SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the registrant /X/
Filed by a party other than the registrant /_/
Check the appropriate box:
/_/ Preliminary proxy statement
/X/ Definitive proxy statement
/X/ Definitive additional materials
/_/ Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
Lotus Development Corporation
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
/X/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1),
or 14a-6(j)(2).
/_/ $500 per each party to the controversy pursuant to
Exchange Act Rule 14a-6(i)(3).
/_/ Fee computed on table below per Exchange Act Rules
14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transactions applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:<F1>
(4) Proposed maximum aggregate value of transaction:
Set forth the amount on which the filing fee is calculated and state
how it was determined.
/_/ Check box if any part of the fee is offset as provided
by Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed:
_________________________________________________________________
March 20, 1995
Dear Shareholder:
You are cordially invited to attend the 1995 Annual Meeting
of Shareholders of Lotus Development Corporation, which will be
held at the Museum of Transportation, Larz Anderson Park, 15
Newton Street, Brookline, Massachusetts, on Tuesday, May 2, 1995
at 10:00 a.m., local time.
Information about the Annual Meeting, including a listing
and discussion of the matters on which the shareholders of the
Company will act, may be found in the enclosed formal Notice of
Annual Meeting and Proxy Statement. The Annual Report to
Shareholders for the fiscal year ended December 31, 1994 has also
been enclosed if it was not previously furnished to you.
We hope that you will be able to attend the Annual Meeting.
However, whether or not you anticipate attending in person, I
urge you to complete, sign and return the enclosed proxy card
promptly to ensure that your shares will be represented at the
Annual Meeting. If you do attend, you, of course, will be
entitled to vote in person, and such vote will revoke your proxy.
Sincerely,
/s/Jim P. Manzi
Jim P. Manzi
Chairman of the Board and President
Lotus Development Corporation 55 Cambridge Parkway, Cambridge,
Massachusetts 02142 617 577-8500
__________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
55 Cambridge Parkway
Cambridge, Massachusetts 02142
-------------------------
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
------------------------
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders (the "Meeting") of Lotus
Development Corporation, a Delaware corporation (the "Company"),
will be held on Tuesday, May 2, 1995 at 10:00 a.m., local time,
at the Museum of Transportation, Larz Anderson Park, 15 Newton
Street, Brookline, Massachusetts. The purpose of the Meeting
shall be:
1. To elect directors of the Company to serve until the next
Annual Meeting of Shareholders and until their respective
successors have been duly elected and qualified.
2. To approve the amendment of the Company's 1992 Stock
Option Plan to increase the number of shares of the Company's
Common Stock that may be offered pursuant to such plan.
3. To ratify the selection of the firm of Coopers & Lybrand
L.L.P., as auditors for the Company for the fiscal year ending
December 31, 1995.
4. To transact such other business as may properly come
before the Meeting or any adjournments thereof.
Only shareholders of record on the books of the Company at
the close of business on March 10, 1995 will be entitled to
notice of and to vote at the Meeting.
Please sign, date and return the enclosed proxy card in the
enclosed envelope at your earliest convenience. If you return
your proxy, you may nevertheless attend the Meeting and vote your
shares in person.
All shareholders of the Company are cordially invited to
attend the Meeting.
By Order of the Board of Directors
Thomas M. Lemberg
Secretary
Cambridge, Massachusetts
March 20, 1995
- -----------------------------------------------------------------
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE
AND MAIL THE ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED FROM WITHIN THE UNITED STATES.
- -----------------------------------------------------------------
LOTUS DEVELOPMENT CORPORATION
55 Cambridge Parkway
Cambridge, Massachusetts 02142
---------------
PROXY STATEMENT
------------
Annual Meeting of Shareholders To Be Held on May 2, 1995
Proxies enclosed with this Proxy Statement are solicited by
the Board of Directors of Lotus Development Corporation, a
Delaware corporation (the "Company"), for use at the Annual
Meeting of Shareholders (the "Meeting") to be held on Tuesday,
May 2, 1995 at 10:00 a.m., local time, at the Museum of
Transportation, Larz Anderson Park, 15 Newton Street, Brookline,
Massachusetts, and any adjournments thereof.
Shares represented by duly executed proxies in the form
enclosed herewith received by the Company prior to the Meeting
will be voted at the Meeting FOR the election of the nominees
for director named below (except to the extent that authority
therefor is withheld) and FOR each proposal described in this
Proxy Statement. Where no choice has been specified on a proxy
with respect to a particular matter, the shares represented by
that proxy will be voted FOR the particular matter.
Any shareholder may revoke a proxy at any time prior to its
exercise by delivering a later-dated proxy or a written notice of
revocation to the Secretary of the Company at the address of the
Company set forth above, or by voting in person at the Meeting.
If a shareholder does not intend to attend the Meeting, any proxy
or notice should be returned for receipt by the Company not later
than the close of business on Monday, May 1, 1995. The persons
named in the proxies are officers of the Company. The Company
will bear the cost of solicitation of proxies relating to the
Meeting.
Only shareholders of record as of the close of business on
March 10, 1995 (the "Record Date") will be entitled to notice of
and to vote at the Meeting and any adjournments thereof.
As of the Record Date there were 48,257,996 shares (excluding
treasury shares) of the Company's Common Stock, $.01 par value
(the "Common Stock"), issued and outstanding. Such shares of
Common Stock are the only voting securities of the Company.
Shareholders are entitled to cast one vote for each share of
Common Stock held of record on the Record Date.
The Board of Directors of the Company (the "Board of
Directors") is not aware of any other matters to be presented at
the Meeting. If any other matter should be presented at the
Meeting upon which a vote properly may be taken, shares
represented by all duly executed proxies received by the Company
will be voted with respect thereto in accordance with the best
judgment of the persons named in the proxies. An Annual Report
to Shareholders, containing financial statements for the fiscal
year ended December 31, 1994, preceded or accompanies this Proxy
Statement. This Proxy Statement and the proxy enclosed herewith
were first mailed to shareholders on or about March 20, 1995.
The mailing address of the Company's principal executive
offices is 55 Cambridge Parkway, Cambridge, Massachusetts 02142.
PRINCIPAL HOLDERS OF VOTING SECURITIES
Security Ownership of Certain Beneficial Owners
The following table sets forth as of December 31, 1994 the
name of each person who, to the knowledge of the Company, owned
beneficially more than five percent (5%) of the shares of Common
Stock of the Company outstanding at such date, the number of
shares owned by each such person and the percentage of the
outstanding shares represented thereby. The information below
with respect to beneficial ownership is based upon information
filed with the Securities and Exchange Commission ("SEC")
pursuant to Sections 13(d) or 13(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and furnished to
the Company by the respective shareholders.
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
------------------- ----------------------- --------
The Capital Group Companies, Inc. 2,630,000(1) 5.51%
333 South Hope Street
Los Angeles, CA 90071
FMR Corp. 6,793,974(2) 14.23%
82 Devonshire Street
Boston, MA 02109
Manning and Napier Advisors, Inc. 3,241,506(3) 6.80%
1100 Chase Square
Rochester, NY 14604
Metropolitan Life Insurance 3,561,300(4) 7.46%
Company
One Madison Avenue
New York, NY 10010
State Street Research & 3,537,500(5) 7.41%
Management Company
One Financial Center
Boston, MA 02111
(1) Represents shares held by Capital Research and Management
Company, a registered investment adviser ("CRMC") and an
operating subsidiary of The Capital Group Companies, Inc. As
of the date set forth above, CRMC exercised sole investment
discretion with respect to all of such shares, all of which
were owned by various institutional investors. CRMC had no
voting power with respect to such shares and disclaims
beneficial ownership of such shares.
(2) Represents shares beneficially owned by (i) FMR Corp.
through its wholly owned subsidiaries, Fidelity Management &
Research Company, a registered investment adviser
("Fidelity"), and Fidelity Management Trust Company, a bank
("FMTC"), (ii) by certain investment companies (including the
Fidelity Magellan Fund) for which Fidelity serves as
investment adviser (the "Fidelity Funds"), and (iii) by
Edward C. Johnson 3d, as Chairman of FMR Corp., and through
certain members of his family and family trusts by virtue of
their controlling interest as a group in the voting stock of
FMR Corp. The Fidelity Magellan Fund beneficially owned
4,757,890 shares or 9.97% of the Common Stock outstanding as
of the date set forth above. FMTC is the beneficial owner of
109,190 shares or .23% of the Common Stock outstanding of the
Company as a result of its serving as investment manager of
institutional account(s). Mr. Johnson and FMR Corp., through
its control of Fidelity, and the Fidelity Funds each had sole
dispositive power with respect to the 6,684,784 shares owned
by the Fidelity Funds. Mr. Johnson and FMR Corp., through
its control of FMTC, had sole dispositive power over 109,190
shares and sole voting power with respect to 7,990 of these
shares and no voting power with respect to 101,200 shares
owned by institutional accounts managed by FMTC. Neither FMC
Corp. nor Mr. Johnson has the sole power to vote or direct
the voting of the shares owned directly by the Fidelity
Funds, which power resides with the Funds' Board of Trustees.
(3) The beneficial owner, a registered investment adviser,
possessed sole voting with respect to 3,170,281 of such
shares and sole dispositive power with respect to all such
shares as of the date stated above.
(4) The beneficial owner, a registered investment adviser and
insurance company, possessed sole voting with respect to
3,430,700 of such shares and sole dispositive power with
respect to all such shares as of the date stated above.
(5) The beneficial owner, a registered investment adviser,
possessed sole voting power with respect to 3,407,100 of such
shares and sole dispositive power with respect to all such
shares as of the date stated above.
Security Ownership of Directors and Executive Officers
The following table sets forth for each member of the Board
of Directors, the Company's Chief Executive Officer ("CEO"), and
each of the next four most highly compensated executive officers
of the Company, the position presently held by such person and
the number of shares and percentage of outstanding Common Stock
of the Company beneficially owned by each and by all directors
and executive officers as a group, as of February 1, 1995.
