information previously only accessible in paper form.
The Company has made a significant investment to develop international
versions of Notes. As of December 31, 1993, Notes was available in 12 different
languages.
Products under development: Notes products currently under development include
enhanced versions, companion products and versions extending their use to
additional operating environments.
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cc:Mail
cc:Mail is a comprehensive LAN-based electronic mail and messaging system.
cc:Mail is available on more platforms today than any other mail system,
including local and remote DOS, Windows, OS/2, Macintosh and UNIX, as well as
all major LANs. The product provides transparent connectivity to all major
public and private electronic mail systems and facsimile machines worldwide. It
will also support wireless computing and other mobile platforms. By the end of
1993, cc:Mail products were being used by more than 4.3 million users worldwide,
and versions were available in 19 different languages.
The Company believes electronic mail represents a substantial opportunity
in the software industry over the next several years. cc:Mail products, which
are tightly integrated with the Lotus suite of products, put Lotus in a position
to capitalize on the anticipated growth of electronic mail in networked
computing environments. The Company also believes that because electronic mail
has the potential for greater desktop penetration than any other application,
cc:Mail products provide Lotus with an added opportunity to introduce customers
to its entire suite of integrated products.
Products under development - cc:Mail products currently under development
include enhanced versions, companion products and versions extending their use
to additional operating environments.
Consulting Services
The Company offers worldwide consulting services to its customers to
assist them in utilizing their computing resources effectively in creating
computing architectures that allow information to move freely and rapidly across
organizational boundaries. The Company provides complete business solutions that
enable customers to leverage their existing computing investment while taking
advantage of emerging technologies. The ability to provide a total solution for
customers enables them to realize greater organizational productivity.
The Company offers a variety of services to its customers, including
complete business needs analysis, comprehensive resource evaluation, project
management for large-scale Notes deployment, system requirements analysis, and
network design assistance. In addition, the Company offers extensive customized
Notes consulting, including rapid prototyping of Notes applications, the design
and development of tailored Notes applications, and training and education.
Mobile Computing
Lotus views communications as the driving force of mobile computing. The
Company believes mobile users will be able to exploit the strengths of Notes and
cc:Mail to break communications barriers while traveling. In June 1993, Lotus
introduced cc:Mail Mobile for the HP 100LX palmtop computer, the first release
of cc:Mail designed specifically for mobile computing environments. This product
offers wireless functionality and unparalleled portability for cc:Mail users.
Products Under Development - Lotus intends to extend Notes and cc:Mail to a
variety of mobile computing technologies such as paging, two-way wireless and
cellular telephony, and to provide links to value-added services.
No assurance can be given that any of the development projects referred to will
be successful or that announced shipping dates for new products will be met.
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PRODUCT DEVELOPMENT
The Company's product development activities are focused around delivering
organizational productivity to its customers with a suite of desktop
applications -- spreadsheets, graphics, word processing, end-user database and
personal information management software products -- and communications
products -- Notes and cc:Mail -- that capitalize on the advantages of a
networked workgroup computing environment. Key development objectives of the
Company include tightening integration across applications, furthering the
networking and communications capability of all of its products, making
applications more customizable, and introducing more of its products to the
growing portable computing market. Furthermore, the Company continues to invest
substantial resources to improve its quality assurance processes and
documentation.
Significant research and development is applied to both enhancement of
existing products and the development of new technologies. Strategic
acquisitions and relationships have focused on product line extensions and new
market opportunities in the areas of end-user database, personal information
management, word processing and communications products.
Lotus' U.S. development organizations are located in Cambridge,
Massachusetts; Atlanta, Georgia; Mountain View, California; and Redwood City,
California. The Company supplements its U.S. based development activities with
product development organizations in Ireland, England, Singapore and Japan which
primarily produce localized versions of Lotus products and provide third-party
support for existing products. Foreign development efforts are aimed at
modifying products to permit operation in different natural languages, adding
features which are tailored to local markets, and supporting hardware platforms
and operating systems that are prevalent outside the U.S.
During the years ended December 31, 1993, 1992 and 1991, research and
development costs charged to operations were $126.9 million, $118.3 million and
$116.6 million. The Company also charged $19.9 million to 1993 operations for
purchased research and development in connection with the acquisition of
Approach Software Corporation. Additionally, the Company capitalized internal
software development costs and acquired technology intangibles of $32.8 million,
$43.6 million and $60.2 million in 1993, 1992 and 1991.
New product development schedules are difficult to predict, because software
development, quality assurance testing and debugging are complex processes that
often take longer than expected. Accordingly, although the Company estimates
the shipment dates of proposed new products for internal purposes, such
estimates are subject to frequent adjustment based on the Company's own periodic
assessments of its progress in the development process. The Company believes
that its experience regarding new product schedules and introductions has been
comparable with that of other companies in the software industry.
MARKETING AND SALES
Lotus sells its products through four principal channels of distribution:
the reseller channel, directly to end users, through original equipment
manufacturers (OEMs), and through Lotus business partners, including value added
resellers (VARs).
The reseller channel is Lotus' principal means of distribution and
consists of distributors and resellers who together represent approximately
8,000 sales locations in North America. To facilitate sales through this channel
and provide a high level of sales support and product coverage to resellers and
large corporate accounts, the Company has built a field sales organization
comprising dedicated account teams to manage these business relationships.
The Company sells some of its products and services through its own
direct sales representatives. Specialized Lotus sales forces have been created
to generate large volume sales to strategic accounts while consulting services
are sold through a separate consultant sales force. The Company also engages in
direct marketing programs focused on end-users, primarily for upgrade product
versions.
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Lotus has an OEM sales channel to sell its products to PC manufacturers.
Lotus' aim is to seed new products and technology to first time users and to PC
buyers who may not have otherwise purchased these products on a standalone
basis.
The Company has also established a network of business partners who provide
networked computing solutions and services to their customer bases. As of
December 31, 1993, the Company had arrangements with more than 1,200 business
partners worldwide, of which approximately 1,000 were located in North America.
At December 31, 1993, Lotus maintained 91 sales offices throughout the
world. In North America, there were 39 sales offices with a sales and sales
support staff of approximately 600. The Company also has a direct presence in
countries throughout Europe, South America, Central America, Asia, Africa, and
the Pacific Rim. Lotus maintained 52 foreign sales offices in 36 countries with
a sales and sales support staff of approximately 525. In a manner similar to the
U.S. market, the Company sells its products internationally primarily through
resellers and distributors. In countries where the Company has not established a
presence of its own, it sells its products through authorized distributors. In
addition, the consulting services business employed approximately 200
consultants worldwide at December 31, 1993.
Lotus does not believe that the loss of any distributor would have a
materially adverse effect on its operations. Lotus offers various credit terms
to its resellers and distributors that it believes are typical for the personal
computer software industry. The Company's practice is to ship its products
promptly upon receipt of purchase orders from its customers and, as a result,
backlog is not meaningful. Two of the Company's distributors, Ingram Micro and
Merisel, accounted for 12% and 11% of worldwide sales in 1993. No one customer
was responsible for more than 10% of worldwide sales in 1992 or 1991.
The Company continues to invest in its worldwide customer support
organization, which now numbers more than 850 people. The Company's aim is to
manage globally its support organization to provide consistently high quality
support around the world. Support and maintenance is an important part of Lotus'
product offerings and will continue to play a key role in delivering
organizational productivity to the Company's customers.
Additional information with respect to foreign and domestic operations
and export sales may be found in Note M on page 18 of the Financial Section of
the Annual Report to Shareholders (Exhibit 13 to this Form 10-K), which Note is
incorporated herein by reference.
MANUFACTURING AND DISTRIBUTION
The Company has principal manufacturing and distribution facilities in
North Reading, Massachusetts; Dublin, Ireland; and Singapore. The Massachusetts
facility manufactures products sold in North America. During 1993, the Company
closed its Puerto Rican manufacturing facility and transferred those operations
to North Reading. The Ireland facility principally manufactures products that
are sold by the Company's European, South American, Central American, African
and Middle Eastern subsidiaries and branches. In 1994, the Company will transfer
the manufacturing of products for the South American and Central American
markets to North Reading. The Singapore facility manufactures products that are
sold by the Company's Japanese, Pacific Rim, and other Asian subsidiaries and
branches.
The Company's manufacturing operations involve the duplication of
diskettes, assembly of purchased parts and packaging. The chief raw materials
and components used include diskettes and printed text. Raw materials for the
Company's products are in adequate supply and available from a number of
alternative suppliers. At present, the Company does not anticipate difficulty in
securing the raw materials it will require in
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connection with its operations. The Company believes that its inventories are
adequate to meet the expected demand.
COMPETITION
The personal computer industry, in both the hardware and software segments,
has been subject to rapid change, which can be expected to continue. The
applications software business is highly competitive. The Company's products
compete with software products offered by major independent software companies,
such as Microsoft, WordPerfect, Borland, and Software Publishing. In addition,
certain products offered by the Company are directed at operating environments
or business applications in which these companies were early entrants and enjoy
significant product acceptance and market share.
As consolidation in the software industry continues, the Company believes
that it must offer an integrated suite of desktop applications in order to be
competitive. Furthermore, the Company expects that in the future a greater
proportion of desktop revenues will be derived from suite revenues.
The principal considerations for purchasers of personal computer
applications software include product reliability and performance, compatibility
with presently owned hardware and software, ease-of-use, functionality, price,
availability across multiple operating environments, network capability,
workgroup enabling, degree of integration across applications, vendor
reputation, and quality of support and training services.
Competition in the Company's industry has intensified with greater
marketing program activities, increased discounts, low-priced upgrades and
special prices on introductory product offers and multi-product purchases.
Competitors' marketing efforts also include price offers targeted at Lotus
customers through direct mail telemarketing and in-channel promotions.
The Company also competes with other companies in the personal computer
applications software market for resellers and other product distribution
channels. In addition to the factors listed above, the principal considerations
for resellers and distributors in determining which products to offer include
profit margins, marketing programs, product support and service, and credit
terms.
PRODUCT PROTECTION
The Company regards its applications as proprietary and attempts to
protect it by relying upon copyrights, patents and common law safeguards,
including trade secret protection, as well as restrictions on disclosure and
transferability that are incorporated into its agreements with other parties. In
cases where, despite these protections, others have unlawfully attempted to copy
aspects of the Company's products or otherwise obtain information which the
Company regards as proprietary, the Company has taken action to enforce its
legal rights. Moreover, the Company actively seeks to enforce its intellectual
property rights in countries around the world against the unauthorized
duplication of its products by end-users and resellers. See "Legal Proceedings".
10
<PAGE>
EMPLOYEES
At December 31, 1993, the Company employed 4,738 people, of which 1,678
were outside the United States. Of the total, 1,151 were in product research and
development, 2,560 in sales, marketing, and support, 492 in manufacturing, and
535 in finance, information systems and administration. As necessary, the
Company supplements its regular employees with temporary and contract personnel.
The Company believes that its ability to attract and retain qualified employees
is an important factor in its growth and development and its future success. To
date, the Company has been successful in recruiting and retaining sufficient
numbers of qualified personnel to conduct its business successfully. None of the
Company's employees is subject to a collective bargaining agreement, and the
Company believes that its employee relations are favorable.
11
<PAGE>
Item 2. Properties
The Company has two principal office facilities located in Cambridge,
Massachusetts. The Lotus Development Building (260,000 sq.ft.) houses the
Company's corporate domestic sales and marketing organizations in addition to
its corporate headquarters' staff. The building is occupied under lease
agreements which commenced in 1985 and run for a period of ten years with
options to renew for two five-year periods.
