==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
X Quarterly Report Pursuant to Section 13 or
--------- 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended October 1, 1994 or
--------- Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the Transition Period from _____ to _____
Commission File Number 0-11626
LOTUS DEVELOPMENT CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 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)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class October 29, 1994
-------------- ------------------
Common Stock, 47,743,797
$.01 par value shares
==============================================================================
PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
October 1, 1994 October 2, 1993
--------------- ---------------
<S> <C> <C>
Net sales ................................................. $235,246 $240,104
Cost of sales ............................................. 42,730 46,809
-------- --------
Gross margin ........................................... 192,516 193,295
Expenses:
Research and development ............................... 42,022 32,558
Sales and marketing .................................... 124,151 115,051
General and administrative ............................. 17,733 17,591
Other (income) / expense, net (Note D) .................. 74,114 (505)
------- -------
Total expenses ....................................... 258,020 164,695
Income (loss) before provision for income taxes ........... (65,504) 28,600
Provision for income taxes ................................ 881 10,296
------- -------
Net income (loss) ..................................... ($66,385) $18,304
======= =======
Net income (loss) per share .......................... ($1.39) $0.41
======= =======
Weighted average common and common
equivalent shares outstanding ............................ 47,637 45,143
======= =======
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
1
_______________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------------
October 1, 1994 October 2, 1993
--------------- ---------------
<S> <C> <C>
Net sales ................................................. $706,247 $702,893
Cost of sales ............................................. 128,006 148,222
-------- --------
Gross margin ........................................... 578,241 554,671
Expenses:
Research and development ............................... 112,611 94,493
Sales and marketing .................................... 360,316 333,303
General and administrative ............................. 51,240 52,722
Other (income) / expense, net (Note D) .................. 71,046 18,813
-------- --------
Total expenses ....................................... 595,213 499,331
Income (loss) before provision for income taxes ........... (16,972) 55,340
Provision for income taxes ................................ 18,353 29,418
-------- --------
Net income (loss) .................................... ($35,325) $25,922
======== ========
Net income (loss) per share .......................... ($0.76) $0.59
======== ========
Weighted average common and common
equivalent shares outstanding ............................ 46,766 43,962
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
2
_______________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
October 1, 1994 December 31, 1993
--------------- -----------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments (Note B) ................... $388,965 $416,693
Accounts receivable, net of allowances of
$49,873 and $30,002 ...................................... 193,539 217,336
Inventory (Note C) ......................................... 18,551 21,220
Other current assets ....................................... 26,065 20,817
-------- --------
Total current assets ................................... 627,120 676,066
-------- --------
Property and equipment, net of accumulated depreciation
and amortization of $178,766 and $153,768 ................... 132,607 127,437
Software and other intangibles, net of accumulated
amortization of $125,571 and $123,016 ....................... 97,643 88,625
Investments and other assets ................................... 17,018 13,217
-------- --------
Total assets ........................................... $874,388 $905,345
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks ..................................... $123 $ --
Current portion of long-term debt ........................... -- 28,480
Accrued compensation ........................................ 35,816 36,368
Accounts payable, accrued expenses and deferred revenue .... 174,499 163,558
Accrued and deferred income taxes ........................... 27,870 49,017
-------- --------
Total current liabilities .............................. 238,308 277,423
-------- --------
Deferred income taxes .......................................... 53,924 49,531
Long-term debt ................................................. 50,000 50,000
Stockholders' equity:
Preferred stock, $1.00 par value,
5,000 shares authorized, none issued ..................... -- --