Positions and Offices Amount and Nature of Percent
Name with the Company Beneficial Ownership (1) of Class
- ----- --------------------- ------------------------ --------
Jim P. Manzi Chairman of the Board, 1,217,072 (2) 2.54%
President and Chief
Executive Officer
Richard S. Braddock Director 8,000 (3) *
Elaine L. Chao Director 0 *
William H. Gray III Director 0 *
Michael E. Porter Director 11,083 (4) *
Henri A. Termeer Director 7,083 (5) *
Edwin J. Gillis Senior Vice President-- 101,759 (6) *
Finance and Operations and
Chief Financial Officer
John B. Landry Senior Vice President-- 42,556 (7) *
Communications,
Development and Chief
Technology Officer
June L. Rokoff Senior Vice President-- 65,471 (8) *
Worldwide Services Group
Robert K. Weiler Senior Vice President-- 83,248 (9) *
Worldwide Sales and Marketing
All directors and executive
officers as a group (14
persons) 1,594,572 (10) 3.30%
________________
* less than 1%
(1) Except where expressly stated otherwise, each named person
possesses sole voting and investment power with respect to
the shares.
(2) Includes 26,201 shares held in the Jim P. Manzi 1993
Irrevocable Trust for the benefit of Mr. Manzi's children.
Includes 46,666 shares that Mr. Manzi has the right to
acquire within 60 days of February 1, 1995 by the exercise of
stock options.
(3) Includes 7,500 shares that Mr. Braddock has the right to
acquire within 60 days of February 1, 1995 by the exercise of
stock options.
(4) Includes 7,083 shares that Mr. Porter has the right to
acquire within 60 days of February 1, 1995 by the exercise of
stock options.
(5) Includes 7,083 shares that Mr. Termeer has the right to
acquire within 60 days of February 1, 1995 by the exercise of
stock options.
(6) Includes 99,479 shares that Mr. Gillis has the right to
acquire within 60 days of February 1, 1995 by the exercise of
stock options. Includes 780 shares held in trust for the
benefit of Mr. Gillis under the Company's 401k and Profit
Sharing Plan.
(7) Includes 31,270 shares that Mr. Landry has the right to
acquire within 60 days of February 1, 1995 by the exercise of
stock options. Includes 112 shares held in trust for the
benefit of Mr. Landry under the Company's 401k and Profit
Sharing Plan and 1,200 shares over which Mr. Landry exercises
investment discretion as custodian of such shares held for
the benefit of his minor children.
(8) Includes 48,541 shares that Ms. Rokoff has the right to
acquire within 60 days of February 1, 1995 by the exercise of
stock options. Includes 7,430 shares held in trust for the
benefit of Ms. Rokoff under the Company's 401k and Profit
Sharing Plan.
(9) Includes 81,979 shares that Mr. Weiler has the right to
acquire within 60 days of February 1, 1995 by the exercise of
stock options.
(10) Includes 387,760 shares that directors and executive
officers of the Company have the right to acquire within 60
days of February 1, 1995 by the exercise of stock options and
8,463 shares of Common Stock held in trust by the Company's
Profit Sharing and 401k Plan as described above.
EXECUTIVE COMPENSATION AND OTHER INFORMATION CONCERNING DIRECTORS
AND EXECUTIVE OFFICERS
Summary Compensation
The following table sets forth information concerning the
cash and noncash compensation in each of the last three fiscal
years for the Company's CEO and the next four most highly
compensated executive officers.
Long Term All Other
Annual Compensation(1) Compensation Compensation
Name and ---------------------- ------------ ------------
Principal Position Year Salary($) Bonus($) Options(#) ($)(2)
- ------------------ ---- --------- -------- ----------- ------
Jim P. Manzi 1994 650,000 227,500 200,000 31,800
Chairman of the 1993 650,000 650,000 40,000 35,046
Board and President 1992 650,000 0 0 34,214
Edwin J. Gillis 1994 325,000 113,750 100,000 17,100
Chief Financial 1993 275,000 275,000 17,500 18,597
Officer and Senior 1992 275,000 0 50,000 23,805
Vice President --
Finance and Operations
John B. Landry 1994 325,000 113,750 100,000 18,150
Senior Vice 1993 325,000 325,000 12,500 28,325
President -- 1992 325,000 182,000 (3) 0 26,889
Communications Development
and Chief Technology Officer
June L. Rokoff 1994 325,000 113,750 100,000 18,150
Senior Vice 1993 325,000 325,000 25,000 19,771
President -- Worldwide 1992 307,400 0 65,000 19,945
Services Group
Robert K. Weiler 1994 350,963 120,313 100,000 18,695
Senior Vice 1993 325,000 325,000 17,500 19,771
President -- Worldwide 1992 325,000 0 0 24,688
Sales and Marketing
_____________
(1) Does not include perquisites or other personal benefits in
any year for which the aggregate amount was less than the lesser
of either $50,000 or 10 percent of the total annual salary and
bonus for the executive officer in that year.
(2) Includes amounts credited to the account of the executive
officer for those years in which he or she served in such capacity
in connection with (i) the profit sharing feature of the Company's
Profit Sharing and 401k Plan, (ii) the Company's Defined
Contribution Restoration Plan and (iii) the Company matching
contribution under the savings feature of the Profit Sharing and
401k Plan as follows:
Defined
Contribution
Profit Sharing Restoration 401k Matching
Name Year Amount($) Plan ($) Contribution($)
- ---- ---- --------- -------- ---------------
Manzi........... 1994 3,150 24,150 4,500
1993 11,084 19,465 4,497
1992 7,781 22,069 4,364
Gillis.......... 1994 3,150 9,450 4,500
1993 11,084 3,016 4,497
1992 7,781 11,660 4,364
Landry.......... 1994 3,150 10,500 4,500
1993 11,084 12,744 4,497
1992 7,781 14,744 4,364
Rockoff......... 1994 3,150 10,500 4,500
1993 11,084 4,190 4,497
1992 7,781 7,800 4,364
Weiler.......... 1994 3,150 11,045 4,500
1993 11,084 4,190 4,497
1992 7,781 12,543 4,364
(3) Represents payment by the Company related to Mr. Landry's
prior employment for cash and other compensation that he had
foregone by joining the Company.
Option Grants in Last Fiscal Year
The following table sets forth information concerning
individual stock option grants made to the Company's CEO and each
of the Company's next four most highly compensated executive
officers during fiscal 1994.
Individual Grants (1)
----------------------------------------
Percent of Potential Realizable
Total Value at Assumed
Options Annual Rates of
Granted to Stock Price Appreciation
Employees for Option Term (2)
Options in Exercise -------------------
Granted Fiscal Year Price Expiration 5% 10%
Name (#) (%) ($/Sh) Date ($) ($)
- ---- -------- ---------- ------- ---------- --------- ---------
Jim P. Manzi.... 200,000 5.06 64.50 January 25, 2001 2,226,330 8,048,709
Edwin J. Gillis. 100,000 2.53 64.50 January 25, 2001 1,113,165 4,024,354
John B. Landry.. 100,000 2.53 64.50 January 25, 2001 1,113,165 4,024,354
June L. Rokoff.. 100,000 2.53 64.50 January 25, 2001 1,113,165 4,024,354
Robert K. Weiler 100,000 2.53 64.50 January 25, 2001 1,113,165 4,024,354
(1) All options described above are "premium" options granted
at a per share exercise price 20% above the fair market value
of a share of Common Stock on the date of grant. The options
are non-qualified stock options, have a seven year term and
vest over three years beginning on the 25th month following
the date of grant and thereafter in equal monthly
installments over the succeeding 35 months.
(2) Calculation of potential realizable values are based on
theoretical rates of return required to be disclosed by the
SEC and may or may not accurately reflect or predict the
actual value of the stock options.
Aggregated Option Exercises In Last Fiscal Year And Fiscal
Year-End Option Values
The following table sets forth information concerning each
exercise of stock options by the CEO and each of the Company's
next four most highly compensated executive officers during
fiscal 1994 and the value of unexercised options at the end of
that fiscal year.
Number of Value of Unexercised
Unexercised in-the-Money
Shares Options at Fiscal Options at
Acquired Year-End Fiscal Year-End (1)
on Value Exercisable/ Exercisable/
Exercise Realized Unexercisable Unexercisable
Name (#) ($) (#) ($)
- ---- ------ ------- ---------------- -------------------
Jim P. Manzi...... 21,250 674,688 44,166 / 233,333 914,883 / 669,785
Edwin J. Gillis... 10,000 421,563 98,385 / 165,364 961,704 / 1,047,808
John B. Landry.... 40,500 1,522,063 40,489 / 144,010 848,605 / 915,064
June L. Rokoff.... 21,250 772,188 46,979 / 164,270 675,635 / 925,284
Robert K. Weiler.. 15,000 643,125 43,385 / 152,864 949,517 / 1,168,121
(1) Based on the closing price on the NASDAQ National Market
System for a share of Common Stock on December 31, 1994 of
$41.00.
Pension Plan
In 1985, the Company established the Lotus Development
Corporation Pension Plan (the "Pension Plan") for the purpose of
assisting its employees in meeting the needs of retirement. In
1992, the Company determined that its Profit Sharing and 401k
Plan could provide adequate retirement assistance to employees
and, effective June 1, 1992, suspended the Pension Plan. While
all benefits accrued under the Pension Plan through May 31, 1992
have become fully vested, no further benefits have accrued to
employees after that date.
Benefits under the Pension Plan are based on an average of
the participant's highest consecutive 36 months of total annual
compensation during the last 72 months of service ("Final Average
Compensation"). The monthly benefit payable upon normal
retirement in the form of a single life annuity is computed as
follows: 1/12th of 1.5% of Final Average Compensation is
multiplied by the participant's total number of years of service
at June 1, 1992 up to no more than 35 years. From that result is
subtracted the monthly value of the annuity that could be
acquired (on specified actuarial assumptions) with the amount of
Company profit sharing contributions for the participant's
account for 1990 and subsequent years accumulated with a deemed
interest return.
The table below sets forth the estimated annual benefits
payable upon normal retirement under the Pension Plan formula to
employees in the specified average salary and years of service
classifications:
Years of Service
------------------------
Remuneration 5 10
------------ ------ ------
$25,000 $1,875 $3,750
50,000 3,750 7,500
75,000 5,625 11,250
100,000 7,500 15,000
125,000 9,375 18,750
150,000 11,250 22,500
175,000 13,125 26,250
200,000 15,000 30,000
228,886* 17,165 34,330
___________________
* The maximum permitted salary recognized under the
Internal Revenue Code of 1986, as amended (the
"Code") as in effect in 1992.
As of June 1, 1992, the date on which the accrual of future
benefits was suspended, Mr. Manzi had eight years, Mr. Landry had
less than one year, Ms. Rokoff had seven years, Mr. Gillis had
less than one year and Mr. Weiler had one year of service under
the Pension Plan.