The Company's Rogers Street facility (265,000 sq.ft.) is located adjacent to
the Lotus Development Building in Cambridge. The building is owned by the
Company and is occupied by the research and development organization. During
1993, the Company commenced a construction project to expand the building by
approximately 115,000 square feet. This project is expected to be completed by
mid-1995.
In 1992, the Company relocated its manufacturing, distribution and
warehousing operations, as well as its customer support and service organization
from Cambridge to two leased buildings (350,000 sq.ft.) in North Reading,
Massachusetts. The leases, which commenced in 1992, run for a period of ten
years with options to renew for two five-year periods. The majority of the
vacated Cambridge space was leased, and the leases expired concurrently with the
relocation. The one owned manufacturing facility that was vacated in the move
was sold in January 1994.
In 1993, the Company also vacated 87,000 square feet of office space located
in two separate buildings in Cambridge. One building, where the Company leased
approximately 41,000 square feet, was vacated as a result of the sale of its One
Source business. The lease expired approximately one month subsequent to the
sale of the One Source business. The remaining 46,000 square feet in the other
building was sublet through the expiration date of the lease in 1995. The
Company also leases approximately 30,000 square feet of warehouse and
distribution space in one building in Cambridge. In 1993, the Company began
leasing approximately 35,000 square feet of office space in Austin, Texas which
has been used to expand its customer support and service organization.
The Company also leases manufacturing and/or office facilities in Dublin,
Ireland; Staines, England; Tokyo, Japan; and Singapore. The two European
facilities have lease terms through 1994 and 1999, respectively, with options to
renew through 2017 and 2014, respectively. The Japan and Singapore facilities
have lease terms which expire in 1997 and 1994, respectively. The Company also
maintains 91 sales offices worldwide, including those in North America, Europe,
Central and South America, Asia and the Pacific Rim.
12
<PAGE>
Item 3. 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.
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.
Item 4. Submission of Matters to a Vote of Security Holder
No matters were submitted to a vote of security holders during the fourth
quarter of 1993.
13
<PAGE>
- - ------------------------------------------------------------------------------
PART II
- - ------------------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Information with respect to this item may be found in the section captioned
"Quarterly Results of Operations" appearing on page 20 of the Financial section
of the Annual Report to Shareholders for the year ended December 31, 1993. Such
information is incorporated herein by reference.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes thereto
appearing elsewhere in this Report.
<TABLE>
<CAPTION>
Five-Year Summary of Selected Financial Data
(In thousands, except per
share data)
1993 1992 1991 1990 1989
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $981,168 $900,149 $828,895 $692,242 $556,033
Income before income taxes
and cumulative effect of
change in accounting principle 101,769 120,005 67,686 52,826 84,951
Net income 55,535 80,403 33,116 23,254 67,961
Net income per share 1.24 1.87 0.75 0.54 1.61
Total assets 905,345 763,444 725,537 656,807 604,277
Cash and short-term
investments 416,693 293,094 224,810 245,386 274,977
Working capital 398,643 296,166 207,670 226,961 299,958
Long-term debt 50,000 108,740 139,000 160,000 202,440
Stockholders' equity 528,391 399,438 323,113 309,439 278,305
</TABLE>
Notes to Selected Financial Data:
(1) 1993 amounts reflect a charge to operations of $19.9
million, or $0.45 per share, in the second quarter for purchased
research and development related to the Approach Software Corporation
acquisition.
(2) 1992 amounts include pre-tax gains on the sale of the
Company's investment in Sybase, Inc. of $34.6 million in the third
quarter and $15.1 million in the fourth quarter with a total gain
for the year of $49.7 million on a pre-tax basis and $33.3 million,
or $0.77 per share, on an after-tax basis. 1992 amounts also include
a restructuring charge in the fourth quarter of $15 million on a pre-tax
basis and $10.1 million, or $0.23 per share, on an after-tax basis.
(3) 1991 amounts include a fourth quarter restructuring charge of
$23 million on a pre-tax basis and $18.6 million, or $0.42 per share,
on an after-tax basis.
(4) 1990 amounts reflect a charge to operations of $53 million,
or $1.23 per share, in the fourth quarter for purchased research and
development related to the Samna acquisition.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
As an aid to understanding the Company's operating results, the table
below indicates the percentage relationships of income and expense items
included in the Consolidated Statements of Operations for the three years ended
December 31, 1993 and the percentage changes in those items for the two years
ended December 31, 1993.
<TABLE>
<CAPTION>
Items as a percentage
Percent changes year to year of net sales
1993-92 1992-91 Income and expense items 1993 1992 1991
- - --------------------------------------------------------------------------------------
<C> <C> <S> <C> <C> <C>
9% 9% Net sales 100.0% 100.0% 100.0%
1% 15% Cost of sales 20.6% 22.2% 21.0%
11% 7% Gross margin 79.4% 77.8% 79.0%
- - --------------------------------------------------------------------------------------
Expenses:
7% 1% Research and development 12.9% 13.1% 14.1%
9% 14% Sales and marketing 47.2% 47.1% 44.7%
1% (1%) General and administrative 7.1% 7.7% 8.4%
-- -- Other (income)/expense, net (A) 1.8% (3.4%) 3.6%
17% (1%) Total expenses 69.0% 64.5% 70.8%
- - --------------------------------------------------------------------------------------
Income before income taxes
and cumulative effect of
(15%) 77% change in accounting principle 10.4% 13.3% 8.2%
17% 61% Provision for income taxes 4.7% 4.4% 3.0%
- - --------------------------------------------------------------------------------------
Income before cumulative effect
(31%) 86% of change in accounting principle 5.7% 8.9% 5.2%
Cumulative effect of change
-- (100%) in accounting principle -- -- 1.2%
(31%) 143% Net income 5.7% 8.9% 4.0%
- - --------------------------------------------------------------------------------------
Per share:
Income before cumulative effect
(34%) 91% of change in accounting principle $1.24 $1.87 $0.98
Cumulative effect of change
- - -- (100%) in accounting principle -- -- 0.23
(34%) 149% Net income per share $1.24 $1.87 $0.75
======================================================================================
</TABLE>
Note (A): 1993, 1992 and 1991 amounts include significant non-recurring income
and expense items which are set forth in Footnote J to the financial statements.
15
<PAGE>
RESULTS OF OPERATIONS
1993 compared to 1992
......................
Revenues
In 1993, Lotus continued to execute its "Working Together"
strategy. That strategy is defined by products which have common
user interfaces, which are integrated with each other, which work
across multiple platforms and which help people work together
more productively. The centerpiece of this strategy is
communications products which facilitate workgroup computing and
make the Company's desktop applications more productive through
group-enabling and ease-of-use features.
Lotus' worldwide revenues increased 9% to $981 million in
1993. This revenue increase comprises distinctly different growth
rates for desktop applications as compared to communications
products and services. Desktop revenues were essentially
unchanged in 1993, while communications related revenues grew
approximately 55%. Consequently, revenue from communications
products and services continues to represent a growing proportion
of total revenue.
Desktop Applications Revenue
Lotus' desktop applications include spreadsheets, word
processing, graphics, end-user database and personal information
management software products. Revenues from desktop applications
were 79% of total revenue in 1993, as compared to 84% in 1992.
In 1993, users continued to migrate from DOS-based applications
to Windows-based applications. Lotus'desktop revenue reflects
this trend as Windows revenues more than doubled from the prior
year, while DOS-based revenues, particularly spreadsheets,
declined approximately $215 million.
The desktop applications market also experienced the
full-fledged emergence of desktop "suites" in 1993. A few major
software publishers have combined and integrated their standalone
applications into attractively-priced suites of Windows products.
Lotus' competitive offering in the suite category, SmartSuite,
represented one-third of total Windows desktop applications revenue
in 1993. The Company believes that SmartSuite revenues were driven by
growing market demand for desktop suites, its highly-rated
individual applications, particularly 1-2-3 for Windows, and the
high degree of integration among the products in its suite.
The Company believes that sales of SmartSuite generate greater revenue
per user desktop and do not significantly reduce gross margins,
despite imputed lower sales prices per application, because users of
the suite purchase applications that they would not otherwise purchase
on a standalone basis.
While competition for market share remains intense for
Windows desktop applications and prices have declined year over
year, pricing remained relatively stable during the second half
of 1993. The Company anticipates that downward pressure on
16
<PAGE>
pricing for Windows applications will continue in 1994.
Significant new Windows desktop products released in 1993
include 1-2-3 for Windows Release 4.0, Improv Release 2.0,
Freelance Graphics for Windows Release 2.0, Organizer Release 1.1
and SmartSuite for Windows Release 2.0. In addition, in June
1993, the Company acquired Approach Software Corporation,
developers of end-user relational database applications for the
Windows environment. The Company also released 1-2-3 for OS/2
Release 2.0, Freelance Graphics for OS/2 Release 1.0, Ami Pro for
OS/2 Release 3.0 and an OS/2 SmartSuite during 1993.
Communications Products and Services Revenue
Communications products and services include Notes, cc:Mail and
consulting services. Revenues from communications products and
services increased substantially, reflecting the growing momentum
behind workgroup computing, and represented 19% of total revenue
in 1993 as compared to 13% in 1992.
Revenue from Notes, the Company's innovative workgroup
computing product, more than doubled over the prior year.
Contributing to Notes growth were market related factors, such as
an expanding client-server market and a greater availability of
networked and portable computing applications. Revenue gains were
also driven by the shipment of Notes 3.0 in May 1993, the
Company's broadening of distribution through its network of
distributors and resellers and an expansion of the number of
business partners selling and developing applications for Notes.
New versions of Notes 3.0 were shipped for the Windows, Macintosh
and OS/2 platforms in May 1993.
cc:Mail revenues grew considerably, primarily on the
strength of new products for the Windows and OS/2 platforms and
the continued growth of the market for PC-based networked
electronic mail systems. Consulting services revenue also
increased significantly resulting from internal growth and from
the acquisition of several consulting businesses.
International Revenue
Revenues outside the United States, most of which are
collectible in foreign currencies, grew by 12% during 1993 and
accounted for 51% of worldwide revenues in 1993 and 49% in 1992.
International sales growth was primarily propelled by sales
gains in the United Kingdom, Germany, Italy and the Asia Pacific
region. The impact of foreign currency fluctuations on
international revenues was insignificant in 1993 as the impact
of the strengthening U.S. dollar in Europe was neutralized by
the weakening of the U.S. dollar in Japan. Foreign currency
fluctuations did not significantly impact revenue in 1992.
Expenses and Profit Margins
Gross margin as a percentage of sales increased to 79% in 1993
compared with 78% in 1992. The rate was favorably affected by
17
<PAGE>
the achievement of manufacturing efficiencies resulting from
higher production volumes, the closing of the Company's Puerto
Rican manufacturing plant and material cost reductions. The
margin improvement is 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 Company continues to make investments in research and
development to maintain a strong competitive desktop position and
to continue to improve its communications products. Research and
development expenses increased 7% to $127 million in 1993,
reflecting a constant level of desktop development spending year
over year and significantly higher spending associated with
development and enhancement of the Company's communications
products and working together technology. Historically, the
primary activities of the development organizations outside the
U.S. were to translate and localize products for international
markets. In the current year, international development
organizations initiated efforts to develop products in parallel
with the development in U.S. with the goal of achieving
simultaneous release of various language versions of new
products. Going forward, the Company plans to continue this
effort in 1994 and expects to reach its goal within the next few
years.