Common stock, $.01 par value,
200,000 and 100,000 shares authorized;
63,575 and 62,152 shares issued;
47,729 and 44,928 shares outstanding ..................... 636 622
Additional paid-in capital ................................. 265,473 251,414
Retained earnings .......................................... 492,934 526,554
Treasury stock, 15,846 and 17,224 shares
at an average cost of $14.44 per share ................... (228,843) (248,728)
Translation adjustment ..................................... 1,956 (1,471)
-------- --------
Total stockholders' equity ............................. 532,156 528,391
-------- --------
Total liabilities and stockholders' equity ............. $874,388 $905,345
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
3
_______________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------
October 1, 1994 October 2, 1993
Cash flows from operating activities: --------------- ---------------
<S> <C> <C>
Net income (loss) ......................................................... ($35,325) $25,922
Depreciation and amortization ............................................. 64,305 65,377
Charge for purchased research and development ............................. 67,944 19,900
Change in assets and liabilities, net of effects from acquisitions:
Decrease in accounts receivable ....................................... 39,891 9,886
Decrease in inventory ................................................. 5,943 3,682
(Increase) decrease in accrued compensation ........................... (1,259) 5,282
Increase in accounts payable, accrued expenses and deferred revenue ... (20,411) (2,509)
Increase (decrease) in accrued and deferred income taxes .............. (22,588) 16,880
Net change in other working capital items ............................. (6,705) 2,118
-------- --------
Net cash provided by operating activities ..................................... 91,795 146,538
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ....................................... (27,947) (17,737)
Payments for software and other intangibles ............................... (28,466) (30,842)
Payments for acquisitions, net of cash received ........................... (65,983) (15,374)
Proceeds from sales of (purchases of) short-term investments, net ......... 134,204 (55,582)
Other, net ................................................................ (2,466) 1,721
-------- --------
Net cash provided by (used for) investing activities .......................... 9,342 (117,814)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt .............................................. (28,480) (30,260)
Issuance of common stock ................................................. 33,944 38,190
Purchase of common stock for treasury ..................................... -- (8,107)
Decrease in short-term borrowings ......................................... (125) (225)
-------- --------
Net cash provided by (used for) financing activities .......................... 5,339 (402)
-------- --------
Net increase in cash and cash equivalents ..................................... 106,476 28,322
Cash and cash equivalents, beginning of year .................................. 164,849 121,133
-------- --------
Cash and cash equivalents, end of third quarter ............................... $271,325 $149,455
======== ========
Supplemental Cash Flow Information Nine Months Ended
---------------------------------
October 1, 1994 October 2, 1993
--------------- ---------------
<S> <C> <C>
Interest received ......................................................... $10,908 $6,486
Interest paid ............................................................. $4,423 $6,422
Income taxes paid ......................................................... $40,357 $12,230
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
4
_______________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
A) Basis of Presentation
The accompanying unaudited consolidated balance sheets,
statements of operations, and statements of cash flows
reflect all adjustments (consisting only of normal
recurring items) which are, in the opinion of management,
necessary for a fair statement of the consolidated
financial position at October 1, 1994, and of consolidated
operations and cash flows for the interim periods ended
October 1, 1994 and October 2, 1993.
The accompanying unaudited condensed financial statements
have been prepared in accordance with the instructions for
Form 10-Q and therefore do not include all information and
footnotes necessary for a complete presentation of
operations, the financial position, and cash flows of the
Company, in conformity with generally accepted accounting
principles. The Company filed audited consolidated
financial statements which included all information and
footnotes necessary for such presentation for the years
ended December 31, 1993 and December 31, 1992 in
conjunction with its 1993 Annual Report on Form 10-K, as
amended.
The results of operations for the interim period ended
October 1, 1994 are not necessarily indicative of the
results to be expected for the year.