Other Benefit Plans
The Company currently provides certain benefits to its
eligible employees (including its executive officers) through the
benefit plans described below:
1992 Stock Option Plan. The Company maintains the Lotus
Development Corporation 1992 Stock Option Plan (the "1992 Stock
Option Plan") to attract and retain the best available personnel
for positions of substantial responsibility and to provide
additional incentives to certain employees and consultants to
contribute to the success of the Company. The 1992 Stock Option
Plan is administered by a committee of the Board of Directors
that consists of independent directors. Stock options granted
under the plan may not be granted at less than fair market value
on the date of grant. See "Proposal No. 2 - Approval of
Amendment to the 1992 Stock Option Plan" below.
Employee Stock Purchase Plan. The Company maintains the
Employee Stock Purchase Plan (the "Employee Plan") to provide
incentive and to encourage ownership of Common Stock by all
eligible employees of the Company and its subsidiaries.
Employees of the Company may participate in the Employee Plan by
authorizing payroll deductions over a six month period, with the
proceeds being used to purchase shares of Common Stock for the
participant at a discounted price. The Employee Plan is
intended to be an "employee stock purchase plan" under Section
423 of the Code.
Profit Sharing Plan and 401k Plan. The Company's Profit
Sharing and 401k Plan (the "Plan") provides savings options to
eligible U.S. employees of the Company through deferment of a
portion of their compensation. Participants may elect to defer 2%
to 12% of their compensation into the Plan and may also elect to
contribute up to an additional 10% of their compensation on a
non-deferred basis; provided that the combination of deferred and
non-deferred contributions cannot exceed 12% of annual
compensation. The Company also makes matching contributions equal
to a percentage of the participant's biweekly deferred
contributions.
Under the Plan, an annual discretionary profit sharing
contribution by the Company based on a percentage of operating
profit is allocated to the accounts of all participants, who do
not themselves make any profit sharing contribution. The level of
Company profit sharing and matching contributions is set
annually by the Board of Directors.
The Plan is administered by a committee appointed by the
Board of Directors. Each participant's contributions to the Plan
are held in trust by a bank trustee and are invested in certain
investment funds in accordance with the participant's
instructions. The Plan is intended to be a qualified plan under
Section 401(k) of the Code.
Defined Restoration Plan. The Company adopted the Defined
Contribution Restoration Plan to provide supplemental retirement
benefits to employees, who because of limitations imposed by the
law on benefits under tax qualified plans, would receive less
than the full benefits to which they would have otherwise been
entitled under the Company's qualified retirement plan. Under the
Defined Contribution Restoration Plan, a participant's account is
credited each year with the amount by which his or her profit
sharing allocation under the Company's Profit Sharing and 401k
Plan, calculated without consideration of the limitations imposed
under the Code, exceeds the amounts permitted under the Code. The
Company's funding policy is to pay these supplemental benefits
directly to participants as they become due.
Compensation Committee Report on Executive Compensation
The Company's executive compensation program is administered
by the Compensation Committee of the Board of Directors (the
"Committee"). The Committee, which is composed of two independent
directors, makes recommendations to the Board of Directors on the
three key components of the Company's executive compensation
program, base salary, annual incentive awards and longterm
incentives.
Compensation Policies for Executive Officers.
The Company's executive compensation program is designed to
attract and retain fully qualified executives in the highly
competitive high technology marketplace. The levels of executive
compensation established by the Committee are designed to be
consistent with those available to other executives in similarly
sized corporations.
The Committee establishes individual compensation awards
based on the contribution the executive has made in attaining the
Company's short term and strategic performance objectives as well
as the executive's anticipated future contribution. The Company's
executive compensation program consists primarily of the
following integrated components:
1. Base Salary - which is designed to compensate executives
competitively within the industry and marketplace.
2. Annual Incentives - which provide a direct link between
executive compensation and annual Company performance against
predetermined measures.
3. Long Term Incentives - which consist of stock options
that link management decision making with long-term Company
performance and shareholder interests.
Base Salary. Base salary levels for executive officers of
the Company are reviewed annually by the Compensation Committee.
The Committee's current policy is to target base salaries at the
mid-range of the market and to maintain the combined amount of
base salary and annual incentives within the upper quartile of
the market based on independent nationally-recognized surveys and
competitive analyses of companies whose gross revenues fall
within the same range as those of the Company. The surveys from
which this market comparison is drawn include data from over 400
major manufacturing and service companies and from over 300 high
technology companies of various sizes. The surveys include, but
are not limited to, data from all industries represented in the
Standard and Poor's 500 High Technology Composite Index, i.e.,
Computer Software & Services, Communication
Equipment/Manufacturers, Computer Systems, Aerospace/Defense,
Electronics (Instrumentation, Defense and Semiconductors) and
Office Equipment and Supplies. The High Technology Composite
Index is the "line of business index" used in the stock
performance graph set forth below. See "Performance
Graph--Cumulative Five-Year Return" below.
Annual Incentives. All executive officers participate in an
Executive Incentive Program, which compensates officers in the
form of annual cash bonuses. Awards under this program are based
on the attainment of four specific Company performance measures
established by the Compensation Committee at the beginning of the
fiscal year. These performance measurements are keyed to
management's annual operating plan and are based on the
achievement of targeted (i) operating profit, (ii) revenue
growth, (iii) revenue per employee and (iv) expense per employee.
As Company performance for fiscal 1994 did not meet the targeted
measures, the Executive Incentive bonuses actually paid were
below targeted amounts.
Long Term Incentives. The Company provides long term
incentives through its Amended and Restated 1983 Nonqualified
Stock Option Plan and its 1992 Stock Option Plan. The purpose of
these plans is to create a direct link between compensation and
the long-term performance of the Company. Stock options under
these plans are granted at or above fair market value and vest in
installments, generally over four years. Options granted before
January 1, 1993 have a five year term and options granted on or
after that date have a seven year term. The Company makes its
annual grant of options to its employees, including its executive
officers, in January, to enable the Company to more closely link
option grants to individual contribution and Company performance.
When recommending option awards for an executive officer,
the Committee considers (i) the executive's current contribution
to Company performance, (ii) the anticipated contribution in
meeting the Company's long-term strategic performance goals and
(iii) industry practices and norms. Because the receipt of value
by an executive officer under a stock option is dependent upon an
increase in the price of the Company's Common Stock, this portion
of the executives' compensation is directly aligned with an
increase in shareholder value.
In 1994, the Company adopted a "premium" stock option
program for the CEO, the executive officers and certain other
officers of the Company. The program is designed to enhance the
link between the participant's compensation and the long-term
performance of the Company and assist in the retention of each
participant. Under this program participants receive options to
purchase Common Stock under the 1992 Stock Option Plan at 20%
above fair market value. Options granted under this program have
a seven year term and vest over three years beginning in the 25th
month following the date of grant and thereafter in equal monthly
installments over the succeeding 35 months.
In January 1995, the Company granted "premium" options to
purchase the following number of shares of Common Stock to the
CEO and the next four most highly compensated executive officers
at an exercise price of $48.60 per share: Mr. Manzi - 100,000;
Mr. Landry - 50,000; Ms. Rokoff - 50,000; Mr. Gillis - 50,000;
and Mr. Weiler - 50,000.
CEO Compensation.
Base Salary. The CEO's salary is positioned competitively
to the mid-range of the marketplace, as determined through
comparison of surveys and competitive analyses in the manner
described above. The CEO has not received a base salary increase
since January 1990.
Incentive Compensation. The annual Executive Incentive
Program is designed to reward the CEO based on the Company's
performance. The CEO's annual bonus payable under this Program
is determined using the same four measurements employed in
determining the annual incentive awards for executive officers
described above. These performance measurement targets are set
and approved by the Committee annually. The CEO's maximum
potential annual incentive award under this program is 150% of
base salary. As Company performance for fiscal 1994 did not meet
three of the four measurement targets, the CEO's Executive
Incentive bonus for 1994 was below the targeted amount.
Long Term Incentive. In January 1995, the CEO received a
"premium" option grant as described above. Consistent with the
Committee's considerations for awards under this plan, the award
was based on the anticipated contribution of the CEO to the
attainment of the Company's long-term strategic performance.
Based upon its assessment of the industry surveys described
above, the Committee believes that the awarding of this grant is
within the scope of the marketplace for executives of similarly
sized companies.
Respectfully submitted by the
Compensation Committee.
Richard S. Braddock, Chairman
Henri Termeer
Compensation of Directors
All Directors, with the exception of Mr. Manzi, received an
annual retainer of $24,000 for the fiscal year ended December 31,
1994, together with reimbursement of expenses incurred in
attending meetings of the Board of Directors.
On January 1, 1995, Mr. Braddock, Ms. Chao, Mr. Gray, Mr.
Porter and Mr. Termeer were each granted an option to acquire
10,000 shares of Common Stock at an exercise price of $40.50 per
share, which price was equal to the market value of the Company's
Common Stock on the first business day following that date,
pursuant to the Company's 1986 Stock Option Plan for Non-Employee
Directors. In addition, in accordance with such plan, Mr. Gray
and Ms. Chao were each granted options to purchase 10,000 shares
of Common Stock at an exercise price of $55.625 and $31.00,
respectively, (the market value of such shares on the date of
grant) in connection with their election to the Board of
Directors.
Compensation Committee Interlocks and Insider Participation
During 1994, Messrs. Aldo Papone, Chester A. Siuda, Richard
S. Braddock and Henri A. Termeer each served on the Compensation
Committee of the Board. Messrs. Papone and Siuda each declined
to stand for re-election to the Board of Directors at the
Company's 1994 Annual Meeting of Shareholders in May 1994.
Compliance with Section 16(a) of the Exchange Act
Michael E. Porter, a Director of the Company, made one late
filing reporting the purchase of 500 shares of Common Stock that
was required to be filed in 1994 on Form 4 under Section 16(a) of
the Exchange Act. Mr. Porter subsequently reported this
transaction.
Performance Graph
The following indexed graph indicates the Company's total
return to its shareholders for the past five year period ended
December 31, 1994 as compared to the total return over such
period for the Standard & Poor's 500 Composite Index and the
Standard & Poor's High Tech Composite Index. This graph assumes a
$100 investment at the beginning of the five-year period and the
reinvestment of all dividends.