Sales and marketing expenses increased 9% to $463 million in
1993 driven by the Company's substantial 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.
The increase is also attributable to the Company's continued
efforts to attract users transitioning from DOS to Windows, the
expansion of worldwide support organizations and the growth of
the consulting services business.
General and administrative expenses increased 1% to $70
million in 1993. The relatively minor change reflects the
Company's continued efforts to control infrastructure and fixed
costs.
Despite declining interest rates, interest income was higher
in 1993 because of higher average cash and short-term investment
balances. Interest expense declined primarily due to scheduled
repayments of long-term debt obligations.
In June 1993, the Company acquired Approach Database Corporation. The
purchase price consisted of approximately $23 million of cash consideration
and assumed liabilities. A significant portion of the purchase price was
allocated to purchased research and development, resulting in a $19.9 million
charge to the Company's 1993 operations. See Note K of Notes to
Consolidated Financial Statements. This charge, which is reflected in other
income and expense, is not deductible for tax purposes. Upon the acquisition,
the Company initiated substantial development projects designed to make
Approach products more competitive in a rapidly changing environment. These
development efforts are focused on improving the user interface, conforming
the technology to the Company's cross-product standards, and integrating the
technology into the Company's suite of desktop applications and are expected
to involve extensive rewriting of the code and the addition of significant new
product features. The Company expects to invest at least $20 million through
1996 to complete and continue the development of the ultimate technology using
the purchased research and development.
Earnings for 1993, excluding the charge for purchased research and
development, were $75.4 million or $1.69 per share. Other income and expense
in 1992 included a pre-tax gain of $49.7 million from the sale of the
Company's investment in Sybase, Inc., offset by a restructuring charge of $15
million. Earnings for 1992, excluding the gain and the restructuring charge,
were $57.2 million or $1.33 per share.
18
<PAGE>
The effective tax rate for 1993, excluding the effect of a
non-deductible charge for purchased research and development
related to the acquisition of Approach, was 38% compared with 33%
in 1992. In 1993, the Company adopted Statement of Financial
Accounting Standard No. 109, Accounting for Income Taxes, ("FAS
109") retroactive to January 1, 1991. The increase in the tax
rate in 1993 reflects the effect of the loss of tax benefits
associated with the closing of the Company's Puerto Rican
manufacturing plant, a one percentage point increase in the U.S.
federal statutory tax rate and the impact of the statutory rate
change on deferred taxes in accordance with FAS 109.
Looking forward, the Company expects the dominant 1993
trends to continue in 1994. The communications business is
expected to grow significantly and will continue to represent a
greater proportion of total revenue. The Company also
anticipates that sales of suites will continue to displace sales
of standalone applications as the market demand for integrated
desktop applications continues to grow. As a result, SmartSuite
revenues are expected to account for a greater percentage of
Windows desktop revenue. While Windows desktop revenues are
expected to increase in 1994, these gains will be partially
offset by further declines of DOS-based revenues. The Company
believes that the magnitude of the decline in DOS-based revenues
in 1994 should not be as dramatic as that experienced in 1993 as
DOS-based revenues continue to represent a smaller share of
overall revenue.
1992 compared to 1991
The 9% increase in worldwide revenue in 1992 compared to 1991
reflected strong volume growth across all desktop applications
for the Windows platform and in communications products and
services, partially offset by the loss of $135 million of
DOS-based revenues. New releases in 1992 included 1-2-3 for
Windows Release 1.1, 1-2-3 Release 2.4 and 3.4 for DOS, and Ami
Pro Release 3.0. Revenues from communications products and
services doubled in 1992 and grew to 13% of total revenue.
International revenues grew by 6% during 1992 and accounted for
49% of worldwide revenue in 1992 compared with 51% in 1991.
Gross margins declined by 1% from 1991 to 1992, attributable
to higher amortization charges for software and other intangibles
and lower selling prices. This decline was partially offset by
more cost effective product packaging and the achievement of
favorable manufacturing efficiencies.
The growth in operating expenses in 1992 reflected higher
sales and marketing spending to gain market share during a
critical period of user migration from DOS to Windows. Spending
increases resulted from advertising and marketing campaigns to
promote the Company's Windows-based products, expansion of
customer support organizations and growth in the consulting
services business. Research and development expenses were
essentially unchanged from 1991 as steps were initiated in 1992
to increase the effectiveness of development spending through
19
<PAGE>
improved focus of development activities, reduced headcount and
lower infrastructure costs.
In order to implement plans to improve its cost structure, the
Company recorded restructuring charges of $15 million in 1992 and
$23 million in 1991. The 1992 restructuring charge related
principally to plans initiated by the Company in the fourth quarter
to close its Puerto Rican manufacturing subsidiary and to reorganize
and centralize its North American and European operations related to
logistics, distribution and support. These plans resulted in the
establishment of approximately $9 million of reserves related to
employee separations and $6 million of reserves related to facilities
consolidations, asset retirements, relocation and other costs.
Substantially all of the amounts accrued were paid during 1992. As
a result of these restructuring activities, the Company maintained
gross margins in light of declining sales prices through the reduction
of excess manufacturing capacity, improved distribution and selling
efficiency in Europe, and lowered customer support costs in North
America.
The 1991 restructuring charge related principally to plans
introduced in December to adjust spending growth in research,
development, sales and marketing to overall revenue growth. These
plans resulted in the establishment of approximately $12 million
of reserves related to employee separations and $11 million of
reserves related to facilities consolidations, asset retirements,
relocation and other costs. During 1992, these reserves were fully
utilized. Cash expenditures were approximately $20 million for
employee-related activities and facility-related actions. The Company
also recorded noncash write-offs of $3 million related to leasehold
improvements on vacated facilities. As a result of these restructuring
activities, the Company streamlined its North American marketing
organization, focused its software development projects on market
opportunities, and outsourced certain administrative activities.
During 1992, the Company sold its investment in Sybase, Inc.
for $77.7 million, resulting in a pre-tax gain of $49.7 million
which is included in other income and expense. After tax, the
gain was $33.3 million or $0.77 per share.
Interest income was lower in 1992 because of declining
interest rates. Interest expense declined primarily due to
scheduled repayments of long-term debt obligations.
The effective tax rate was 33% in 1992 compared to 36.3% in
1991. Most of the improvement resulted from the utilization of
research and development credit carryforwards.
Liquidity and Capital Reserves
Cash and short-term investments increased $124 million to $417
million at December 31, 1993. The two primary sources of cash
flow in 1993 were $162 million of cash generated by operations
and $82 million in proceeds from the issuance of common stock
under the Company's employee stock plans and tax benefits
thereon. The Company used a portion of the cash for investing and
20
<PAGE>
financing activities, including $31 million for the purchase of
property and equipment, $37 million for payments for software and
other intangibles, $15 million for the acquisition of Approach
Software Corporation and $30 million for the scheduled repayment
of long-term debt.
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
short-term investments and unused portions of credit facilities.
During 1993, the Company increased its revolving credit
facilities with domestic and international banks by $25 million
to $150 million. The Company believes its financial reserves and
funds provided by ongoing operations are adequate to meet future
liquidity requirements.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company
required by this Item are included in this Report at pages
F-1 through F-22.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
21
<PAGE>
- - ------------------------------------------------------------------------------
PART III
- - ------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Information with respect to Directors and compliance with Section 16(a) of the
Exchange Act may be found in the sections captioned "Proposal No. 1 - Election
of Directors" and "Executive Compensation and Other Information Concerning
Directors and Executive Officers" appearing in the definitive Proxy Statement to
be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held on Wednesday, May 25, 1994. Such information is
incorporated herein by reference.
Executive Officers of the Registrant
The executive officers of the Company as of February 28, 1994 are:
Name Age Position
- - ---- --- --------
Jim P. Manzi 42 Chairman of the Board, President
and Chief Executive Officer
Kc Branscomb 38 Senior Vice President,
Business Development
Edwin J. Gillis 45 Senior Vice President,
Finance and Operations and
Chief Financial Officer
John B. Landry 46 Senior Vice President,
Development and Chief
Technology Officer
June L. Rokoff 44 Senior Vice President,
Development
Robert P. Schechter 45 Senior Vice President,
International Business Group
Robert K. Weiler 43 Senior Vice President,
North American Business Group
Mr. Manzi has served as President since October 1984 and was named Chief
Executive Officer in April 1986. In July 1986 he was appointed Chairman of the
Board upon the resignation of the former Chairman and founder of the Company,
Mitchell Kapor. Mr. Manzi joined Lotus in May 1983 as Director of Corporate
Marketing and was named Vice President of Marketing and Sales in September 1983.
Ms. Branscomb joined Lotus in October 1992 as Senior Vice President of
Business Development. From November 1991 until joining Lotus, Ms. Branscomb was
the Chief Executive Officer of IntelliCorp, Inc. She had previously held the
position of Chief Operating Officer since late 1988. Prior to joining
ItelliCorp, Ms. Branscomb was Senior Vice President of Sales and Marketing at
Aion Corporation, founding Principal and Vice President of Metaphor Computer
Systems and a consultant with the Boston Consulting Group Inc.
Mr. Gillis joined Lotus in July 1991 as Senior Vice President of Finance and
Administration and Chief Financial Officer and in February 1994 Mr. Gillis was
named Senior Vice President of Finance and Operations and Chief Financial
Officer. Mr. Gillis came to Lotus after 15 years at Coopers and Lybrand, an
international accounting and consulting firm, where he was a partner and served
as chairman of the software industry group.
Mr. Landry joined Lotus in December 1991 as Senior Vice President of
Software Development and Chief Technology Officer. From December 1990 until
joining Lotus, Mr. Landry was Executive Vice President and Chief Technology
Officer of Dun & Bradstreet Software. Prior to joining Dun & Bradstreet, Mr.
Landry was Chairman and Chief Executive Officer of Agility Systems, Inc., which
he formed in September 1989. Previously, he served as executive vice president
and
22
<PAGE>
a member of the Board of Directors of Cullinet Software. Mr. Landry joined
Cullinet Software in 1987 when it acquired Distribution Management Systems where
he was Chairman.
Ms. Rokoff was named Senior Vice President of Development in May 1992. She
had previously held the positions of Senior Vice President of the Consulting and
Information Services Group since November 1991, and Vice President of the
Communications and Information Services Group since June 1990. Ms. Rokoff came
to Lotus in 1986 as Director of Development for the Information Services
Division. She has held several executive positions since joining Lotus including
Vice President of the Graphics and Information Management Group and general
manager of both the Workstation Products Group and 1-2-3 Release 3.0.
Mr. Schechter was named Senior Vice President of the International Business
Group in May 1991. Mr. Schechter joined Lotus in August 1987 as Vice President
of Finance and Operations and Chief Financial Officer and became Senior Vice
President of Finance and Operations in October 1987. Mr. Schechter came to Lotus
after 14 years at Coopers & Lybrand, where he was a partner and served as
Northeast regional chairman of the High Technology Industry Group.
Mr. Weiler joined Lotus in 1991 as Senior Vice President of Sales and
Marketing, and was named Senior Vice President of the North American Business
Group in November 1991. From 1989 until joining Lotus, Mr. Weiler was President
and Chief Operating Officer of Interleaf, Inc. Prior to joining Interleaf,
Mr. Weiler served as Executive Vice President of North American Sales and Client
Service of Cullinet Software before being appointed President and Chief
Operating Officer. Mr. Weiler joined Cullinet in 1987 when it acquired
Distribution Management Systems where he was President and Chief Operating
Officer.