B) Cash and Short-term Investments
Cash and short-term investments consist of the following:
October 1, December 31,
1994 1993
---------- ----------
Cash and cash equivalents $271,325 $164,849
Short-term investments 117,640 251,844
-------- --------
Cash and short-term investments $388,965 $416,693
======== ========
C) Inventory
Inventory consists of the following:
October 1, December 31,
1994 1993
--------- -----------
Finished goods $ 8,121 $13,962
Raw materials 10,430 7,258
------- -------
Total $18,551 $21,220
======= =======
5
____________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
D) Other (income) / expense , net
Other (income) / expense, net consists of the following:
Three Months Ended
October 1, 1994 October 2, 1993
--------------- ---------------
Charge for purchased research and
development (Note E) $67,944 $ --
Restructuring charge (Note F) 9,000 --
Interest income (3,938) (2,848)
Interest expense 717 1,853
Currency transaction
(gains)/losses, net 60 463
Other, net 331 27
------- ------
Total $74,114 ($ 505)
======= =======
Nine Months Ended
October 1, 1994 October 2, 1993
--------------- ---------------
Charge for purchased research and
development (Note E) $67,944 $19,900
Restructuring charge (Note F) 9,000 --
Interest income (11,843) (8,510)
Interest expense 4,109 6,921
Currency transaction
(gains)/losses, net 770 209
Other, net 1,066 293
------- -------
Total $71,046 $18,813
======= =======
E) Acquisitions
In May 1994, the Company acquired all outstanding shares
of Iris Associates, Inc. ("Iris"), the privately held
developer of Lotus Notes ("Notes"), in exchange for
approximately 1.4 million shares of Lotus common stock.
The transaction was accounted for as a pooling of
interests. Acquired net assets of approximately $1.7
million have been recorded at historical amounts. Prior
periods were not restated due to immateriality, and,
accordingly, results of operations have been included since
the date of acquisition. Prior to the combination, the
Company funded the development of Notes and made royalty
payments to Iris based upon product sales.
In July 1994, the Company acquired all outstanding shares
of Soft*Switch, Inc. ("Soft*Switch"), a privately held
developer of electronic mail message switches that link
disparate electronic messaging systems. The two principal
products sold by Soft*Switch at the acquisition date were
Soft*Switch Central, a main-frame based message switch, and
EMX, a LAN-based message switch. The total purchase price
of $77.5 million consisted of approximately $64.3 million
of cash consideration, $8 million of assumed liabilities,
and $5.2 million of deferred tax liabilities. The
acquisition was 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. Purchased software that had reached
technological feasibility and was principally represented
by the technology comprising the Central product, was
valued using a risk adjusted
6
_______________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
E) Acquisitions, continued
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 $15 million to purchased software, which was
capitalized and is being amortized over five years.
Purchased research and development that had not reached
technological feasibility and that had no alternative
future use was valued using the same methodology.
Purchased research and development that had not reached
technological feasibility is represented by the EMX
technology. 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 $62.5 million to purchased research and
development expense. This amount, which is not deductible
for tax purposes, was charged to operations at the
acquisition date.
Soft*Switch'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.
In September 1994, the Company acquired all the
outstanding shares of Edge Research, Inc. ("Edge"), a
privately held developer of applications development tools
for Lotus Notes, for approximately $5.4 million of cash
consideration. The acquisition was accounted for using the
purchase method. Using methodology consistent with that
used to account for the Soft*Switch acquisition, the
Company identified no tangible or intangible assets, other
than research and development that had not reached
technological feasibility and had no alternative future
use. This analysis resulted in the allocation of $5.4
million to purchased research and development expense.
This amount, which is not deductible for tax purposes, was
charged to operations at the acquisition date.
Edge'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.
F) Restructuring Activities
In the third quarter of 1994, the Company recorded a $9
million restructuring charge related to its European
operations and the discontinuance of a product. European
restructuring activities include the streamlining of the
marketing organization from a product focus to a market
segment focus, the centralization of certain finance and
administration functions, and a reduction in desktop
applications support staff. The charge related to the
discontinued product reflects a $1.1 million write-off of
capitalized software due to the decision in the third
quarter of 1994 to discontinue further development and
marketing.
G) Income Taxes
The Internal Revenue Service ("IRS") is examining the
Company's U.S. income tax returns for the years 1985
through 1989. The IRS has proposed adjustments to the
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, as it believes it has provided
adequate reserves. Additionally, the IRS has recently
commenced its examination of the Company's U.S. income tax
returns for the years 1990 through 1992. The Company
believes that sustained adjustments, if any, from the
examination will not be material to the financial
statements.