(Pursuant to Item 304 of Regulation S-T, the Company has submitted
the performance graph under cover of Form SE)
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Each of the persons named below has been nominated for
election as a director of the Company until the 1996 Annual
Meeting of Shareholders and until his successor has been duly
elected and qualified. No proxy may be voted for more persons
than the number of nominees listed below. Shares represented by
all duly executed proxies received by the Company and not marked
to withhold authority to vote for any individual director or for
all directors will be voted FOR the election of all the nominees
named below. The Board of Directors knows of no reason why any
such nominee should be unable or unwilling to serve, but if such
should be the case, the shares represented by duly executed
proxies received by the Company will be voted for the election of
a substitute nominee selected by the Board of Directors. The
nominees receiving a plurality of the votes cast at the Meeting
will be elected as directors.
Information Pertaining to Nominees
The following table sets forth the name and address of each
nominee, the age of each nominee, the year in which each nominee
first became a director of the Company, the principal occupation
of each nominee during the past five years and any other
directorships held, as of February 1, 1995, by each nominee in
any company subject to the reporting requirements of the Exchange
Act or in any company registered as an investment company under
the Investment Company Act of 1940, as amended.
<TABLE>
<CAPTION>
Year in
Which
Nominee
First
Became Principal Occupation
Name and Address Age Director During Past 5 Years Directorships
---------------- --- -------- ------------------- -------------
<S> <C> <C> <C> <C>
Jim P. Manzi 43 1984 Chairman of the Board None
c/o Lotus Development of the Company (1986 to
Corporation present); President and
55 Cambridge Parkway Director of the Company
Cambridge, MA 02142 (1984 to present).
Richard S. Braddock 53 1992 Partner (1994 to present), Eastman Kodak
c/o Clayton, Dubilier Clayton, Dubilier & Rice, Company;
& Rice, Inc. Inc.; Chief Executive True North
126 East 56th Street Officer (1993) Medco Communications
New York, NY 10022 Containment Services, Inc. Inc.
(health care related
services company);
President and Chief
Operating Officer (1990-1992),
Citicorp and Citibank, N.A.
(bank and financial services
companies).
Elaine L. Chao 42 1994 President and Chief Dole Food
c/o United Way Executive Officer (1992 to Company
of America present), United Way of
701 North Fairfax Street America; Director (1991 -
Alexandria, VA 22314 1992), Peace Corps; Deputy
Secretary (1989-1991),
United States Department of
Transportation.
William H. Gray III 53 1994 President and Chief Chase Manhattan
c/o United Negro Executive Officer (1991 Corp.; MBIA
College Fund to present), United Negro Corp.;
700 13th Street, N.W. College Fund; Congressman Prudential
Suite 1180 2nd District Pennsylvania Insurance Corp.
Washington, D.C. 20005 (1979-1991), U.S. House of of America;
Representatives. Rockwell Int'l
Corp.; Union
Pacific Corp.;
Warner Lambert
Corp.; and
Westinghouse
Corp.
Michael E. Porter 47 1993 Professor (1973 to present), Alpha Beta
c/o Harvard Business Harvard Business School. Technologies,
School Inc.
Aldrich Building,
Room 200
Soldiers Field Road
Boston, MA 02163
Henri A. Termeer 48 1993 Chairman, President and Abiomed Inc.;
c/o Genzyme Corporation Chief Executive Officer AutoImmune
One Kendall Square (1988 to present), Genzyme Inc.; Hambrecht
Cambridge, MA 02139 Corporation. & Quist Health
Care Investors,
Inc.; Hambrecht
& Quist Life
Sciences; IG
Laboratories,
Inc.; Xenova
Corp.; Genzyme
Corp.; Genzyme
Transgenics; and
Neozyme II Corp.
</TABLE>
Board Meetings and Committees
The Board of Directors is comprised of Jim P. Manzi, Richard
S. Braddock, Elaine L. Chao, William H. Gray III, Michael E.
Porter and Henri A. Termeer. The Board of Directors met six
times during the year ended December 31, 1994. The Board of
Directors has a Compensation Committee, which establishes and
reviews compensation of senior management and which consists of
Messrs. Braddock and Termeer. The Compensation Committee met once
during 1994. The Board of Directors also has an Audit Committee
which oversees actions taken by the Company's independent
auditors and reviews the Company's internal controls, consisting
of Mr. Porter and Ms. Chao. The Audit Committee met twice during
1994.
Pursuant to the Company's By-laws, the Board of Directors
has set the number of directors of the Company to be elected at
the Meeting at six. All nominees are currently members of the
Board of Directors.
Certain Transactions
In 1994, the Company paid fees for legal services of
approximately $2,790,188 to O'Sullivan Graev & Karabell, the law
firm of which Lawrence G. Graev is a member. Mr. Graev served as
a member of the Board of Directors until May 1994.
The Company's Profit Sharing and 401k Plan invests in a
number of investment funds at the direction of its participants.
During 1994, the Profit Sharing and 401k Plan invested in the
Fixed Income Fund, which is managed by Fidelity Management Trust
Company, and in the Fidelity Magellan Fund and the Fidelity
Equity Income Funds, which are managed by Fidelity Management &
Research Company. Both Fidelity Management Trust Company and
Fidelity Management & Research Company are wholly owned
subsidiaries of FMR Corp., which, as of December 31, 1994,
beneficially owned greater than 5% of the outstanding Common
Stock of the Company. See "Principal Holders of Voting
Securities" above and "Other Benefit Plans--Profit Sharing and
401k Plan" above.
The Board of Directors unanimously recommends that
shareholders vote FOR the election of each of the nominees listed
above.
PROPOSAL NO. 2 - APPROVAL OF AMENDMENT
TO THE 1992 STOCK OPTION PLAN
Description of the 1992 Stock Option Plan
Purpose. The purpose of the Lotus Development Corporation
1992 Stock Option Plan is to further the growth and success of
the Company and its Subsidiaries (as defined in such plan) by
enabling officers, employees and consultants of the Company and
its Subsidiaries to acquire shares of Common Stock, thereby
increasing their personal interest in such growth and success and
to provide a means of rewarding outstanding performance by such
persons to the Company or its Subsidiaries. Options granted
under the 1992 Stock Option Plan ("Options") may be either
"incentive stock options" ("ISOs"), intended to qualify as such
under the provisions of Section 422 of the Code, or non-qualified
stock options ("NSOs").
Shares to be Optioned. The number of shares eligible for
the granting of Options under the 1992 Stock Option Plan is
6,000,000, subject to adjustment as described below. No Option
may be granted after April 21, 2002, the tenth anniversary of the
date on which the 1992 Stock Option Plan was adopted by the Board
of Directors. Common Stock issuable upon exercise of an Option
granted under the 1992 Stock Option Plan may be authorized but
unissued shares of Common Stock and/or shares of Common Stock
held in the Company's treasury. If and to the extent that
Options granted under the 1992 Stock Option Plan terminate,
expire or are canceled without having been fully exercised, new
Options may be granted under the 1992 Stock Option Plan with
respect to the shares of Common Stock covered by the unexercised
portion of such terminated, expired or canceled Options.
Administration of the Plan. The 1992 Stock Option Plan
shall be administered by a Stock Option Committee (the
"Committee") consisting of two or more non-employee Directors who
are ineligible to participate in such plan and who shall be
appointed to such Committee by the Board of Directors from time
to time. In addition, so long as the 1992 Stock Option Plan
shall be required to comply with Rule 16b-3 under the Exchange
Act, each member of the Committee shall be a "disinterested
person" within the meaning of Rule 16b-3. The Committee shall
have sole discretion (subject to the limits of the 1992 Stock
Option Plan) to determine the persons to whom Options shall be
granted ("Optionees"), the time of such grants, the number of
shares subject to each Option, the Option exercise price, the
time or times when each Option shall become exercisable and the
duration of the exercise period. Except as otherwise expressly
provided in the 1992 Stock Option Plan, the Committee shall have
all powers with respect to the administration and interpretation
of the Plan and any Option agreement issued thereunder.
Eligible Persons. Options granted under the 1992 Stock
Option Plan shall be, at the discretion of the Board of Directors
(or the Committee), either ISOs or NSOs. ISOs may be granted
only to persons who are officers or employees (including
directors who are officers or employees) of the Company or its
Subsidiaries. NSOs may be granted to officers, employees and
consultants of the Company and its Subsidiaries (including
directors who are officers, employees or consultants). No
individual participant under the 1992 Stock Option Plan may be
granted Options to purchase more than 250,000 shares of Common
Stock in the aggregate during any calendar year. No ISO may be
granted to an officer or employee who owns stock possessing more
than 10% of the total voting power of all classes of stock of the
Company (a "10% Person") unless the option price of the shares
subject to such ISO is fixed at not less than 110% of Fair Market
Value (as defined in the 1992 Stock Option Plan) on the date of
grant and such ISO is not exercisable more than five years after
its date of grant. As of December 31, 1994, approximately 5,665
persons would have been eligible to receive Options under such
plan.
Option Price. Options granted under the 1992 Stock Option
Plan may not be granted at less than Fair Market Value on the
date of grant. At March 1, 1995, the Fair Market Value of a
share of Common Stock computed in accordance with the 1992 Stock
Option Plan was $41.25.
Exercise of Option. The terms of each Option granted under
the 1992 Stock Option Plan shall be set forth in the Option
Agreement evidencing the Option. Upon the exercise of an Option,
an Optionee may pay the Company the amount of the aggregate
Option exercise price with cash or a personal or certified check
and/or, at the discretion of the Committee at the time of grant,
with shares of Common Stock. Anything contained in the 1992
Stock Option Plan to the contrary notwithstanding, an ISO granted
under the 1992 Stock Option Plan to an Optionee shall not be
exercisable to the extent that the aggregate Fair Market Value of
all stock with respect to which incentive stock options are
exercisable for the first time by such Optionee during such
calendar year (under all plans of the Company and its
Subsidiaries) exceeds $100,000 (Fair Market Value being
determined for such purpose for all such stock as of the date of
grant of such ISO).
Changes in Capital Structure. If the Common Stock is
changed by reason of a stock split, reverse split, stock dividend
or recapitalization, or converted into or exchanged for other
securities as a result of a merger, consolidation or
reorganization, the Committee shall make such adjustments in the
number and class of shares of stock with respect to which Options
may be granted under the 1992 Stock Option Plan as shall be
equitable and appropriate in order to make such Options
immediately after such change, as nearly as may be practicable,
equivalent to such Options immediately prior to such change. A
corresponding adjustment shall be made to each Option outstanding
at the time such change is made. No such adjustment will be
made in the case of ISOs, however, if such adjustment would
constitute a modification, extension or renewal of such ISOs
within the meaning of Section 422 and 425 of the Code and the
regulations promulgated thereunder or would be considered, under
Section 422 of the Code, the adoption of a new plan requiring
shareholder approval.