Item 11. Executive Compensation
Information with respect to this item may be found in the sections captioned
"Executive Compensation and Other Information Concerning Directors and Executive
Officers" appearing in the definitive Proxy Statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
Wednesday, May 25, 1994. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item may be found in the section captioned
"Principal Holders of Voting Securities" appearing in the definitive Proxy
Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders to be held on Wednesday, May 25, 1994. Such information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to this item may be found in the sections captioned
"Proposal No. 1 - Election of Directors, Certain Transactions" appearing in the
definitive Proxy Statement to be delivered to shareholders in connection with
the Annual Meeting of Shareholders to be held on Wednesday, May 25, 1994. Such
information is incorporated herein by reference.
23
<PAGE>
- - --------------------------------------------------------------------------------
PART IV
- - --------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents Filed as Part of Form 10-K
1. Financial Statements
The following financial statements are contained in this Report:
Page Number
-----------
Report of Independent Accountants F-1
Consolidated Statements of Operations for each of the three
years ended December 31, 1993 F-2
Consolidated Balance Sheets as of December 31, 1993 and 1992 F-3
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1993 F-4
Consolidated Statements of Stockholders' Equity for each of
the three years ended December 31, 1993 F-5
Notes to Consolidated Financial Statements F-6
Supplemental Financial Information F-22
2. Financial Statement Schedules
Page Number
or Location
-----------
Report of Independent Accountants 28
Schedule I - Marketable Securities-Other Security Investments 29
Schedule VIII - Valuation and Qualifying Accounts *
Schedule X - Supplementary Income Statement Information *
Schedules other than those listed above have been omitted since
they are either not required or not applicable or the information
is otherwise included.
- - --------
* Filed as part of the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, filed March 30, 1994, and incorporated herein by reference.
24
<PAGE>
3. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
---------- -----------------------------------------------------------
<S> <C>
3(a) Restated Certificate of Incorporation of the Company, as
amended (filed as Exhibit 3(a) to Registration Statement
2-85675 on Form S-1 and incorporated herein by reference).
3(a)(1) Amendments to Exhibit 3(a) adopted April 27, 1987,
concerning limitation of directors' liability,
indemnification and by-law amendments (filed as Exhibit
3(a)(i) to the Annual Report on Form 10-K for the year
ended December 31, 1987 and incorporated herein by
reference).
3(b) By-Laws of the Company as amended October 19, 1992 filed as
Exhibit 3(b) to the Annual Report on Form 10-K for the year
ended December 31, 1992 and incorporated herein by
reference.
4(a) Form of Note Agreements dated as of May 25, 1989, between
the Company and the respective purchasers listed in the
Purchasers Schedule thereto (filed as Exhibit 4(a) to the
Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 1, 1989 and incorporated herein by
reference).
4(b) Lotus Development Corporation Defined Contribution
Restoration Plan dated as of January 1, 1990 (filed as
Exhibit 4(b) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1991 and incorporated
herein by reference).
4(c) Rights Agreement dated as of November 7, 1988, between the
Company and The First National Bank of Boston as Rights Agent
in respect of Preferred Share Purchase Rights (filed as
Exhibit 1 to the Company's Registration Statement on Form 8-A
filed November 10, 1988, and incorporated herein by
reference).
4(d)(1) Amendment dated as of April 5, 1990 between the Company and
The First National Bank of Boston to the Rights Agreement
dated as of November 7, 1988 (filed as Exhibit 28(a) to the
Company's Current Report on Form 8-K dated April 5, 1990 and
incorporated herein by reference).
4(d)(2) Amendment dated as of September 16, 1991 between the Company
and the First National Bank of Boston as Rights Agent in
respect of Preferred Share Purchase Rights (Filed as Exhibit
28(a) to the Company's Current Report on Form 8-K dated
September 16, 1991 and incorporated herein by reference).
4(e) Authorizing resolutions adopted by the Board of Directors of
the Company on November 7, 1988, in respect of Preferred
Share Purchase Rights (filed as Exhibit 4(c)(2) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988 and incorporated herein by
reference).
10(a) 1986 Stock Option Plan for Non-Employee Directors and form
of Stock Option Agreement thereunder (filed as Exhibit 10(e)
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987 and incorporated herein by
reference).
10(b) Lease for Riverside Place, Cambridge, Massachusetts, between
the Company and Cabot, Cabot and Forbes dated October 20,
1983 (filed as Exhibit 10(f) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1988 and
incorporated herein by reference).
10(b)(1) Amendment of Lease dated as of July 12, 1984, between the
Company and the Trustees of CC&F Cambridge Parkway Trust
(filed as Exhibit 10(a) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 2, 1988 and
incorporated herein by reference).
10(b)(2) Schedule setting forth the material details of the leases
for Riverside Place (Lotus Development Building) between the
Company, and Cabot, Cabot and Forbes which have been omitted
per Sec.229.601 (a) (filed as Exhibit 10(o) to the Company's
Annual Report on Form 10-K for the fiscal year ended December
31, 1985 and incorporated herein by reference).
10(b)(3) Amendment to Lease dated as of July 1, 1990 between the
Company and CC&F Cambridge Parkway Trust (filed as Exhibit 10
(f)(3) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 and incorporated herein
by reference).
10(c) Net Lease dated as of July 25, 1990 between Lotus Rogers
Street
</TABLE>
25
<PAGE>
<TABLE>
<S> <C>
Corporation, as Landlord, and the Company, as Tenant
(filed as Exhibit 4(n) to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended September 29, 1990 and
incorporated herein by reference).
10(d) Form of Indemnification Agreement between the Company and
each of its officers and directors pursuant to Article VII of
the Company's By-Laws (filed as Exhibit 10(k) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1987 and incorporated herein by
reference).
10(e)* Resolution adopted by the Board of Directors of the Company
on November 30 and December 1, 1993 concerning compensation
of Directors.
10(f) Lease Agreement dated October 25, 1990 by and between the
Trustees of River Park 93 Realty Trust, as Landlord, and the
Company, as Tenant, pertaining to Lot 3A, Riverside Park
Drive, North Reading, Massachusetts (filed as Exhibit (10)(l)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990 and incorporated herein by
reference).
10(g) Lease Agreement dated October 25, 1990 by and between the
Trustees of River Park 93 Realty Trust, as Landlord, and the
Company, as Tenant, pertaining to Lot 4A, Riverside Park
Drive, North Reading, Massachusetts (filed as Exhibit (10)(m)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1990 and incorporated herein by
reference).
11* Computation of Earnings Per Share.
13** Annual Report to Shareholders for the year ended December
31, 1993.
</TABLE>
With the exception of the information incorporated by reference in Item 5 of
this Form 10-K, the Annual Report to Shareholders for the year ended December
31, 1993 is not deemed filed as part of this report.
<TABLE>
<S> <C>
22* Subsidiaries of the Registrant.
24* Consent of Independent Accountants.
</TABLE>
(NOTE: The Company agrees to furnish to the Securities and
Exchange Commission upon request a copy of any instrument with
respect to long-term debt of the Company or any of its
subsidiaries which is not filed herewith or listed herein
since it relates to outstanding debt in an amount not greater
than 10% of the total assets of the Company and its
subsidiaries on a consolidated basis.)
_______________
*Filed herewith.
**Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993, filed March 30, 1994, and incorporated herein by
reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fiscal quarter
ended December 31, 1993.
26
<PAGE>
SIGNATURES
Pursuant of the requirements of Section 13 or 15(d) 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,
Finance and Operations
Date: October 17, 1994
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Lotus Development
Corporation has been incorporated by reference in this Form 10-K, as amended by
Amendment No. 2 to the Annual Report on Form 10-K/A, and is included in the
Financial section of the 1993 Annual Report to Shareholders of Lotus Development
Corporation. In connection with our audits of such financial statements, we have
also audited the related financial statement schedules listed in Item 14(a)2 of
this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND
Boston, Massachusetts
January 26, 1994
28
<PAGE>
Schedule I
LOTUS DEVELOPMENT CORPORATION
Marketable Securities--Other Security Investments
December 31, 1993
(In thousands)
<TABLE>
<CAPTION>
Number of shares Carrying amount
or units -- Market value of in the
Name of issuer and principal amount Cost of each issue at December 31, 1993
title of each issue of bonds or notes each issue December 31, 1993 balance sheet
- - ------------------------------ ----------------- ---------- ----------------- ----------------
<S> <C> <C> <C> <C>
Corporate bonds and Eurobonds:
7 World Trade Financial Inc $5,000 $4,997 $4,998 $4,997
Abbey National $5,000 $5,099 $5,079 $5,073
American General Corporation $3,645 $3,832 $3,781 $3,784
Banque Nationale de Paris $2,000 $2,103 $2,053 $2,052
Compagnie Bancaire $4,500 $4,726 $4,579 $4,563
Credit Agricole $850 $882 $854 $853
Credit Lyonnais $2,500 $2,574 $2,554 $2,559
Credit National $6,860 $7,134 $6,945 $6,939
E. I. DuPont De Nemour $2,000 $2,129 $2,054 $2,049
General Electric Capital Corporation $1,250 $1,319 $1,281 $1,281
Guiness Finance BV $3,000 $3,144 $3,063 $3,055
IMI Bank International $10,480 $11,007 $10,766 $10,764
Japan Airlines Co. Ltd. $2,920 $3,048 $2,972 $2,962
Kimberly-Clark Corporation $2,515 $2,715 $2,688 $2,694
McDonalds Corporation $665 $657 $663 $662
Panasonic Finance $2,000 $2,113 $2,022 $2,020
Reed Publishing $5,360 $5,686 $5,597 $5,589
Salomon Inc. $5,000 $5,000 $4,997 $5,000
Toyota Motor Credit $5,000 $5,250 $5,097 $5,091
------- ------- -------
Subtotal $73,415 $72,043 $71,987
Government bonds:
Export Development Corporation $3,000 $3,153 $3,071 $3,064
Finnish Export Credit $3,504 $3,567 $3,563 $3,566
Italy, Republic of $7,000 $7,359 $7,267 $7,249
Japan Development Bank $3,245 $3,396 $3,296 $3,288
New Zealand $2,000 $2,134 $2,064 $2,057
Oesterreichische Kontrol Bank $2,000 $2,134 $2,051 $2,047
Svensk Exportkredit $4,000 $3,838 $3,974 $3,971
Swedish National Housing Authority $11,020 $11,716 $11,549 $11,548
------- ------- -------
Subtotal $37,297 $36,835 $36,790
Municipal bonds:
AFICA-1988 Series M (H. I. Mayaguez Hotel Project) $2,118 $2,175 $2,128 $2,128
San Juan Cement Co. $1,000 $1,056 $1,000 $1,000
------- ------- -------
Subtotal $3,231 $3,128 $3,128
Collateralized mortgage obligations:
Banco Santander de Puerto Rico Grantor Trust $5,502 $5,718 $5,510 $5,510
Bank Trust Mortgage Trust $3,558 $3,558 $3,558 $3,558
First Financial Mortgage Trust $4,637 $4,637 $4,637 $4,637
GNMA Backed Mortgage Pass Thru Trust $3,251 $3,251 $3,251 $3,251
Investors in Mortgage Certificates Trust $2,967 $2,968 $2,967 $2,967
R&G Federal Mortgage Trust $4,231 $4,231 $4,231 $4,231
R&G Federal Savings Bank Grantor Trust $5,353 $5,450 $5,413 $5,413
------- ------- -------
Subtotal $29,813 $29,567 $29,567
</TABLE>
29
<PAGE>
Schedule I
LOTUS DEVELOPMENT CORPORATION
Marketable Securities--Other Security Investments (continued)
December 31, 1993
(In thousands)
<TABLE>
<CAPTION>
Number of shares Carrying amount
or units -- Market value of in the
Name of issuer and principal amount Cost of each issue at December 31, 1993
title of each issue of bonds or notes each issue December 31, 1993 balance sheet
- - --------------------------- ------------------ ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
Corporate commercial paper:
Alpha Finance $3,000 $2,966 $2,979 $2,979
Broadway Capital Corporation $2,000 $1,981 $1,984 $1,984
Heller International Corporation $2,000 $1,981 $1,984 $1,984
Idemitsu International $5,000 $4,956 $4,983 $4,982
Mortgage Asset European Securitization No 1 PLC $3,000 $2,962 $2,980 $2,980
Mitsubishi Electric $3,000 $2,975 $2,996 $2,995
Strait Capital Corporation $1,436 $1,424 $1,425 $1,424
------- ------- -------
Subtotal $19,245 $19,331 $19,328
Government commercial paper:
Government Development Bank for Puerto Rico $17,520 $17,520 $17,520 $17,520
Certificates of deposit: $32,459 $32,457 $32,460 $32,457
Repurchase agreements: $27,782 $27,782 $27,782 $27,782
Time deposits: $9,000 $9,000 $9,000 $9,000
Other investments: $4,285 $4,285 $4,285 $4,285
-------- -------- --------
Total short-term investments $254,045 $251,951 $251,844
========= ======== ========
</TABLE>
30
<PAGE>
- - ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Lotus Development Corporation
We have audited the accompanying consolidated balance sheets of
Lotus Development Corporation as of December 31, 1993 and 1992,
and the related consolidated statements of operations, cash
flows, and stockholders' equity for each of the three years in
the period ended December 31, 1993. 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 audits 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 statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Lotus Development Corporation at December
31, 1993 and 1992, and the consolidated results of its operations
and cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in Notes B and H to the consolidated financial
statements, effective January 1, 1991, the Company changed its
method of accounting for income taxes.