7
_______________________________________________________________________________
ITEM 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Revenue for the third quarter of 1994 decreased 2% to $235.2
million from $240.1 million in the same prior year period.
Revenue for the nine months ended October 1, 1994 increased
slightly to $706.2 million from $702.9 million in the same prior
year period. The third quarter revenue decline over the same
prior year period reflected a 17% decrease in revenue from the
Company's desktop applications products. This decline was
partially offset by a 72% increase in revenue from communications
products and services, which in the third quarter of 1994
included revenue from the Company's newly acquired Soft*Switch
products. On a year-to-date basis, a 99% increase in
communications products and services revenue was substantially
offset by a 15% decline in desktop applications revenue. Revenue
in the third quarter of 1993 and the first nine months of 1993
included $4.6 million and $20.2 million of revenue from the One
Source business, which was sold in September of 1993.
The Company's desktop applications product groups include
1-2-3 (spreadsheets), Ami Pro (word processing), Freelance
Graphics (graphics), Lotus Approach (end-user database), Lotus
Organizer (personal information management) and SmartSuite
(integrated applications suite). Revenue from desktop
applications represented 67% of total revenue in the third
quarter of 1994 compared to 79% of revenue in the third quarter
of 1993. On a year-to-date basis, revenue from desktop
applications represented 69% of total 1994 revenue compared to
81% for the same prior year period. DOS desktop revenue,
primarily from 1-2-3 for DOS, declined approximately $38 million
and $101 million over the corresponding three month and nine
month periods in 1993, respectively. The decline in DOS desktop
revenue was partially offset by a 9% increase in Windows desktop
revenue quarter over quarter and a 7% increase year over year.
Revenue from Windows standalone desktop applications declined
significantly in the third quarter, but was more than offset by
an increase in revenue from SmartSuite. SmartSuite represented
41% of Windows desktop revenue in the third quarter of 1994
compared to 30% in the same prior year period. On a year-to-date
basis, SmartSuite represented 44% of 1994 Windows desktop revenue
compared to 23% in the same prior year period.
The 17% decline in desktop revenue in the third quarter of
1994 over the same period in 1993 is attributable to a number of
factors, including the continued migration of users from
DOS-based to Windows-based applications, the disappointing
performance of the Company's European operations, and the
transition by the Company to a new sales program for volume
purchases. These factors are described below.
The marketplace migration from DOS to Windows adversely
affects the Company's results, as its current market share for
Windows spreadsheets is lower than that for DOS spreadsheets.
However, the Company believes that the magnitude of the decline
in DOS-based revenue in 1994 should not be as dramatic as that
experienced in 1993, as DOS-based revenue continues to represent
a smaller share of overall revenue.
The Company believes that in Europe, weaker than expected
end-user demand, higher than desired distribution channel
inventories in certain markets, severe competition and downward
pricing pressures in the Windows desktop applications market
contributed to the decline in desktop applications revenue. In
addition, the Company believes that its introduction of new
releases of certain desktop products in Europe in September 1994
occurred at a point in the third quarter where there was little
opportunity for a significant positive impact on revenue or
market share.
In May 1994, the Company launched Passport, a new sales
program intended to facilitate and simplify volume purchases by
corporate customers on a worldwide basis. Under the Passport
program, the Company's resellers offer worldwide pricing to
end-user customers based on customers' non-binding commitment to
purchase a certain volume of Lotus products in the future. Prior
to Passport, contract-based sales activity was consummated
through the Company's own direct sales force. Under the Passport
program, customers are not required to place an initial order;
however, they have a specified period of time to purchase against
their commitments, and are required to purchase a certain
percentage of their total purchase commitment within the first
six months. The Company believes that the transition to Passport
has initially resulted in a slower-than-expected conversion of
customer purchase commitments into actual sales. In addition,
because the Passport program is administered through the
Company's resellers as opposed to the Company's direct sales
force, the Company now relies on reseller sales reports, which
increases the time it takes for the Company to learn of customer
software installation. Since the Passport program was only
recently introduced, the Company can not yet predict the timing
or the rate at which purchase commitments will be realized as
revenue.