In addition, no adjustment to options shall be made in
connection with the dissolution or liquidation of the Company, a
reorganization, merger or consolidation in which the Company is
not the surviving corporation, or a sale of all or substantially
all of the assets of the Company (a "Corporate Transaction"), if
provision is made in connection with such transaction for the
assumption of outstanding Options by, or the substitution for
such Options of new options covering the stock of, the surviving,
successor or purchasing corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to the number, kind and
option prices of shares subject to such new options; provided,
however, that in the case of ISOs, the Committee shall, to the
extent not inconsistent with the best interests of the Company or
its Subsidiaries, use its best efforts to ensure that any
adjustment or substitution will not constitute a modification,
extension or renewal of such ISOs within the meaning of Section
425(h) of the Code or regulations promulgated thereunder.
Restrictions on Options. No Options shall be granted under
the 1992 Stock Option Plan, and no shares of Common Stock shall
be issued upon the exercise of Options, unless and until the
Company and/or the Optionee shall have complied with all laws and
regulations relating thereto, including but not limited to
federal and state securities laws. Options granted under the
1992 Stock Option Plan are nonassignable and nontransferable by
the Optionee except by will or by the laws of descent and
distribution.
Amendment. The Board may at any time modify and amend the
1992 Stock Option Plan in any respect; provided, however, that
the approval of holders of a majority of the voting capital stock
of the Company (voting as a single class) shall be obtained prior
to any such amendment becoming effective if such approval is
required by law or is necessary to comply with regulations
promulgated under Section 16(b) of the Exchange Act or with
Section 422 of the Code or the regulations promulgated
thereunder.
Termination of Options. Options granted under the 1992
Stock Option Plan and not theretofore exercised shall
automatically terminate 90 days following any Termination for
Cause (as defined in the 1992 Stock Option Plan), 12 months after
the date on which the Optionee ceases to serve the Company by
reason of death or total disability and six months after the
Optionee ceases to serve the Company for any other reason;
provided that the Option Agreement may provide for termination at
such earlier times upon the occurrence of these and other events
as the Committee determines in its discretion at the time of
grant. In addition, Options will terminate automatically upon
the occurrence of a Corporate Transaction if no provision is made
for the assumption of outstanding Options or substitution of new
options for such Options. An Option shall terminate
automatically upon the tenth anniversary of its date of grant (or
in the case of an ISO granted to a 10% Person, upon the fifth
anniversary of the date of grant) and upon any transfer of a
right or privilege relating thereto (other than by will or the
laws of descent and distribution).
Federal Income Tax Consequences. An NSO granted under the
Plan will be treated for U.S. Federal income tax purposes
pursuant to Section 83 of the Code and the Treasury Regulations
promulgated thereunder. The following general rules are
applicable to Optionees who are holders of such "non-statutory"
options and to the Company for Federal income tax purposes,
based upon the assumption that such options under the Plan do
not have a "readily ascertainable fair market value" at the time
of grant, as defined in the Treasury Regulations promulgated
under Section 83 of the Code.
1. The Optionee will not recognize any income on the
grant of an NSO under the Plan.
2. The Optionee will recognize ordinary compensation
income on the date of exercise of an NSO in an amount equal
to the excess, if any, of the fair market value of the
shares acquired on the date of exercise over the exercise
price paid therefor.
3. When an Optionee sells shares acquired through
the exercise of an NSO, he or she will recognize gain or
loss in an amount equal to the difference between the fair
market value of the shares on the date of exercise and his
or her selling price. Such gain or loss will be
characterized as capital gain or loss if the shares are
held as a capital asset immediately before their sale. If
the Optionee holds the shares for the requisite one-year
statutory holding period, this gain or loss will be treated
as long-term capital gain or loss.
4. In general, the Company will be entitled to a
tax deduction in the year in which compensation income is
recognized by the Optionee. The amount of the Company's
allowable deduction will be equal to the compensation
income recognized by the Optionee.
The following Federal income tax consequences are
applicable to ISOs granted and exercised pursuant to the Plan.
1. If the Optionee is not a 10% Person (or if the
Optionee is a 10% Person and the Option price is at least
110% of the fair market value of the shares at the date of
grant), no taxable income results to the Optionee upon the
grant of an ISO or upon the issuance of shares to him or
her upon exercise of such option.
2. No tax deduction is allowed to the Company upon
either grant or exercise of an ISO pursuant to the Plan.
3. If shares acquired upon exercise of an ISO are
not disposed of (i) within the two years following the date
the ISO was granted or (ii) within one year following the
date the shares are transferred to him or her pursuant to
the Option exercise, the difference between the amount
realized on any disposition of the shares thereafter and
the Option price will be treated as long-term capital gain
or loss to the Optionee.
4. If shares acquired upon exercise of an ISO are
disposed of before the expiration of either of the
requisite holding periods, then the lower of (i) any excess
of the fair market value of the shares at the time of
exercise of the ISO over the Option price or (ii) the
actual gain on disposition, will be treated as compensation
to the Optionee and will be taxed as ordinary income.
5. In any year that an Optionee recognizes ordinary
compensation income on the disposition of an ISO, the
Company will generally be entitled to a corresponding tax
deduction, in the same amount.
6. Any excess of the amount realized by the Optionee
on disposition over the sum of (i) the exercise price, and
(ii) the amount of ordinary income recognized under the
above rules will be treated as either long-term or
short-term capital gain, depending upon the time elapsed
between receipt and disposition of such shares.
In addition to the tax consequences described above, ISOs
granted pursuant to the Plan may result in a further
"alternative minimum tax" to the Optionee under the Code. In
such case, an amount equal to the excess, if any of the fair
market value of the shares acquired on the date of exercise over
the exercise price will be included as a positive adjustment to
income in determining the alternative minimum taxable income of
the Optionee as of the date of exercise.
The 1992 Stock Option Plan is not an employee benefit plan
which is subject to the provisions of the Employee Retirement
Income Security Act of 1974. The provisions of Section 401(a) of
the Code are therefore not applicable to the 1992 Stock Option
Plan.
Proposed Action
It is proposed that the Shareholders approve the amendment
of the 1992 Stock Option Plan to increase the authorized number
of shares of Common Stock that may be offered under the plan from
6,000,000 to 12,000,000 shares.
As of February 1, 1995, approximately 295,000 shares of
Common Stock remained available for grant pursuant to the 1992
Stock Option Plan. The adoption of the amendment to the 1992
Stock Option Plan will provide additional shares for grant after
the currently remaining shares in the plan have been granted in
order that the Company may continue to attract and retain the
best available personnel for positions of substantial
responsibility and provide certain directors, employees and
consultants with an additional incentive to contribute to the
success of the Company. Additional authorized shares under the
1992 Stock Option Plan may also be used to provide incentives to
senior management of the Company in the form of "premium
options", which are priced above fair market value on the date of
grant. See "Executive Compensation and Other Information
Concerning Directors and Executive Officers - Option Grants in
Last Fiscal Year" above. It is therefore proposed that the
Company's shareholders approve the amendment of the 1992 Stock
Option Plan.
Approval of the amendment of the 1992 Stock Option Plan will
require the affirmative vote of a majority of the shares of
Common Stock present or represented, and entitled to vote at the
Meeting.
The BOARD oF DIRECTORS unanimously recommends that
shareholders vote FOR approval of the amendment of the 1992
Stock Option Plan.
PROPOSAL NO. 3 - RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected the firm of Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") independent certified
public accountants, to serve as auditors for the fiscal year
ending December 31, 1995. Coopers & Lybrand has served as the
Company's auditors since 1982. It is expected that a member of
the firm of Coopers & Lybrand will be present at the Meeting and
will be available to make a statement and to respond to
appropriate questions. If the shareholders do not ratify the
selection of Coopers & Lybrand, the Board of Directors may
consider selection of other independent certified public
accountants to serve as independent auditors, but no assurances
can be made that the Board of Directors will do so or that any
other independent certified public accountants would be willing
to serve.
The Board of Directors unanimously recommends a vote FOR the
ratification of this selection.
VOTING PROCEDURES
For purposes of determining whether a proposal has received
a majority vote, abstentions will be included in the vote totals,
with the result that an abstention will have the same effect as a
negative vote. In instances where brokers are prohibited from
exercising discretionary authority for beneficial holders who
have not returned a proxy (so-called "broker non-votes"), those
shares will not be included in the vote totals and, therefore,
will have no effect on the outcome of the vote. Shares that
abstain or for which the authority to vote is withheld on certain
matters will, however, be treated as present for quorum purposes
on all matters.
OTHER BUSINESS
The Board of Directors knows of no business which will be
presented for consideration at the Meeting other than that stated
above. If other business should come before the Meeting, the
persons named in the proxies solicited hereby, each of whom is an
officer of the Company, may vote all shares subject to such
proxies with respect to any such business in the best judgment of
such persons.
SHAREHOLDER PROPOSALS
It is currently contemplated that the 1996 Annual Meeting of
Shareholders will be held on or about May 9, 1996. Proposals of
shareholders intended for inclusion in the proxy statement to be
furnished to all shareholders entitled to vote at the next
annual meeting of the Company must be received at the Company's
principal executive offices not later than December 18, 1995. It
is suggested that proponents submit their proposals by certified
mail, return receipt requested.
EXPENSES AND SOLICITATION
The cost of solicitation of proxies will be borne by the
Company. Proxies will be solicited principally by the Company by
use of the mails. The Company has also engaged the services of
Georgeson & Company Inc., a professional proxy solicitation firm,
to assist in the solicitation of proxies for a fee of $7,500 plus
expenses. Further solicitation of proxies from some shareholders
may be made by directors, officers and regular employees of the
Company personally or by telephone, telegraph or letter. No
additional compensation, except for reimbursement of reasonable
out-of-pocket expenses, will be paid for any such further
solicitation. In addition, the Company may request banks, brokers
and other custodians, nominees and fiduciaries to solicit
customers of theirs who have shares of Common Stock registered in
the name of a nominee. The Company will reimburse any such
persons for their reasonable out-of-pocket expenses.
Dated: March 20, 1995
__________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
55 Cambridge Parkway
Cambridge, Massachusetts 02142
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Edwin J. Gillis and Thomas
M. Lemberg as Proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent and to vote
all the shares of Common Stock, $.01 par value, of Lotus
Development Corporation held of record by the undersigned on
March 10, 1995, at the Annual Meeting of Shareholders to be held
on May 2, 1995, or any adjournment thereof, on all matters on
which the undersigned would be entitled to vote.