Coopers & Lybrand
Boston, Massachusetts
January 26, 1994
F-1
<PAGE>
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except for per share data) 1993 1992 1991
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $981,168 $900,149 $828,895
Cost of sales 202,443 200,103 174,209
-------- -------- --------
Gross margin 778,725 700,046 654,686
Expenses:
Research and development (Note B) 126,884 118,308 116,586
Sales and marketing 462,658 423,813 370,635
General and administrative 70,057 69,103 69,955
Other (income) / expense, net (Note J) 17,357 (31,183) 29,824
-------- -------- --------
Total expenses 676,956 580,041 587,000
Income before income taxes and cumulative
effect of change in accounting principle 101,769 120,005 67,686
Provision for income taxes (Note H) 46,234 39,602 24,570
-------- -------- --------
Income before cumulative effect of change
in accounting principle 55,535 80,403 43,116
Cumulative effect of change in accounting
principle (Notes B and H) -- -- 10,000
-------- -------- --------
Net income $ 55,535 $ 80,403 $ 33,116
======== ======== ========
Per share:
Income before cumulative effect of change
in accounting principle $1.24 $1.87 $0.98
Cumulative effect of change in accounting
principle (Notes B and H) -- -- 0.23
-------- -------- --------
Net income per share $1.24 $1.87 $0.75
======== ======== ========
Weighted average common and
common equivalent shares outstanding 44,721 42,994 43,952
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-2
<PAGE>
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(In thousands) 1993 1992
- - -------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments (Note B) $ 416,693 $ 293,094
Accounts receivable, net of allowances
of $30,002 and $25,326 217,336 178,340
Inventory (Note C) 21,220 23,560
Other current assets 20,817 19,040
--------- ---------
Total current assets 676,066 514,034
Property and equipment, net of accumulated
depreciation and amortization of $153,768
and $165,973 (Note D) 127,437 135,667
Software and other intangibles, net of
accumulated amortization of $123,016 and
$110,715 (Note B) 88,625 99,299
Investments and other assets (Note E) 13,217 14,444
--------- ---------
Total assets $ 905,345 $ 763,444
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks (Note I) $ -- $ 1,130
Current portion of long-term debt (Note I) 28,480 --
Accounts payable 45,914 40,922
Accrued compensation and benefits 36,368 27,180
Accrued and deferred income taxes (Note H) 49,017 48,790
Other accrued expenses 77,648 75,363
Deferred revenue (Note B) 39,996 24,483
--------- ---------
Total current liabilities 277,423 217,868
Deferred income taxes (Note H) 49,531 37,398
Long-term debt (Note I) 50,000 108,740
Commitments and contingencies (Note F)
Stockholders' equity (Note G):
Preferred stock, $1.00 par value,
5,000 shares authorized, none issued -- --
Common stock, $.01 par value,
100,000 shares authorized;
62,152 issued; and 44,928
and 41,881 outstanding 622 622
Additional paid-in capital 251,414 216,740
Retained earnings 526,554 471,019
Treasury stock, 17,224 and 20,271 shares
at an average cost of $14.44 and $14.19
per share (248,728) (287,655)
Translation adjustment (1,471) (1,288)
--------- ---------
Total stockholders' equity 528,391 399,438
--------- ---------
Total liabilities and stockholders'
equity $ 905,345 $ 763,444
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1993 1992 1991
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 55,535 $ 80,403 $ 33,116
Gain on sale of investment in Sybase, Inc. -- (49,706) --
Charge for purchased research and
development 19,900 -- --
Depreciation and amortization 86,973 84,319 70,625
Cumulative effect of change in accounting
principle -- -- 10,000
Change in assets and liabilities, net of
effects from acquisitions:
(Increase) in accounts receivable (42,000) (11,031) (49,514)
(Increase) decrease in inventory 3,207 7,681 (9,077)
Increase (decrease) in accounts payable
and accrued expenses 10,832 (1,295) 37,651
Increase in accrued and deferred income
taxes 11,892 20,620 634
Increase in deferred revenue 15,601 521 7,819
Net change in other working capital items 259 (3,170) (2,780)
--------- --------- ---------
Net cash provided by operating activities 162,199 128,342 98,474
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (30,587) (34,042) (38,806)
Payments for software and other intangibles (36,771) (39,315) (32,618)
Proceeds from sale of investment in
Sybase, Inc. -- 77,719 --
Purchases of short-term investments, net (79,883) (31,551) (55,118)
Acquisitions (15,455) (8,725) (31,592)
Other 2,002 1,364 4,114
--------- --------- ---------
Net cash used for investing activities (160,694) (34,550) (154,020)
-------- --------- ---------
Cash flows from financing activities:
Repayment of long-term debt (30,260) (30,260) (21,000)
Purchase of common stock for treasury (8,107) (35,876) (55,397)
Issuance of common stock, including tax
benefit thereon 81,708 32,244 37,364
Increase (decrease) in short-term borrowings (1,130) (23,167) 18,885
--------- --------- ---------
Net cash provided by (used for) financing
activities 42,211 (57,059) (20,148)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 43,716 36,733 (75,694)
--------- --------- ---------
Cash and cash equivalents, beginning of year 121,133 84,400 160,094
Cash and cash equivalents, end of year $ 164,849 $ 121,133 $ 84,400
========= ========= =========
</TABLE>
Supplemental Cash Flow Information
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest received $ 9,971 $ 10,952 $ 13,138
Interest paid ($8,702) ($13,970) ($17,185)
Income taxes paid ($24,698) ($18,982) ($23,973)
- - ------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31, 1991, 1992,
and 1993 (Note G) Additional
Common Paid-In Retained Treasury Translation
(In thousands) Stock Capital Earnings Stock Adjustment Total
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 $591 $157,368 $357,500 ($206,587) $ 567 $309,439
Net Income -- -- 33,116 -- -- 33,116
Acquisition of 2,104 shares of common stock -- -- -- (55,397) -- (55,397)
Issuance of 464 shares of common stock under
employee stock purchase plan 5 7,797 -- -- -- 7,802
Exercise of 43 incentive stock options 1 474 -- -- -- 475
Exercise of 1,605 non-qualified stock options 16 29,071 -- -- -- 29,087
Currency translation effect -- -- -- -- (1,409) (1,409)
---- -------- -------- --------- ------- --------
Balance, December 31, 1991 613 194,710 390,616 (261,984) (842) 323,113
---- -------- -------- --------- ------- --------
Net Income -- -- 80,403 -- -- 80,403
Acquisition of 1,968 shares of common stock -- -- -- (35,876) -- (35,876)
Issuance of 395 shares of common stock under
employee stock purchase plan -- 1,308 -- 5,518 -- 6,826
Exercise of 1,229 non-qualified stock options 9 20,722 -- 4,687 -- 25,418
Currency translation effect -- -- -- -- (446) (446)
---- -------- -------- --------- ------- --------
Balance, December 31, 1992 622 216,740 471,019 (287,655) (1,288) 399,438
---- -------- -------- --------- ------- --------
Net Income -- -- 55,535 -- -- 55,535
Acquisition of 250 shares of common stock -- -- -- (8,107) -- (8,107)
Issuance of 360 shares of common stock under
employee stock purchase plan -- 2,894 -- 5,139 -- 8,033
Exercise of 2,937 non-qualified stock options -- 22,604 -- 41,895 -- 64,499
Income tax benefit related to exercise
of stock options -- 9,176 -- -- -- 9,176
Currency translation effect -- -- -- -- (183) (183)
---- -------- -------- --------- ------- --------
Balance, December 31, 1993 $622 $251,414 $526,554 ($248,728) ($1,471) $528,391
==== ======== ======== ========= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
<PAGE>
LOTUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A BUSINESS
The Company and its subsidiaries are engaged in the development,
manufacturing, marketing and support of applications software.
The Company sells its products primarily through distributors and
resellers.
B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
.....................
The consolidated financial statements comprise those of the
Company and its wholly owned domestic and foreign subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition
...................
Revenue from the sale of software products to distributors,
resellers and original equipment manufacturers is recognized when
the products are shipped. Revenue from the sale of software
products under installation agreements with end-users is
recognized upon expected installation by the customer, provided
that payment is due currently. Maintenance, service and
subscription revenues are recognized ratably over the term of the
related sales contract or as services are performed. Allowances
for estimated future product returns under the Company's
agreements with its distributors and resellers for stock
balancing and upgrade swaps are provided in the same period as
the related revenue.
At the time the Company recognizes revenue from the sale of software
products, no significant vendor and postcontract support obligations remain,
and the costs of insignificant support obligations are accrued.
Cash and Short-term Investments
...............................
All highly liquid investments with a maturity of three months or
less at the date of purchase are considered to be cash
equivalents, and those with maturities greater than three months
are considered to be short-term investments. Short-term
investments are stated at cost, which approximates market.
commercial paper and other money market instruments.
Cash equivalents and short-term investments consist
primarily of certificates of deposit, repurchase agreements,
commercial paper and other money market instruments.
<TABLE>
<CAPTION>
December 31,
(In thousands) 1993 1992
- - -----------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $164,849 $121,133
Short-term investments 251,844 171,961
- - -----------------------------------------------------
Cash and short-term investments $416,693 $293,094
- - -----------------------------------------------------
</TABLE>
Inventory
.........