8
_______________________________________________________________________________
ITEM 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations (continued)
While the Company believes that Passport will strengthen
its competitive position and will result in increased sales, the
transition to Passport may continue to affect revenue over the
next several quarters.
Factors that could affect the Company's desktop applications
revenue over its next fiscal year include the rate at which the
DOS market continues to decline, the rate of growth of the
Windows market, the market shift from standalone applications to
integrated suites and the impact of "Windows 95", the new
operating system that Microsoft has announced it will release in
1995. The Company believes that demand in the Windows desktop
applications market is shifting from standalone applications to
integrated suites and that sales of the desktop suites will
continue to account for a growing percentage of all of its
Windows desktop applications sales. Consequently, the Company's
ability to capture market share for suites will be a critical
factor in maintaining and growing desktop revenue. Additionally,
the Company anticipates that downward pressure on pricing for
Windows applications will continue.
The Company's communications products and services now
include Soft*Switch as well as Lotus Notes, cc:Mail and
consulting services. Although revenue from communications
products and services grew significantly and represented 33% of
total revenue in the third quarter of 1994 compared to 19% in the
third quarter of 1993, the Company believes that third quarter
1994 communications revenue was adversely affected by the
Passport program. On a year-to-date basis, communications
products and services represented 31% of 1994 revenue compared to
16% for the same prior year period. Increased sales of
communications products and services reflect the growing momentum
behind workgroup and networked computing. While the Company is
not aware of any current significant competition with respect to
Notes, which was last updated in May 1993, it anticipates that
its competitors will offer competing workgroup computing products
in the future.
Revenue outside the United States declined to 40% of the
Company's worldwide revenue for the third quarter of 1994 down
from 51% for the same prior year period, primarily due to the
significant decline in European revenue. On a year-to-date
basis, revenue outside the United States accounted for 48% of
1994 worldwide revenue compared with 51% for the same prior year
period. The impact of foreign currency fluctuations on
international revenue was insignificant.
The gross margin percentage was 82% for the third quarter of
1994 as well as for the first nine months of 1994. The gross
margin percentage for the third quarter of 1993 and for the first
nine months of 1993 was 81% and 79%, respectively. The gross
margin improvement is attributable primarily to reduced
manufacturing and delivery costs resulting from increased
non-physical unit license sales, and material cost reductions.
The 29% and 19% increase in research and development expense
quarter over quarter and year over year, respectively, reflects a
constant level of desktop development spending and significantly
higher spending associated with the development and enhancement
of the Company's communications products. Additionally, higher
spending was driven by the acquisition of Soft*Switch in July
1994 and by development efforts to translate and localize
products for international markets. International development
organizations have continued their efforts to develop products in
parallel with U.S. product development, with the goal of
achieving simultaneous release of various language versions of
new U.S. products. Capitalized software costs for the third
quarter of 1994 were $8 million compared with $7 million for the
same period in 1993. Year-to-date capitalized software costs
were $24 million compared with $19 million for the same period in
1993.
Sales and marketing expenses grew 8% in both the third
quarter of 1994 and the first nine months of 1994 compared with
the same 1993 periods. The third quarter 1994 increase largely
reflects advertising and promotional program spending for third
quarter 1994 product launches of 1-2-3 for Windows Release 5.0,
1-2-3 for DOS Release 4.0, Approach for Windows Release 3.0,
point releases of Ami Pro and Freelance for Windows and
SmartSuite for Windows Release 3.0. Additionally, the third
quarter growth as well as year-to-date growth was driven by the
Company's continued 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 Company has continued its
efforts to attract users transitioning from DOS to Windows and
to grow the consulting services business.