This Proxy when properly executed will be voted in the
manner indicated herein by the undersigned. If no contrary
indication is made, the proxies will vote FOR the other proposals
described in this Proxy and the accompanying Proxy Statement.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
Please mark
X votes as in
______ this example
The Board of Directors recommends that you vote FOR Proposals 1 through 3.
1. Election of Directors
Nominees: Jim P. Manzi, Richard S. Braddock,
Elaine L. Chao, William H. Gray III,
Michael E. Porter and Henri A. Termeer
FOR WITHHELD
______ ______
______________________________________
For all nominees except as noted above
2. Amendment of 1992 Stock Option Plan
to increase number of authorized shares.
FOR AGAINST ABSTAIN
________ ________ _________
3. Ratification of selection of Coopers & Lybrand L.L.P.
as auditors.
FOR AGAINST ABSTAIN
________ ________ __________
MARK HERE
FOR ADDRESS
CHANGE AND ________
NOTE AT LEFT
This proxy must be signed exactly as your name appears
hereon. When shares are held by joint tenants both should
sign. Executors, administrators, trustees, etc. should indicate
their capacities. If the signer is a corporation, please sign
full corporate name and indicate capacity of duly authorized
officer executing on behalf of the corporation.
Signature:__________________________ Date___________
Signature:__________________________ Date___________
____________________________________________________________________________
LOTUS DEVELOPMENT CORPORATION
1994 REPORT TO SHAREHOLDERS
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
- ---------------------------------------------------------------------------------------------
(In thousands,
except per share data) 1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales ................. $970,723 $981,168 $900,149 $828,895 $692,242
Net income (loss) ......... (20,879) (1) 55,535 (2) 80,403 (3) 33,116 (4) 23,254 (5)
Net income (loss) per share (0.44) (1) 1.24 (2) 1.87 (3) 0.75 (4) 0.54 (5)
Total assets .............. 904,079 905,345 763,444 725,537 656,807
Stockholders' equity ...... 554,130 528,391 399,438 323,113 309,439
=============================================================================================
Notes: (1) 1994 amounts include a non-tax deductible charge to operations of
$67.9 million, or $1.40 per share, for purchased research and
development related to the acquisitions of Soft*Switch, Inc. and
Edge Research, Inc. 1994 amounts also include a restructuring charge
of $9 million on a pre-tax basis and $5.8 million, or $0.12 per
share, on an after-tax basis.
(2) 1993 amounts include a non-tax deductible charge to operations of
$19.9 million, or $0.45 per share, for purchased research and
development related to the acquisition of Approach Software
Corporation.
(3) 1992 amounts include gains on the sale of the Company's investment
in Sybase, Inc., 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 of $15 million on a pre-tax basis and
$10.1 million, or $0.23 per share, on an after-tax basis.
(4) 1991 amounts include a restructuring charge of $23 million on a
pre-tax basis and $18.6 million, or $0.42 per share, on an after-tax
basis.
(5) 1990 amounts include a non-tax deductible charge to operations of
$53 million, or $1.23 per share, for purchased research and
development related to the acquisition of Samna Corporation.
</TABLE>
<PAGE>
PRESIDENT'S LETTER
1994 was the year of the information superhighway - in the media, countless
conference speeches, and almost anything associated with information technology.
We've been unable to escape from the metaphor. So we've made it the theme for
this year's annual report.
But we've got our own take on it. For us, it's as much a continuing journey
as an ultimate destination. Last year I vowed to never again mention the word
"transition," but in retrospect, that was unrealistic. Transition is another
word for change, and in our business, change is inevitable. In fact, our company
is all about creating and exploiting change.
Lotus began an important journey back in 1985 with the start of development
for Notes. Back then, all the focus was on the individual desktop, which was
perhaps not inappropriate for the flood tide of the PC Revolution. The idea of
personal computers that would reach beyond the individual desktop and allow
people to communicate and share information had fewer adherents.
With Notes, we soon blazed a rather substantial road. Today, we have more
than 5,000 customers and 1.35 million users. An entire industry has built up
around Notes, with more than 8,000 business partners offering new products and
services. cc:Mail, the industry's leading mail product, now has 6.5 million
users.
For Lotus, the information superhighway is not something on the drawing
boards, or under construction. We have ten years of development experience and
five years of in-market experience with our communications products, and people
are using it to get places. In early 1994, IDC announced the results of a study
showing that companies deploying Notes are realizing returns on investment
averaging 179 percent.
This past year, we've been joined by several partners in broadening the
scope of Notes in the marketplace, including AT&T, Hewlett-Packard, and IBM.
Our communications strategy has clearly given us a fast lane for growth - with
revenues increasing 94 percent this past year. In the fourth quarter,
communications revenues exceeded desktop revenues for the first time.
We now have three major businesses. The first two, communications and
desktop applications, are well established. As the transition toward
communications continues, the desktop business remains substantial, generating
revenues and profits that enable us to invest in growth. Our third business,
public networks and inter-enterprise computing, is just getting started and
has vast potential.
Our commitment to the desktop remains strong. We continued to move ahead
with our desktop applications in 1994, with 1-2-3 Release 5, a new SmartSuite,
and new releases of Approach, Organizer, Freelance Graphics and Ami Pro. But
this is no longer an easy business. There are factors, such as the maturity
of the business and the unrelenting competition, that have changed this business
forever. We also made our own mistakes - a series of product slips at mid-year
and poor performance in Europe - but we've taken steps to correct them.
The pace of growth for each of our businesses is clearly quite different.
The desktop business has become mature, with marginal growth. Renewed growth
will depend on our ability to reinvent it through team computing. Our
communications business, on the other hand, has established considerable
momentum. And our public network inter-enterprise business is a classic
start-up, with no profits now, but enormous growth potential.
Given this mix and range in our businesses, it is not surprising that our
stock price was volatile this past year. The market had a wide range of
views on the size and timing of future profits. For our part, we are quite
happy with our mix. It provides a good balance of steady revenues and
substantial growth opportunities.
The question we must always ask is: Are we there yet?
Part of the answer, obviously, is yes. We have built a great road. We are
out in front with Notes. No competitor has anything like it. Our customers are
reaching destinations in terms of return on investment and achieving business
goals.
But in another sense, we are still on our way. Our customers continue to
face difficult technology and investment choices, and no one is going to get
there all at once. Our job is to help them manage the journey. As Jack Kerouac
said in On the Road: "There's always more, a little further - it never ends."
That's fine with us. There are many opportunities still ahead - for Lotus, our
shareholders, and our customers.
/s/ Jim Manzi
Jim Manzi
President and CEO
<PAGE>
Figure 1 - photo of Jim Manzi, President and CEO Lotus Development Corporation.
<PAGE>
Figure 2 - graphic text reads across the top of all pages of the story.
Figure 3 - photo of a portion of a yellow line in road.
Figure 4 - the words STARTING OUT appear in vertical text format
along left side of page.
There is such a thing as vision in the world of business. It is never as
dramatic or far-reaching as what happened to Saul on the road to Damascus, but
it does occur, and when it does, it can have a major impact on a company and
its customers, even on the way that all companies do business.
The vision that now guides Lotus began back in 1985, when Ray Ozzie and a
small team of developers started work on the software that became Lotus Notes.
It began with an idea that was different - at the time.
In 1985, the PC Revolution was in full flower, and all the attention was
on the possibilities of individual empowerment and, it was assumed, individual
productivity.
The different view - or vision - of the Notes developers was that
personal computers were more interesting, and quite possibly more valuable, if
people could use them, not just to work in isolation, but to communicate and
share information with other people. Work in any organization is, after all, as
much collaborative as personal. In fact, work always involves other people, and
in business, products are rarely developed or sold, and revenues are rarely
generated, by people acting alone.
Figure 5 - photo of a "Pedestrians Crossing" street sign.
The insight seems obvious today, when everyone is clamoring to engineer
their way onto the information superhighway. But back in 1985, developing Notes
was an errand into the wilderness, an errand that took five years of
development, followed by five years of in-market and further development to
reach what it's become today. But our foresight has paid off with annual growth
rates of nearly 100 percent for Lotus communications products, and we are ahead
of the rush to the highway. We have been on it, with our customers, for some
time. As Old Bull Lee says in On the Road: "Only damn fools pay no attention
to visions."
Figure 6 - photo of a pair of binoculars in the lower right corner of page.
<PAGE>
Figure 7 - photo of tire tread marks in road.
Figure 8 - the words ROADS PRECEDE MAPS appear in vertical text format
along left side of page.
If you are making a map, it helps if you've been there. Otherwise you are
like those mapmakers before Columbus who drew wild beasts at the edge of the
world. Or those real estate boosters in early 19th century America who created
maps of imaginary roads to imaginary cities in order to sell land on the
frontier.
For Lotus, there is nothing new about groupware, communications software,
or helping people use computer networks to share information and achieve
organizational goals. We've been exploring this territory with our customers for
some time.
Roads have been built, and people are using them to get where they want to
go. There are now 1.35 million users of Notes, and 6.5 million users of cc:Mail,
and thousands more are being added every month. Lotus has more than 5,000
customers and 8,000 business partners developing applications for Notes and
cc:Mail.
<PAGE>
Figure 9 - photo of bridge overpass.
Other substantial roads built by Lotus preceded these newer ones. They are
our desktop applications. One of them, 1-2-3, pretty much blazed the way for
a whole new industry. When we began building communications software, at first
it appeared to diverge from traditional desktop applications. But we always
believed that all of our products are more useful if they work together, if
you can readily get from one to the other, if the roads converge.
Today, many customers use our desktop suite because it works so well with
our communications applications, and vice versa.
In discussions of computer systems and software, you often hear the term
"architecture." It is like a map, and some say that when you don't have
products in the marketplace, an architecture is the next best thing. But Lotus'
communications architecture is real, something on which real products, tools,
services, and thousands of applications are being built. It is a map being
drawn from ever-widening experience and knowledge.
Figure 10 - photo of a globe in lower right corner.
<PAGE>
Figure 11 - an abstract photo of an interstate highway sign.
Figure 12 - the words ROADS ARE FOR COMMERCE appear in vertical text
format along the left side of page.
The Romans built roads to administer their empire, and one rationale for
the interstate highway system in the United States was civil defense. But
the main purpose of roads has always been commerce: getting goods and
services to market, connecting business with customers, producers with
suppliers.
The same is true of today's electronic highways. The main purpose is not
home entertainment, but work and commerce.