Inventory is stated at cost, using the first-in, first-out (FIFO)
F-6
<PAGE>
method, but not in excess of net realizable value.
Property, Equipment and Depreciation
....................................
Property and equipment are stated at cost. Depreciation and
amortization of property and equipment are computed using the
straight-line method over the estimated useful life of the assets
as follows:
Buildings 30 years
Computer Equipment 3- 5 years
Manufacturing and other equipment 3- 5 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of lease term or life of asset
Building improvements Shorter of 10 years or life of asset
Maintenance and repairs are expensed as incurred. The costs of
retired assets are removed from asset accounts and related
depreciation is removed from accumulated depreciation.
Software and Other Intangibles
..............................
Costs related to research, design and development of computer
software are charged to research and development expense as incurred.
The Company capitalizes eligible software costs upon establishing product
technological feasibility and amortizes these costs on a product-by-product
basis commencing upon general release of the products to customers.
Capitalized software costs are amortized on a straight-line basis over the
economic life of the product, generally three years. The straight-line method
of amortization generally results in approximately the same amount of expense
as that calculated using the ratio that current period gross product revenues
bear to the total of current and anticipated future gross product revenues.
Internal software costs of $25.0 million, $26.0 million and $27.7 million were
capitalized in 1993, 1992 and 1991. Related amortization charges
of $25.2 million for 1993, $22.2 million for 1992 and $13.9 million
for 1991 are reflected in cost of sales.
Intangible assets associated with acquisitions capitalized
in 1993 of $15.2 million were largely attributable to the
acquisitions of Approach Software Corporation and consulting
services businesses. Intangible assets of $22.1 million and $32.5
million were acquired in 1992 and 1991. These assets are
amortized on a straight-line basis, generally over a three to
five year period. Related amortization charges, substantially all
of which were reflected in cost of sales, totaled $22.5 million
in 1993, $19.2 million in 1992 and $15.9 million in 1991.
The Company evaluates the net realizable value of capitalized software and
other intangibles on an ongoing basis relying on a number of factors
including operating results, business plans, budgets and economic
projections. In addition, the Company's evaluation considers
non-financial data such as market trends, product development cycles,
and changes in management's market emphasis.
F-7
<PAGE>
Income Taxes
............
The Company adopted Statement of Financial Accounting Standard
No. 109, Accounting for Income Taxes ("FAS 109"), retroactive to
January 1, 1991. Prior to 1991, the Company accounted for income
taxes under Accounting Principles Board Opinion No. 11. Under
FAS 109, deferred tax liabilities and assets are determined based
on the difference between the financial statement carrying
amounts and tax basis of assets and liabilities using current
statutory tax rates. FAS 109 also requires a valuation reserve
against deferred tax assets if, based upon weighted available
evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. (See Note H).
U.S. Federal income taxes, net of applicable foreign tax
credits, are provided on the portion of foreign earnings which
may be remitted to the parent in future years. Undistributed
earnings of foreign affiliates reinvested in those operations
indefinitely, and for which no U.S. taxes have been provided,
aggregated approximately $40 million at December 31, 1993 and
1992.
Net Income per Share
....................
Net income per share is calculated using the weighted average
number of common shares and common share equivalents outstanding
during the year. Common share equivalents are attributable to
unexercised stock options.
Foreign Currency Translation
............................
Assets and liabilities of foreign subsidiaries are translated to
U.S. dollars at year-end exchange rates. Income and expense
items are translated at average rates of exchange during the
year. Resulting translation adjustments are accumulated in a
separate component of stockholders' equity. The effect of
exchange rate changes on cash and cash equivalents was immaterial
in 1993, 1992 and 1991.
In an effort to minimize the effect of exchange rate
fluctuations on the results of its operations and the asset and
liability positions of foreign subsidiaries, the Company hedges
certain portions of its foreign currency exposure through the use
of forward exchange contracts and options on foreign currencies.
It does not engage in foreign currency speculation. The cash
flows related to the gains and losses on foreign currency hedges
are classified in the statements of cash flows as part of cash
flows from operating activities.
Forward exchange contracts primarily to exchange foreign
currencies for U.S. dollars totaling $50 million were outstanding
at December 31, 1993. These contracts are used to hedge asset
and liability positions of foreign subsidiaries. Gains and losses
F-8
<PAGE>
associated with currency rate changes on these contracts are
recorded currently in income, offsetting losses and gains on the
related assets and liabilities. All contracts, which primarily
hedge European currencies and Japanese yen, mature during 1994.
Foreign currency options are used to hedge certain anticipated
transactions denominated primarily in European currencies and Japanese
yen. At December 31, 1993, the amount of foreign currency options totaled
$96 million. Potential losses are limited to the cost of the options and
were immaterial. Gains on such options are recorded in income only when
realized, offsetting foreign exchange losses of the related transactions.
Deferred gains related to these short-term options were not significant.
The market risk exposure from currency options is limited to the cost
of such instruments. The market risk exposure from forward contracts is
assessed in light of the underlying currency exposures and is controlled by
the initiation of additional or offsetting foreign currency contracts. Credit
risk exposure from currency options and forward contracts is minimized as
these instruments are contracted with multiple financial institutions.
The fair value of currency options is established by obtaining bids,
based upon a hypothetical sale of the options, from banks that are authorized
currency traders. Forward contracts are revalued monthly by comparing
contract rates to month-end exchange rates. Such revalued amounts approximate
fair values. The Company's currency options and forward contracts are OTC
instruments.
Financial Instruments
.....................
The fair value of financial instruments, including cash
equivalents, marketable securities, debt, options on foreign
currencies and forward exchange contracts, approximated their
carrying values at December 31, 1993. Fair values have been
determined through information obtained from market sources and
management estimates.
Diversification of Credit Risk
...............................
The Company's investment portfolio is diversified and consists of
cash equivalents and short-term investments placed with high
credit qualified institutions. At December 31, 1993 and 1992,
approximately 41% and 38% of accounts receivable represented
amounts due from ten customers. The credit risk in the Company's
trade accounts receivable is substantially mitigated by the
Company's credit evaluation process, reasonably short collection
terms and the geographical dispersion of sales transactions.
C INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1993 1992
- - ---------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 13,962 $ 14,030
Raw materials 7,258 9,530
- - ---------------------------------------------------------------------------
Total $21,220 $ 23,560
===========================================================================
</TABLE>
F-9
<PAGE>
D PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1993 1992
- - ---------------------------------------------------------------------------
<S> <C> <C>
Land $ 7,395 $ 3,892
Buildings and building improvements 55,463 54,959
Leasehold improvements 36,699 39,537
Computer equipment 111,045 126,482
Manufacturing and other equipment 44,191 47,794
Furniture and fixtures 26,412 28,976
- - ---------------------------------------------------------------------------
281,205 301,640
Less accumulated depreciation
and amortization 153,768 165,973
- - ---------------------------------------------------------------------------
Property and equipment, net $127,437 $135,667
===========================================================================
</TABLE>
E INVESTMENTS AND OTHER ASSETS
Investments and other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1993 1992
- - -----------------------------------------------------
<S> <C> <C>
Marketable securities $ 3,004 $ 5,829
Deposits and other 10,213 8,615
- - -----------------------------------------------------
Total $13,217 $14,444
=====================================================
</TABLE>
Marketable securities represent investments in interest bearing
securities held at a custodial institution in Puerto Rico. These
securities are carried at cost, which approximates market.
F LEASE OBLIGATIONS
The Company leases certain facilities and equipment under various
operating leases. At December 31, 1993, future minimum lease
payments under operating leases with terms in excess of one year
were as follows:
<TABLE>
<CAPTION>
Year (In thousands)
- - -----------------------------------
<S> <C>
1994 $ 40,715
1995 30,109
1996 23,086
1997 19,136
1998 17,254
Future years 37,424
- - ----------------------------------
Total $167,724
==================================
</TABLE>
Total rental expense was approximately $41.7 million, $40.2
million and $38.9 million for the years ended December 31, 1993,
1992 and 1991.
F-10
<PAGE>
G STOCK PLANS
Stock Option Plans
..................
The Company has stock option plans for employees and consultants
which provide for non-qualified and incentive stock options.
Options are granted at a price not less than the fair market
value on the date of grant. The options generally become
exercisable over a four-year period and expire over a period not
exceeding ten years. At December 31, 1993, 6.0 million shares
were available for grant.
The Company also has a stock option plan for non-employee
directors which provides that each independent director of the
Company be granted annually an option to acquire 10,000 shares of
common stock at a price equal to the fair market value on the
date of grant. The term of each option is for a period not
exceeding ten years. At December 31, 1993, 175,000 shares were
available for grant.
Activity in these plans was as follows:
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except option prices) 1993 1992 1991
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares under option, beginning of year 7,154 8,782 8,204
Options granted (at option prices of
$19.63 to $47.38 in 1993,
$17.38 to $33.88 in 1992 and
$18.13 to $35.63 in 1991) 2,453(B) 788(A) 3,081
Options exercised (2,937) (1,229) (1,605)
Options cancelled (856) (1,187) (898)
- - ----------------------------------------------------------------------------------
Shares under option, end of year
(at exercise prices of $16.00 to $47.38
in 1993 and $6.25 to $37.88 in 1992
and 1991) 5,814 7,154 8,782
- - ----------------------------------------------------------------------------------
Average price of options exercised $ 22.09 $ 20.74 $ 18.12
- - ----------------------------------------------------------------------------------
Shares exercisable 1,412 2,919 2,482
- - ----------------------------------------------------------------------------------
Average option price of shares
Years ended December 31,
(In thousands, except option prices) 1993 1992 1991
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
exercisable $ 23.71 $ 22.49 $ 21.92
==================================================================================
</TABLE>
(A) The Company's annual grant to employees, historically made
in December, was moved to January 1993 to more closely link
option grants to performance. In January 1993, the Company
granted 1.8 million options at fair market value on the date of grant.
(B) In January 1994, the Company granted a total of 2.6 million
options to its employees. Of the total grant, 1.6
million options were granted at fair market value on the
date of grant. The remaining 1.0 million options were
granted at 120% of fair market value on the date of grant.
F-11
<PAGE>
Employee Stock Purchase Plan
............................
The Employee Stock Purchase Plan authorizes the Company to sell
up to 4.1 million shares of common stock to employees on a
limited basis through voluntary payroll withholdings. The stock
price to employees is equal to 85% of the market price on the
first or last day of each six-month withholding period,
whichever is lower. Through December 31, 1993, approximately
2.2 million shares were purchased by employees pursuant to the
plan.
Shares issued to employees during the past three years are
summarized in the table below.
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share data) 1993 1992 1991
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Number of shares 360 395 464
Proceeds $8,033 $6,826 $7,802
Average price per share $22.34 $17.29 $16.82
===============================================================
</TABLE>
H INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE
In the first quarter of 1993, the Company adopted Financial
Accounting Standard No. 109, Accounting for Income Taxes ("FAS
109") which requires a change from an income statement to a
balance sheet approach for accounting for income taxes. The
Company has elected to apply the provisions of FAS 109
retroactively to January 1, 1991. Accordingly, the cumulative
effect of this change decreased 1991 net income by $10 million or
$0.23 per share relating to the establishment of a valuation
reserve for foreign tax benefits. The effect of the adoption of
FAS 109 on 1992 income was not significant.