9
_______________________________________________________________________________
ITEM 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations (continued)
In July 1994, the Company acquired Soft*Switch, Inc. The
purchase price consisted of approximately $64.3 million of cash
consideration, $8 million of assumed liabilities, and $5.2
million of deferred tax liabilities. A significant portion of
the purchase price was allocated to purchased research and
development, resulting in a $62.5 million charge to the Company's
third quarter 1994 operations. See Note E 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 efforts to make the Soft*Switch EMX
products more competitive in a rapidly changing environment.
These efforts are focused on the development of the ultimate
standalone EMX product and the integration of the underlying EMX
technology with Lotus Communications Server, a cross-platform,
multi-protocol message server, which is currently being developed
by the Company. Development efforts will be concentrated on
improving performance, cross-platform functionality, usability,
connectivity, systems management and communication protocol
layers and are expected to involve extensive rewriting of the
code. The Company expects to invest considerable amounts through
1997 to complete and continue development of the ultimate
technologies using the purchased research and development.
In September 1994, the Company acquired Edge Research, Inc.
The purchase price was allocated to purchased research and
development resulting in a $5.4 million non-deductible charge to
other income and expense in the third quarter of 1994.
The Company recorded a $9 million restructuring charge to
other income and expense in the third quarter of 1994 related to
the Company's European operations and to the discontinuance of a
product. European restructuring activities include the
streamlining of the marketing organization from a product focus
to a market segment focus, the centralization of certain finance
and administration functions, and a reduction in desktop
applications support staff. The restructuring activities
resulted in a reduction in force of approximately 90 positions,
primarily in the United Kingdom and Germany. The associated
charge reflects severance costs and, to a lesser extent,
facilities abandonment costs. Severance payments made during the
quarter were $1.3 million. The charge related to the discontinued
product reflects a $1.1 million non-cash write-off of capitalized
software due to the decision in the third quarter of 1994 to
discontinue further development and marketing. The Company
anticipates that the restructuring activities will be essentially
completed within the next six months and that the likely effects
on future operating results will principally consist of a
reduction in compensation, facilities and amortization expenses.
The Company expects to save approximately $7 million annually
over the next several years as a result of the restructuring.
The Company does not believe the restructuring will have a
material impact on future liquidity.
Other income and expense also includes interest income and
expense and the effect of currency transaction gains and losses.
Interest income was higher in the third quarter of 1994 and in
the first nine months of 1994 compared with the same prior year
periods because of higher average cash and short-term investment
balances and higher interest rates. Interest expense declined
primarily due to scheduled debt repayments.
Net income for the three months and nine months ended
October 1, 1994, excluding the restructuring and purchased
research and development charges, was $7.3 million, or $0.15 per
share, and $38.4 million, or $0.79 per share, respectively.
Other income and expense in 1993 includes a second quarter charge
of $19.9 million for purchased research and development related
to the acquisition of Approach Software Corporation ("Approach").
Net income for the nine months ended October 2, 1993, excluding
the charge, was $45.8 million, or $1.04 per share.
The estimated tax rate for 1994 of 36%, excluding the effect
of non-deductible charges for purchased research and development
related to the acquisitions of Soft*Switch and Edge, compares
with 38% for the third quarter of 1993, excluding the effect of a
non-deductible charge for purchased research and development
related to the acquisition of Approach. The decrease in the rate
reflects benefits derived from the Company's manufacturing
operation in Dublin, Ireland.
10
_______________________________________________________________________________
ITEM 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition
Cash and short-term investments decreased $28 million during
the first nine months of 1994 to $389 million at October 1, 1994.
The two primary sources of cash flow were $92 million of cash
generated by operations and $34 million in proceeds from the
issuance of common stock under the Company's employee stock
plans. The Company used a significant portion of the cash for
investing and financing activities, including $28 million for the
purchase of property and equipment, $28 million for payments for
software and other intangibles, $66 million for acquisition
payments in the third quarter of 1994 and for a scheduled debt
repayment of $28 million in the second quarter of 1994.