Eventually there may be movies on demand and a marketplace for home
shopping that goes beyond ordering pizza or floral arrangements. But in the
meantime, there's already substantial and rapidly growing traffic that serves
the business (as distinct from the consumer) marketplace. Companies invest in
Notes applications because they can reduce the time and enhance the quality of
such basic business processes as product development and customer service. The
growth of the business market is driven by the tangible returns companies
receive on their investment.
Figure 13 - photo of the side of a truck.
The first electronic links are internal, connecting groups within the
enterprise, but soon reach outward to connect the enterprise with customers and
suppliers. As a result of this electronic web, the structure of business
organizations, and the nature of commerce itself, is changing. Businesses
are able to focus on what they do best, and "outsource" other functions. The
lines between companies, even industries, become blurred, and new
configurations and new opportunities for commerce become possible. One road
leads to another.
Figure 14 - photo of a scale in the lower right corner of page.
<PAGE>
Figure 15 - photo of a 15-minute parking sign.
Figure 16 - the words YOU NEED TO GET THERE FROM HERE appear in vertical
text format along the left side of page.
There is no standing still - we know we can't be complacent.
Lotus' communications strategy rests on the premise that our customers
have little interest in open-ended questions. Companies are more concerned with
achieving specific goals, such as profitability and market share. "Are we there
yet?" is about as general as any business question gets, and it implies a
destination.
Surfing on a sea of information is not a business goal. Nor is the
accumulation of information. Since economic value is based on scarcity, and
since the amount of information in the world is infinite, information has no
value by itself. It is valuable when it is used, when it leads to the
production of goods and services.
<PAGE>
Figure 17 - photo of tire tread marks on the road into the horizon.
The information economy is nothing new. Every economy - from the
hunter-gatherer clans to market economies and even planned economies - depends
on information. What has changed is the velocity of information and the
potential access to it - both the result of today's information and
communications technology. This places a premium on getting the right
information and getting it fast, and on marshalling information in order to
decide and act. Businesses are attempting to transform themselves with
information technology ("reengineering" has become well established in business
parlance).
Lotus' business lies at the heart of a major intersection where technology,
organizational change, and the impact on people at work all converge. Our
purpose is to provide not just great products - Notes, cc:Mail and desktop
applications for team computing - but also the benefit of our experience and
knowledge, so that our customers can get where they want to go.
Figure 18 - photo of a welcome mat in lower right corner of page.
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 each of the three years ended
December 31, 1994 and the percentage changes in those items for each of the
two years ended December 31, 1994.
<TABLE>
<CAPTION>
Percent changes year to year Items as a percentage of net sales
- ------------------------------------------------------------------------------------------
1994-93 1993-92 Income and expense items 1994 1993 1992
- ------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C> <C>
(1%) 9% Net sales 100.0% 100.0% 100.0%
(15%) 1% Cost of sales 17.8% 20.6% 22.2%
- ------------------------------------------------------------------------------------------
3% 11% Gross margin 82.2% 79.4% 77.8%
Expenses:
25% 7% Research and development 16.3% 12.9% 13.1%
8% 9% Sales and marketing 51.2% 47.2% 47.1%
(2%) 1% General and administrative 7.1% 7.1% 7.7%
- - Other (income)/expense, net (A) 7.0% 1.8% (3.4%)
- ------------------------------------------------------------------------------------------
17% 17% Total expenses 81.6% 69.0% 64.5%
- ------------------------------------------------------------------------------------------
(94%) (15%) Income before provision for
income taxes 0.6% 10.4% 13.3%
(43%) 17% Provision for income taxes 2.7% 4.7% 4.4%
- ------------------------------------------------------------------------------------------
(138%) (31%) Net income (loss) (2.1%) 5.7% 8.9%
==========================================================================================
(135%) (34%) Net income (loss) per share ($0.44) $1.24 $1.87
==========================================================================================
Note (A): 1994, 1993 and 1992 amounts include significant non-recurring income and expense
items which are set forth in Footnote J to the financial statements.
</TABLE>
<PAGE> 3
RESULTS OF OPERATIONS
1994 compared to 1993
- ---------------------
Revenue
The Company's revenue is derived from desktop applications products and
communications products and services. Desktop applications products include
SmartSuite (an integrated applications suite), 1-2-3 (spreadsheets), Ami Pro
(word processing), Freelance Graphics (presentation graphics), Lotus Approach
(end-user database) and Lotus Organizer (personal information management).
Communications products and services include Lotus Notes (workgroup computing),
cc:Mail (electronic mail), Soft*Switch (electronic mail switching) and
consulting services.
The Company's worldwide revenue decreased 1% to $971 million in 1994.
Revenue from desktop applications declined by 20%, while revenue from
communications products and services grew by 94%. This performance generally
reflects competition for the Company's products in the maturing desktop
applications market, growing momentum for the Company's products in the
expanding client-server communications market and an initial adverse effect
from the implementation of the Company's Passport program.
Desktop Applications Revenue
Revenue from desktop applications represented 64% of total revenue in 1994, as
compared to 79% in 1993. DOS desktop applications revenue, primarily from 1-2-3
for DOS, declined approximately $135 million in 1994. Windows desktop
applications revenue remained relatively unchanged in 1994, as an increase in
revenue from SmartSuite was offset by a decline in revenue from standalone
applications. SmartSuite represented 46% of Windows desktop applications
revenue in 1994 compared to 30% in 1993.
The 20% decline in desktop applications revenue in 1994 is primarily
attributable to severe competition, as well as downward pricing pressure and the
continuing migration of users from DOS-based to Windows-based applications.
The Company believes that intense competition, particularly from its
largest competitor, Microsoft Corporation ("Microsoft"), resulted in a reduction
in Windows desktop applications revenue and market share. The Company believes
that mid-year delays in the shipment of certain Windows desktop products also
contributed to a decrease in revenue and market share as certain end-users may
have purchased competitive products rather than waiting for the Company's new
product offerings. Windows market share losses were particularly pronounced in
the Company's European business, where weaker-than-expected end-user demand,
higher-than-desired distribution channel inventories in certain markets and
severe competition contributed to the decline in desktop applications revenue.
On a worldwide basis, pricing for Windows desktop applications products
declined in 1994 compared to 1993 due to competitive factors and an increase in
the number of volume sales contracts with large corporate customers. The
Company anticipates that downward pressure on pricing will continue.
The marketplace migration from DOS to Windows adversely affected and will
continue to affect 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 1995
should not be as dramatic as that experienced in recent years, as DOS-based
revenue continues to represent a smaller share of overall revenue.
Other factors that could affect the Company's desktop applications revenue
over its next fiscal year include the rate of growth of the Windows market, the
market shift from standalone applications to integrated suites, the impact of
"Windows 95", a new operating system that Microsoft has announced it will
release in 1995, and the sales and marketing efforts of Microsoft and Novell,
Inc. ("Novell") relative to those of the Company. See "Issues and Risks".
Significant new desktop products released in the third quarter of 1994
included 1-2-3 for Windows Release 5.0, 1-2-3 for DOS Release 4.0, SmartSuite
for Windows Release 3.0, Ami Pro for Windows Release 3.1, Freelance Graphics for
Windows Release 2.1 and Lotus Approach for Windows Release 3.0. In the fourth
quarter of 1994, the Company released Lotus Organizer for Windows Release 2.0.
<PAGE> 4
Communications Products and Services Revenue
Revenue from communications products and services represented 36% of total
revenue in 1994 as compared to 19% in 1993. The primary component of the
communications revenue growth was a substantial increase in Lotus Notes revenue.
Notes revenue increased more than 100% during the year, and the number of Notes
users more than doubled. As of December 31, 1994, there were approximately
1.35 million users of Notes worldwide.
The Company believes that its Notes revenue performance was driven by
several elements. As the client-server market expands and there is a greater
availability of networked personal computers, demand for networked applications,
such as Notes, has increased. In addition, end-user demand for Notes has grown
dramatically as customers have begun to understand how the product's workgroup
computing capabilities can enable them to become more productive. The Company
has further enhanced the product's value to customers by expanding the number
of third parties, or business partners, who are capable of developing
applications for Notes. As of December 31, 1994, the number of business
partners offering products and services for Notes had increased to more than
8,000. Also contributing to the growth in Notes revenue is the greater
availability of Notes on different operating system platforms. As of December
31, 1994, Notes was available on the Windows, Windows NT, OS/2, Macintosh,
UNIX SCO, UNIX AIX, UNIX HP-UX and Sun Solaris operating system platforms.
The Company announced that it will lower its pricing for Notes in 1995 in an
effort to accelerate growth in the number of end-users. While the Company does
not believe that competition is currently a significant factor in the workgroup
computing market, several competitors with greater resources than those of the
Company have announced their intentions to enter into this market. In
addition, the Company expects that continued growth in this market will
attract other competitors. The latest commercially available version of Notes,
Release 3.2, was last updated in the third quarter of 1994.
Also contributing to the communications revenue growth were increases in
product and service revenue from cc:Mail, consulting services and customer
support. In addition, communications revenue in 1994 included
five months of revenue from newly acquired Soft*Switch, Inc. ("Soft*Switch").
While cc:Mail revenue continues to grow, its rate of growth is lower than that
of the prior year. The Company believes that the decline in the rate of growth
of cc:Mail revenue is attributable to a decline in the growth rate of the
LAN-based electronic mail market and to increased competition. As of December
31, 1994, there were approximately 6.5 million cc:Mail users worldwide. The
Company anticipates that customer support revenue from communications products
will continue to represent a growing component of communications revenue as the
installed base of Notes, cc:Mail and Soft*Switch customers grows.
Passport Program
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 discounted
worldwide pricing to end-user customers based on customers' cumulative program
purchases or their non-binding commitments to purchase certain volumes of Lotus
products in the future. Customers can select options that may or may not
require an initial purchase. However, if an initial purchase is not required,
customers can maintain their program pricing by purchasing against their
commitments in a specified period of time and by purchasing a certain
percentage of their total commitment within the first six months. The Company
believes that the transition to Passport resulted in a slower-than-expected
conversion of customer purchase commitments into actual sales in the second and
third quarters of 1994. However, the Company believes that over time Passport
will strengthen its competitive position and will result in increased sales.
International Revenue
Revenue outside the United States declined to 48% of the Company's worldwide
revenue in 1994 from 51% in 1993, primarily due to the decline in desktop
revenue in Europe. This decline was partially offset by sales gains in the Asia
Pacific region, particularly in communications revenue in Japan. The impact of
foreign currency fluctuations on international revenue was insignificant.