The components of the provision for income taxes were as follows:
F-12
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1993 1992 1991
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic:
Current $18,437 $ 7,970 $ 6,915
Deferred 7,581 17,902 (2,354)
- - --------------------------------------------------------------------------------
26,018 25,872 4,561
- - --------------------------------------------------------------------------------
Foreign:
Current 19,763 9,470 14,280
Deferred (347) 3,460 5,354
- - --------------------------------------------------------------------------------
19,416 12,930 19,634
- - --------------------------------------------------------------------------------
State:
Current 800 800 375
Deferred -- -- --
- - --------------------------------------------------------------------------------
800 800 375
- - --------------------------------------------------------------------------------
Total:
Current 39,000 18,240 21,570
Deferred 7,234 21,362 3,000
- - --------------------------------------------------------------------------------
Total income taxes $46,234 $ 39,602 $ 24,570
================================================================================
</TABLE>
Income before provision for income taxes and cumulative effect of a change in
accounting principle from domestic and foreign operations was as follows:
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1993 1992 1991
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $37,337 $ 72,622 ($32,771)
Foreign 64,432 47,383 100,457
- - --------------------------------------------------------------------------------
Total $101,769 $120,005 $ 67,686
================================================================================
</TABLE>
F-13
<PAGE>
Provisions for income taxes were at rates other than the U.S. Federal statutory
tax rate for the following reasons:
<TABLE>
<CAPTION>
Years ended December 31,
1993 1992 1991
- - --------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory tax rate 35.0% 34.0% 34.0%
Foreign operations 4.4 (.8) (2.5)
Research and development credit (4.5) (4.0) --
Impact of U.S. Federal statutory rate
increase on beginning deferred taxes 2.0 -- --
Tax exempt interest income (.6) (.9) (2.8)
Non-deductible amortization 2.0 3.7 5.6
Other, net (.3) 1.0 2.0
- - --------------------------------------------------------------------
Subtotal 38.0 33.0 36.3
Non-deductible charge for purchased
research and development 7.4 -- --
- - --------------------------------------------------------------------
Effective tax rate 45.4% 33.0% 36.3%
====================================================================
</TABLE>
Consolidated net income includes income of manufacturing
subsidiaries operating in Ireland, Singapore and Puerto Rico.
Income from the sale and licensing of products manufactured in
Ireland is subject to a 10% tax rate through the year 2010.
Income from Singapore operations is taxed at favorable rates, relative
to U.S. statutory rates, until 1997 under a grant issued by the Singapore
government. The income from products manufactured in Puerto Rico, which is not
subject to U.S. Federal income tax, is subject to a local tax rate of
approximately 5%. In addition, remitted Puerto Rico earnings may
be subject to Puerto Rico withholding taxes at rates not in
excess of 10%. The aggregate dollar and per share tax benefits from tax holidays
were immaterial to the results of operations in 1993 and 1992. In 1991,
aggregate tax benefits associated with the Company's Puerto Rican manufacturing
operation were $7 million, or $0.16 per share.
For U.S. Federal income tax purposes, at December 31, 1993,
the Company has tax credit carryforwards of approximately $35
million and a net operating loss carryforward of $38 million,
which expire between 1994 and 2008. The net operating loss
carryforward includes tax deductions related to stock option
activity.
The Internal Revenue Service ("IRS") is examining the
Company's U.S. income tax returns for the years 1985 through
1989. The IRS has notified the Company that it intends to
propose adjustments to its income tax returns for that period.
The Company will contest these adjustments and believes that any
sustained adjustments from the IRS examination will not be
material to the financial statements.
Deferred taxes result from temporary differences in the
recognition of revenues and expenses for tax and financial
reporting purposes. The sources of these temporary differences
for 1993, 1992 and 1991, and the effect of each on the tax
provision, were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1993 1992 1991
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
Unrepatriated foreign earnings, net $14,110 $11,911 $ 17,237
Depreciation (1,130) (1,769) (2,616)
Compensation (1,423) 4,338 1,849
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1993 1992 1991
- - -----------------------------------------------------------------------
<S> <C> <C> <C>
Capitalized software costs 1,590 557 1,760
Charges to (provision for) reserves (1,654) 2,031 (11,276)
Deferred revenue (2,171) 3,628 (3,418)
Other, net (2,088) 666 (536)
- - -----------------------------------------------------------------------
Total $ 7,234 $21,362 $ 3,000
=======================================================================
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1993 1992
- - -----------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Reserves $ 16,352 $ 12,960
Depreciation 5,871 5,054
Tax credits against unrepatriated
foreign earnings 77,363 58,038
Tax return carryforwards 48,233 49,438
Deferred revenue 2,574 391
Other 11,934 9,312
- - -----------------------------------------------------------
Total 162,327 135,193
- - -----------------------------------------------------------
Valuation allowances (A) 35,794 29,360
- - -----------------------------------------------------------
Net deferred tax assets 126,533 105,833
Deferred tax liabilities:
Capitalized software costs 10,381 8,552
Unrepatriated foreign earnings 130,417 106,906
Compensation 2,972 4,269
Other 6,389 4,051
- - -----------------------------------------------------------
Total 150,159 123,778
- - -----------------------------------------------------------
Net deferred tax liability $ 23,626 $ 17,945
===========================================================
</TABLE>
(A) At December 31, 1993 and 1992, there is a $10.0 million
valuation allowance for foreign tax benefits. In addition,
valuation allowances of $25.8 million and $19.4 million at
December 31, 1993 and 1992 have been established for tax
return carryforwards resulting from stock option deductions.
The tax benefit associated with the stock option deductions
will be credited to equity when realized.
F-15
<PAGE>
I DEBT
Long-term Debt
..............
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1993 1992
- - -----------------------------------------------------
<S> <C> <C>
Notes payable to banks, bearing
interest at LIBOR plus 0.45%
per annum $50,000 $ 50,000
Notes payable to insurance
companies, bearing interest at
10.57% per annum 28,480 58,740
- - -----------------------------------------------------
Total debt 78,480 108,740
Less current portion 28,480 --
- - -----------------------------------------------------
Long-term debt $50,000 $108,740
=====================================================
</TABLE>
In July 1990, the Company completed a $50 million floating rate
financing with a group of banks collateralized by its office
facility in Cambridge, Massachusetts. Principal payment of the
notes is due in 1997.
In May 1989, the Company arranged a $100 million private
debt placement with a group of insurance companies. The final
principal payment of $28 million is due in June 1994. The Company
is required, among other things specified in the note agreements
with insurance companies, to maintain a minimum level of net
worth as well as specified debt to capitalization and fixed
charge coverage ratios.
The Company also maintains two multi-currency revolving
credit agreements with groups of domestic and international
banks. The agreements commit the participating banks, subject to
certain terms and conditions, to lend an aggregate of $150
million at December 31, 1993. Of this aggregate commitment, $75
million expires in June 1994 and the remaining $75 million
expires in June 1995. Interest rates on borrowings are set
under a number of bid options not exceeding 5/8% over LIBOR.
Commitment fees are payable on unborrowed amounts at a maximum
rate of 1/4% per annum. The covenants of these facilities
conform closely to the covenants in the insurance company note
agreements. The Company was in compliance with the covenants
of its debt agreements at December 31, 1993.
exit
Short-term debt
...............
Notes payable to banks of $1.1 million at December 31, 1992 were
borrowings under unsecured credit facilities with several
domestic and international banks which are primarily used to meet
short-term domestic and international cash requirements. There
were no such borrowings outstanding at December 31, 1993. The
F-16
<PAGE>
average short-term borrowing was $0.7 million for 1993 compared
with $2.2 million for 1992. The maximum aggregate amount
outstanding at any month-end was $1.2 million for 1993 and $6.2
million for 1992. The weighted average interest rate was 7.1%
during 1993, 9.1% during 1992 and 10.8% in 1991, and 11.1% and
7.1% at December 31, 1992 and 1991. As of December 31, 1993, the
Company had unused short-term credit facilities of $36 million.
J OTHER (INCOME)/EXPENSE, NET
Other (income)/expense consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1993 1992 1991
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
Charge for purchased
research and development $ 19,900 $ -- $ --
Restructuring charges -- 15,000 23,000
Gain on sale of investment in
Sybase, Inc. -- (49,706) --
Interest income (11,890) (10,679) (13,829)
Interest expense 8,525 13,547 16,738
Other, net 822 655 3,915
- - ---------------------------------------------------------------------
Total other (income)/expense, net $ 17,357 ($31,183) $ 29,824
=====================================================================
</TABLE>
In June 1993, the Company acquired all outstanding shares of
Approach Software Corporation. A significant portion of the
purchase price, $19.9 million, was allocated to purchased
research and development. This amount, which is not deductible
for tax purposes, was charged to operations at the acquisition
date.
In December 1992 and 1991, the Company recorded
restructuring charges of $15 million and $23 million. During
1993 and 1992, the Company took a number of actions consistent
with the previously recorded reserves, including the closing of
its Puerto Rican manufacturing facility, restructuring of
operations in North America and Europe, employee separations and
related facilities consolidations and equipment write-downs.
At December 31, 1993 and 1992, accrued amounts of $1.1 million
and $13.7 million, respectively, were included in other accrued
expenses.
In 1992, the Company sold its investment in Sybase, Inc.,
for cash consideration of $77.7 million, resulting in a pre-tax
gain of $49.7 million. The investment of $28.0 million consisted
of 2.5 million common shares and was accounted for at cost.
F-17
<PAGE>
K ACQUISITIONS AND DISPOSITIONS
Approach Software Corporation
.............................
In June 1993, the Company acquired all outstanding shares of Approach
Software Corporation ("Approach"), a privately held developer of end-user
relational database applications for the Windows environment. The purchase
price consisted of approximately $23 million of cash consideration and assumed
liabilities. The acquisition has been accounted for using the purchase
method.
The purchase price was allocated among the identifiable tangible and
intangible assets based on the fair market value of those assets. After
allocating the purchase price to net tangible assets, purchased software,
which had reached technological feasibility and was principally represented by
the technology comprising the database products being sold by Approach at the
date of the acquisition, was valued using a risk adjusted cash flow model,
under which future cash flows were discounted taking into account risks
related to existing and future markets and an assessment of the life
expectancy of the purchased software. This analysis resulted in an allocation
of $3.4 million to purchased software, which was capitalized. The purchased
software will be amortized over three years.
Purchased research and development, which had not reached
technological feasibility and which had no alternative future use, was valued
using the same methodology. Expected future cash flows associated with
in-process research and development were discounted considering risks and
uncertainties related to the viability of and potential changes in future
target markets and to the completion of the products that will ultimately be
marketed by Lotus. This analysis resulted in an allocation of $19.9 million
to purchased research and development expense. This amount, which is not
deductible for tax purposes, was charged to operations at the acquisition
date.
Approach's operating results have been included in the consolidated
financial statements from the date of acquisition. Pro forma statements of
operations would not differ materially from reported results.
One Source
..........
Effective August 28, 1993, the Company sold its One Source
business, a developer and marketer of CD-ROM information
products. Total consideration received was immaterial and
no gain or loss was recognized on the sale. The financial statements
reflect the operations of One Source through the effective date.
cc:Mail
........
In March 1991, the Company acquired all outstanding shares of
cc:Mail, Inc. ("cc:Mail"), a privately held concern which
developed and marketed the leading LAN-based electronic mail
product, for $31.6 million and additional payments contingent
upon future performance. In 1992, final contingent payments of
F-18
<PAGE>
$8.7 million were made. The acquisition has been accounted for
using the purchase method. cc:Mail's operating results have been
included in the consolidated financial statements from the date
of acquisition. Pro forma statements of operations would not
differ materially from reported results.