A substantial portion of the Company's cash and short-term
investments are either deposited in financial institutions
located in Puerto Rico or held by subsidiaries outside the United
States. These investments can be readily transferred to the
United States as required, subject to income and/or withholding
taxes upon repatriation. Taxes have already been provided for
the tax liability which would result.
The Company's financial reserves are represented by cash,
short-term investments and unused portions of credit facilities.
The Company believes its financial reserves and funds provided by
ongoing operations are adequate to meet future liquidity
requirements.
11
_____________________________________________________________________________
PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS
The Company commenced an action on July 2, 1990 in the U.S.
District Court in Boston against Borland International, Inc.
("Borland") (Civ. Action No. 90-11662-K), alleging infringement
of its copyrights in the Lotus 1-2-3 software program by
Borland's "Quattro" and "Quattro Pro" software products. The
action against Borland alleges that the "1-2-3 compatible modes"
of Quattro and Quattro Pro identically recreate substantial and
significant elements of 1-2-3's user interface, including its
menu structure and command choices. The action sought an
injunction preventing further sale of the infringing products and
seeks an award of damages, attorney's fees and costs. On July
31, 1992, the Court found that Borland 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 remaining
liability issues 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 Key Reader infringed the Company's
copyrights, and permanently enjoined 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
compatible modes and/or its Key Reader facility. The Court has
scheduled a jury trial to determine the amount of damages Borland
owes the Company because of its infringements. On September 10,
1993, Borland filed an appeal from the Court's decision and the
permanent injunction pertaining to the infringing products in the
United States Court of Appeals for the First Circuit. This
appeal was argued before the Court of Appeals on October 6, 1994.
A suit was filed against the Company on July 27, 1989, in
the U.S. District Court in New York City by REFAC International,
Ltd. ("REFAC"). The suit alleges that the Company has committed
patent infringement with respect to a U.S. patent issued in 1983
entitled "A Process and Apparatus for Converting A Source Program
Into An Object Program". The Court has determined to resolve
issues concerning validity of the patent before addressing the
alleged infringement. In July 1993, a trial was held on one of
those issues, the Company's claim that the patent is
unenforceable by reason of inequitable conduct before 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.
12
_______________________________________________________________________________
PART II. OTHER INFORMATION
ITEM 1:
LEGAL PROCEEDINGS (Continued)
Commencing on June 23, 1994, six complaints were filed in
the U.S. District Court, District of Massachusetts, against the
Company and various of its officers and directors, captioned
"Jefferson Heritage Partners v. Lotus Development Corp., Jim
Manzi and Edwin Gillis" (Civ. Action No. 94-11279 (PBS)); "Fecht
v. Jim P. Manzi, Edwin J. Gillis, John B. Landry and Lotus
Development Corp." (Civ. Action No. 94-11280 (PBS)); "Cohen v.
Lotus Development Corp., Thomas Lemberg, James Manzi, Edwin J.
Gillis, John Landry, Robert Weiler and Robert P. Schechter" (Civ.
Action No. 94-11281 (PBS)); "Dollinger v. Lotus Development
Corp., Thomas Lemberg, James P. Manzi, Edwin J. Gillis, John B.
Landry, Robert K. Weiler and Robert P. Schechter" (Civ. Action
No. 94-11291 (PBS)); "Rosenbaum v. Lotus Development Corp.,
James M. Manzi and Edwin J. Gillis" (Civ. Action No. 94-11303
(PBS)); and "Weisman v. Lotus Development Corp., James M. Manzi
and Edwin J. Gillis" (Civ. Action No. 94-11308 (PBS)). Each
complaint purports to state a claim for violation of (S) 10(b) of
the Securities Exchange Act of 1934 and SEC Rule 10b-5
promulgated thereunder, arising out of the alleged non-disclosure
by the Company of adverse information concerning its anticipated
revenues and earnings for the second quarter of 1994, which ended
on July 2, 1994. Each complaint also purports to be brought on
behalf of a class of persons who purchased Lotus stock during
periods commencing on various dates in April and May 1994 and
terminating on June 20, 1994, when the Company made certain
public disclosures concerning its anticipated revenues and
earnings. The defendants' time within which to respond to each
complaint has been extended by stipulation. The Company believes
that the allegations of each complaint are without merit and
intends to defend these actions vigorously.