L EMPLOYEE BENEFIT PLANS
The Company maintains a discretionary, non-contributory profit
sharing plan for its employees. Contributions are based on a
percentage of consolidated operating profit and are allocated
among employees on the basis of compensation received during the
plan year. Profit sharing expense was $11.1 million, $7.1 million
and $8.3 million in 1993, 1992 and 1991.
In the U.S., the profit sharing plan was integrated with a
pension plan which provided a minimum guaranteed defined benefit
based on the employee's years of service and final average
compensation. In June 1992, the Company elected to suspend the
pension plan with the intent to terminate at a future date. The
curtailment did not have a material impact on the Company's
financial statements, nor will the expected termination. The
actuarially determined pension cost related to the minimum
guaranteed retirement benefit under the pension plan was not
significant in 1993, 1992 and 1991.
Additionally, the Company offers a savings plan which allows
eligible U.S. employees to make tax-deferred contributions, a
portion of which are matched by the Company. Company
contributions under the savings plan were $3.8 million in 1993,
$3.2 million in 1992 and $3.0 million in 1991.
The Company also maintains retirement plans, principally
defined contribution plans, covering substantially all of its
international employees. Costs related to these plans amounted
to approximately $3.4 million in 1993, $3.2 million in 1992 and
$2.5 million in 1991.
The Company does not offer postretirement benefits other
than those described above.
M INTERNATIONAL OPERATIONS
Sales and marketing operations outside the United States are
conducted principally through foreign sales subsidiaries and
through various representative and distributorship arrangements.
The Company's international manufacturing operations are
located in Ireland and Singapore. The products of these
manufacturing facilities are sold through the Company's foreign
sales subsidiaries and, where the Company has not established a
presence of its own, direct to distributors in those countries.
Other financial information by geographical area is summarized
below:
F-19
<PAGE>
<TABLE>
<CAPTION>
(In thousands) North Asia/ Europe/
America Pacific Other Eliminations Consolidated
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993:
Net sales $531,536 $149,700 $308,938 ($9,006) $981,168
- - --------------------------------------------------------------------------------------------
Operating income:
By area 51,151 34,085 46,659 (441) 131,454
Corporate expenses (32,228)
Other income/
(expense) 2,543
---------
Income before
provision for
income taxes 101,769
- - --------------------------------------------------------------------------------------------
Total assets $489,419 $130,869 $299,577 ($14,520) $905,345
============================================================================================
1992:
Net sales $494,592 $116,199 $300,049 ($10,691) $900,149
- - --------------------------------------------------------------------------------------------
Operating income:
By area 34,972 25,066 26,019 (567) 85,490
Corporate expenses (11,668)
Other income/
(expense) 46,183
---------
Income before
provision for
income taxes 120,005
- - --------------------------------------------------------------------------------------------
Total assets $431,487 $78,545 $266,017 ($12,605) $763,444
============================================================================================
1991:
Net sales $455,802 $117,180 $263,826 ($7,913) $828,895
- - --------------------------------------------------------------------------------------------
Operating income:
By area 584 34,539 53,793 (895) 88,021
Corporate expenses (13,511)
Other income/
(expense) (6,824)
---------
Income before
provision for
income taxes and
cumulative effect
of change in
accounting principle 67,686
- - --------------------------------------------------------------------------------------------
Total assets $431,598 $45,131 $255,745 ($6,937) $725,537
============================================================================================
</TABLE>
F-20
<PAGE>
Intersegment sales between geographic areas presented are
insignificant. For this presentation, certain expenses incurred
at the Company's corporate offices were classified as general
corporate expenses, including the charge of $19.9 million for
purchased research and development in 1993, or allocated to
geographic areas on the basis of sales. Other income/(expense)
includes interest income, interest expense, other expense, net, and
in 1992, the $49.7 million gain on sale of investment in Sybase, Inc.
The decrease in operating income in the Europe/Other region in 1993
and 1992 as compared to fiscal 1991 was due to increased marketing spending
relating to the introduction of new communications products and in response to
heightened European competition, particularly related to Windows-based
applications. The decrease in earnings was also due to the expansion of the
Company's international development organization in Ireland, where new efforts
were undertaken to translate products into local language versions for use on
the Windows platform. The increase of assets in the Asia/Pacific region is
due to the accumulation of unremitted earnings of the region.
Sales to unaffiliated customers outside the United States,
including U.S. export sales, were $485.9 million for the year
1993, $434.9 million for the year 1992 and $421.0 million for the
year 1991. In 1993, one customer accounted for 12% of world wide
sales and a second customer accounted for 11% of such sales. No
one customer accounted for more than 10% of worldwide sales in
1992 or 1991.
N SHAREHOLDER RIGHTS PLAN
The Company has a shareholder rights plan which grants to holders
of record one stock purchase right per share of common stock upon
the occurrence of certain triggering events. Such events would
include the acquisition of Lotus shares through open market
purchases or a tender offer that, in the aggregate, equal or
exceed 15% of outstanding shares.
Should a triggering event occur, holders of such rights
would be entitled to purchase Lotus common stock (or stock of the
acquiring entity, as the case may be) at a 50% discount from its
then current market value. Each right entitles the holder to
purchase shares with a market value aggregating $150 for a price
of $75. Such rights do not extend to any holder whose action
triggered the rights.
The rights expire in November 1998 and may be redeemed prior
to that time at the option of the Board of Directors for nominal
consideration. Until a triggering event occurs, the rights will
not trade separately from the related Lotus common stock.
F-21
<PAGE>
LOTUS SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY RESULTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except 1993, Three Months Ended
per share data) April 3 July 3 Oct 2 Dec 31 Year
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $227,004 $235,785 $240,104 $278,275 $981,168
Gross margin 176,625 184,751 193,295 224,054 778,725
Income before provision
for income taxes 20,791 5,949 28,600 46,429 101,769
Net income 12,267 (4,649) 18,304 29,613 55,535
Net income per
share $0.29 ($0.11) $0.41 $0.64 $1.24
(In thousands, except 1992, Three Months Ended
per share data) March 28 June 27 Sept 26 Dec 31 Year
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $227,063 $220,319 $206,742 $246,025 $900,149
Gross margin 177,018 171,775 159,353 191,900 700,046
Income before provision
for income taxes 31,006 22,299 44,937 21,763 120,005
Net income 20,774 14,940 30,108 14,581 80,403
Net income per
share $0.47 $0.34 $0.72 $0.35 $1.87
</TABLE>
Notes to Quarterly Results of Operations:
(1) 1993 amounts reflect a charge to operations of $19.9
million, or $0.45 per share, in the second quarter for purchased
research and development related to the Approach Software Corporation
acquisition.
(2) 1992 amounts include pre-tax gains on the sale of the
Company's investment in Sybase, Inc. of $34.6 million in the third
quarter and $15.1 million in the fourth quarter with a total gain
for the year of $49.7 million on a pre-tax basis and $33.3 million,
or $0.77 per share, on an after-tax basis. 1992 amounts also include
a restructuring charge in the fourth quarter of $15 million on a pre-tax
basis and $10.1 million, or $0.23 per share, on an after-tax basis.
(3) 1991 amounts include a fourth quarter restructuring charge of
$23 million on a pre-tax basis and $18.6 million, or $0.42 per share,
on an after-tax basis.
(4) 1990 amounts reflect a charge to operations of $53 million,
or $1.23 per share, in the fourth quarter for purchased research and
development related to the Samna acquisition.
F-22
<PAGE>
EXHIBIT 10(e)
Mr. Manzi next proposed that the compensation for
non-employee directors for 1994 be $24,000. After discussion,
and upon motion duly made and seconded, it was unanimously:
RESOLVED: That the compensation for the Corporation's
non-employee directors for 1994 shall be the
sum of $24,000.
<PAGE>
EXHIBIT 11
LOTUS DEVELOPMENT CORPORATION
Computation of Primary and Fully Diluted
Earnings Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Net income $55,535 $80,403 $33,116
Weighted average shares outstanding
during the year 43,089 42,306 42,960
Common equivalent shares 1,632 688 992
------- ------- -------
Common and common equivalent shares
outstanding for purpose of calculating
primary net income per share 44,721 42,994 43,952
Incremental shares to reflect full dilution 924 -- --
------- ------- -------
Total shares for purpose of calculating
fully diluted net income per share 45,645 42,994 43,952
======= ======= =======
Primary net income per share $ 1.24 $ 1.87 $ 0.75
======= ======= =======
Fully diluted net income per share $ 1.22 $ 1.87 $ 0.75
======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE REGISTRANT
Name of Organization Jurisdiction
Aleph 2, S.N.C. France
Approach Software Corporation California
cc:Mail, Inc. California
Lotus Assistance France
Lotus Charles Park Corporation Massachusetts
Lotus CSG Canada Limited Canada
Lotus Desenvolvimento de Software Ltda. Brazil
Lotus Development, B.V. Netherlands
Lotus Development Benelux, B.V. Netherlands
Lotus Development Canada Ltd. Canada
Lotus Development Caribe Corporation Delaware
Lotus Consulting Services Gmbh Germany
Lotus Development Corporation Massachusetts
Lotus Development Danmark AS Denmark
Lotus Development Distribution Limited Ireland
Lotus Development European Corporation Delaware
Lotus Development Foreign Sales Corporation, Ltd. Jamaica
Lotus Development Foundation, Inc. Massachusetts
Lotus Development GmbH Austria
Lotus Development Holdings, B.V. Netherlands
Lotus Development Iberica Spain
Lotus Development Italia SpA Italy
Lotus Development Japan Ltd. Japan
Lotus Development New Zealand, Ltd. New Zealand
Lotus Development Nordic A.B. Sweden
Lotus Development Norway AS Norway
Lotus Development Pty, Ltd. Australia
Lotus Development Russia Russia
Lotus Development S.A. France
Lotus Development S.A. (Pty.) Ltd. South Africa
Lotus Development (Schweiz) A.G. Switzerland
Lotus Development Security Corporation Delaware
Lotus Development Singapore Pte. Ltd. Singapore
Lotus Development (Software) Ltd. Israel
Lotus Development Software (Hong Kong) Ltd. Hong Kong
Lotus Development (U.K.), Ltd. United Kingdom
Lotus Fulfilment Limited Ireland
Lotus Korea Development Co. Ltd. Korea
Lotus Rogers Street Corporation Delaware
Lotus Club International S.A. (Pty.) Ltd. South Africa
PS Publishing Corporation California
Samna Corporation Georgia
Vanguard Business Solutions, Inc. California
<PAGE>
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Lotus Development Corporation on Form S-8 and
related prospectuses with respect to the 1992 Stock Option Plan
(No. 33-51263), Employee Stock Purchase Plan (Nos. 2-88906,
33-6366), 1986 Stock Option Plan for Non-Employee Directors
(Nos. 33-35497, 33-55488), Amended and Restated 1983
Non-Qualified Stock Option Plan (Nos. 2-92360, 33-6702,
33-46652) and Soft-Switch, Inc. Amended and Restated Stock
Option Plan (33-55077), of our reports dated January 26, 1994, on our
audits of the consolidated financial statements and financial
statement schedules of Lotus Development Corporation as of
December 31, 1993 and 1992 and for each of the three years in
the period ended December 31, 1993, which reports are included
or incorporated by reference in this Annual Report on Form 10-K,
as amended by Amendment No. 2 to the Annual Report on Form 10-K/A.
COOPERS & LYBRAND
Boston, Massachusetts
October 17, 1994