13
_______________________________________________________________________________
PART II. OTHER INFORMATION
ITEM 6:
Exhibits and Reports on Form 8-K
(a) Exhibits
Part I:
Exhibit 11* - Computation of Primary and Fully Diluted Earnings per
Share - page 15
Part II:
None.
(b) Reports on Form 8-K
None.
___________________
*filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LOTUS DEVELOPMENT CORPORATION
(Registrant)
By /s/ Edwin J. Gillis
----------------------------
Edwin J. Gillis, Senior Vice President
of Finance and Operations
(Chief Financial Officer)
By /s/ Lyn L. Benton
-----------------------------
Lyn L. Benton, Vice President of Finance and
Corporate Services and Corporate Controller
(Principal Accounting Officer)
Date: November 15, 1994
14
____________________________________________________________________________
Exhibit 11
LOTUS DEVELOPMENT CORPORATION
COMPUTATION OF PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
October 1, 1994 October 2, 1993
--------------- ---------------
<S> <C> <C>
Net income (loss) .................................................... ($66,385) $18,304
======= =======
Weighted average shares outstanding during the period ............... 47,637 43,430
Common stock equivalent shares ...................................... -- 1,713
------ ------
Common and common stock equivalent shares outstanding for
purpose of calculating primary net income per share ............. 47,637 45,143
Incremental shares to reflect full dilution ......................... -- 535
------ ------
Total shares for purpose of calculating fully diluted
net income (loss) per share ..................................... 47,637 45,678
====== ======
Primary net income (loss) per share ................................. ($1.39) $0.41
Fully diluted net income per (loss) share ........................... ($1.39) $0.40
Nine Months Ended
---------------------------------
October 1, 1994 October 2, 1993
--------------- ---------------
Net income (loss) ................................................... ($35,325) $25,922
======= =======
Weighted average shares outstanding during the period ............... 46,766 42,643
Common stock equivalent shares ...................................... -- 1,319
------ ------
Common and common stock equivalent shares outstanding for
purpose of calculating primary net income per share ............. 46,766 43,962
Incremental shares to reflect full dilution ......................... -- 1,066
------ ------
Total shares for purpose of calculating fully diluted
net income (loss) per share ..................................... 46,766 45,028
====== ======
Primary net income (loss) per share ................................. ($0.76) $0.59
Fully diluted net income (loss) per share ........................... ($0.76) $0.58
</TABLE>
15
_______________________________________________________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> OCT-1-1994
<CASH> 271,325
<SECURITIES> 117,640
<RECEIVABLES> 193,539
<ALLOWANCES> 49,873
<INVENTORY> 18,551
<CURRENT-ASSETS> 627,120
<PP&E> 132,607
<DEPRECIATION> 178,766
<TOTAL-ASSETS> 874,388
<CURRENT-LIABILITIES> 238,308
<BONDS> 50,000
<COMMON> 636
0
0
<OTHER-SE> 531,520
<TOTAL-LIABILITY-AND-EQUITY> 874,388
<SALES> 706,247
<TOTAL-REVENUES> 706,247
<CGS> 128,006
<TOTAL-COSTS> 128,006
<OTHER-EXPENSES> 589,632
<LOSS-PROVISION> 1,472
<INTEREST-EXPENSE> 4,109
<INCOME-PRETAX> (16,972)
<INCOME-TAX> 18,353
<INCOME-CONTINUING> (35,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,325)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