<PAGE> 5
Expenses and Profit Margins
Gross margin as a percentage of sales increased to 82% in 1994 compared with 79%
in 1993. The gross margin improvement is primarily attributable to reduced
manufacturing and delivery costs resulting from an increase in the percentage
of sales in the form of non-physical license rights, a corresponding decrease
in the percentage of sales in the form of physical units ("shrinkwrap product")
and material cost reductions. Gross profit margins in the United States were
approximately 85% in 1994 as compared to approximately 80% in 1993.
International gross profit margins were approximately 77% in 1994 as compared to
approximately 78% in 1993. The difference in geographic margins in 1994 was
primarily due to a more rapid shift in the United States of sales from physical
units to non-physical license rights.
The Company continues to make investments in research and development to
maintain a competitive position in the desktop market and to add to and improve
its communications products. Research and development expenses increased 25% to
$159 million in 1994, reflecting a constant level of desktop development
spending year over year and significantly higher spending associated with the
Company's communications products. Additionally, the acquisition of
Soft*Switch and an increase in international product development spending
contributed to higher research and development expenses. Capitalized software
development costs during 1994 were $36 million compared with $25 million for
1993. The increase reflects the growth in research and development spending
on communications products.
Sales and marketing expenses increased 8% to $497 million in 1994. The
increase consists of significantly higher spending for marketing, sales and
support of communications products and a slight decrease in marketing spending
for desktop products. The Company's expansion of its communications support
capability and growth in the consulting services business also drove higher
sales and marketing spending in 1994.
General and administrative expenses decreased 2% to $69 million in 1994 as
the Company continued efforts to control infrastructure and fixed costs.
In May 1994, the Company acquired all of the outstanding shares of Iris
Associates, Inc. ("Iris") in a transaction that was accounted for as a pooling
of interests. The acquisition had an immaterial impact on the results of
operations in 1994.
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 1994
operations. See Note K of Notes to Consolidated Financial Statements. This
charge, which is included in other income and expense, is not deductible for tax
purposes. Subsequent to the acquisition, the Company initiated substantial
development efforts to make Soft*Switch's 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 the Company's other communications products. 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. ("Edge"). The
purchase price was allocated to purchased research and development resulting in
a $5.4 million non-tax deductible charge to other income and expense in 1994.
See Note K of Notes to Consolidated Financial Statements.
<PAGE> 6
In the third quarter of 1994, the Company recorded a $9 million
restructuring charge to other income and expense related to the Company's
European operations and to the discontinuation 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 in 1994 resulted in a reduction
in force of approximately 130 positions, primarily in the United Kingdom and
Germany. The associated charge reflects severance and related costs, of which
$5.8 million was paid in 1994. The charge related to the discontinued product
reflects a $1.1 million non-cash write-off of capitalized software due to the
decision to discontinue further development and marketing. The Company
anticipates that these 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 and
amortization expenses. The Company expects to save approximately $8 million
annually over the next several years as a result of the restructuring. The
Company does not believe that 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 1994 than in 1993 because of higher average cash and short-term investment
balances and higher interest rates. Interest expense declined primarily due to
scheduled debt repayments.
In June 1993, the Company acquired Approach Software Corporation
("Approach"). 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 included in other
income and expense, is not deductible for tax purposes. Subsequent to the
acquisition, the Company initiated substantial development efforts 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. These efforts are expected to involve extensive
rewriting of the code and the addition of significant new product features.
At the time of the acquisition, the Company expected to invest approximately
$20 million through 1996 to complete and continue the development of the
ultimate technology using the purchased research and development.
Earnings for 1994, excluding the restructuring and purchased research and
development charges, were $52.8 million, or $1.08 per share. Earnings for 1993,
excluding the charge for purchased research and development, were $75.4
million, or $1.69 per share.
The effective tax rate for 1994 of 36%, excluding the effect of non-tax
deductible charges for purchased research and development related to the
acquisitions of Soft*Switch and Edge, compares with 38% for 1993, excluding the
effect of a non-tax 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 international manufacturing operations.
<PAGE> 7
Issues and Risks
- ----------------
There are a number of business factors, which singularly or combined, may affect
the future results of the Company. The following issues and risks, among others,
should be considered when evaluating the future outlook of the Company.
Competition, generally. The applications software business is highly
competitive. The Company's products compete with software products offered by
larger independent software companies, such as Microsoft and Novell. Certain
products offered by the Company are directed at operating environments or
business applications in which one or more companies were early entrants and
enjoy significant product and market share.
Rapid technological change. The personal computer and software industries
are characterized by rapid technological change, such as changes in operating
systems, and uncertainties as to widespread acceptance of new products. The
Company's success in the future will depend in part on its ability to anticipate
and respond to these changes on a timely basis.
Changes in the personal computer industry. The Company believes that demand
for the Company's products is indirectly linked to the demand for new personal
computers for business use, particularly in the case of desktop applications.
Historically, the industry has been characterized by sustained growth in unit
sales of personal computers, but no assurance can be given that this trend will
continue. Accordingly, the level of demand for personal computers for business
use may be viewed by certain investors as potentially predictive of future
demands for the Company's products.
Long-term investment cycle. Developing, manufacturing and licensing software
is expensive and the investment in product development often involves a long
pay-back cycle. The Company's future plans include significant investments in
software research and development, from which significant revenues may not be
realized for a number of years.
Historical significance of desktop revenue. Historically, the Company has
used profits from desktop revenue to make substantial investments in the
Company's communications products. Although revenue from communications
products has grown significantly over the last few years, revenue from desktop
applications is important to the continued funding of the communications
business. There can be no assurance that desktop revenue will continue at
historical levels.
Windows desktop applications competition. The Company believes that its
share of the Windows desktop applications market will be an important factor in
its future success. Although the Company's share of this market fluctuates from
quarter to quarter, management believes that the Company is second in market
share to Microsoft, the developer of the MS-DOS and Microsoft Windows
operating environments, in the spreadsheet and desktop suite product
categories, and third behind Microsoft and WordPerfect, a unit of Novell, in
the word processing product category. Furthermore, the Company believes that
Microsoft has and will continue to use its position in operating systems to
leverage its lead in the Windows desktop applications market.
The market for Windows desktop applications is highly competitive and
attempts by these larger competitors to maintain or increase market share
may lead to product price reductions and increased marketing efforts aimed
at sales of bundled desktop applications sold as suites.
Desktop suites competition. Competition in the Windows applications market
has been intensified by the emergence of desktop "suites", in which software
publishers combine and integrate standalone applications for sale as a unit.
The desktop suite magnifies the effects of competition in the desktop
applications market, since the popularity of one major product in a suite may
drive the sale of the entire suite and may enable the software publisher to
occupy the buyer's entire personal computer "desktop". Generally, the sales
price of a suite is greater than the price of any single application included
in the suite, but is significantly less than the aggregate price of all the
applications included in the suite, if purchased separately. 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. The Company expects that
sales of desktop suites will continue to account for a growing percentage of
all Windows desktop sales and will eventually surpass aggregate sales of
individual desktop applications as a percentage of all Windows desktop sales.
<PAGE> 8
The Company, Microsoft and Novell each market applications suites for the
Windows operating environment. The Company believes that SmartSuite revenue
has been driven by growing demand for desktop suites, the Company's highly rated
individual applications, particularly 1-2-3 for Windows, and the high degree of
integration among the products in its suite. However, no assurance can be
given that sales of SmartSuite will grow.
Communications products competition. The Company was an early entrant into
the market for software designed to facilitate workgroup computing and believes
that its offering, Lotus Notes, is the leading product in this category.
Workgroup computing is an emerging technology and, as such, is subject to rapid
changes. There can be no assurance that Notes will continue to gain market
acceptance as increased competition brings new products and new technology
to the marketplace for workgroup computing.
Like the market for desktop applications generally, the market for local
area network-based e-mail products is also highly competitive. The Company's
largest competitor in this market is Microsoft, which has announced its
intention to include certain e-mail functions in future versions of its
operating systems software. There can be no assurance that such development will
not have an adverse effect on the Company's market share for communications
products.
Possibility of new product delays. As is common in the computer software
industry, the Company has from time to time experienced delays in its product
development and "debugging" efforts, and may experience similar delays from
time to time in the future. Significant delays in developing, completing or
shipping new or enhanced products could adversely affect the Company.
Historical patterns of revenue flow. The Company's sales revenue typically
fluctuates from quarter to quarter, with sales being relatively higher in the
fourth quarter and in quarters in which new versions of established products
are introduced. In addition, a high percentage of the Company's revenues are
expected to be realized in the third month of each fiscal quarter and tend to
be concentrated in the latter half of that month. The Company's backlog early
in a quarter will not generally be large enough to assure that it will meet its
revenue targets for any particular quarter. Accordingly, the Company's
quarterly results may be difficult to predict until the end of the quarter,
and a shortfall in shipments or contract orders at the end of any particular
quarter may cause the results of that quarter to fall short of anticipated
levels.
Reserves for sales returns. The Company engages channel partners to sell
products to end-users. Channel partners buy significant quantities of products
from the Company in anticipation of sales of such products. In certain
circumstances, channel partners may be unable to sell their inventories to
end-users and thus may return inventory to the Company. Consequently, the
Company maintains reserves for product returns in accordance with historical
experience and by making judgments about future competitive conditions and
product life cycles. There can be no assurance that historical experience
will be an accurate guide for the future, because the rate of product returns
is primarily a function of the competitive state of the market in the future,
and thus, in large part, is a function of the actions of the Company's
competitors, which the Company cannot anticipate.
Protection of intellectual property and other proprietary rights. The
Company regards its applications as proprietary and attempts to protect its
intellectual property rights by relying on copyrights, trademarks, patents,
and common law safeguards, including trade secret protection, as well as
restrictions on disclosure and transferability in its agreements with other
parties. Although the Company intends to protect its intellectual property
rights vigorously, there can be no assurance that the laws of all jurisdictions
in which the Company's products are or may be developed, manufactured or sold
will afford the same protection to its products and intellectual property, or
will be enforced or enforceable by the Company, to the same extent as under the
laws of the United States.
The software industry is characterized by frequent litigation regarding
copyright, patent and other intellectual property rights. The Company has from
time to time had infringement claims asserted by third parties against it and
its products. There can be no assurance that such third party claims will be
resolved in a satisfactory manner, that third parties will not assert other
claims against the Company with respect to existing or future products or
that licenses will be available on reasonable terms, or at all, with respect
to any third party technology underlying any such claims. In the event of
litigation to determine the validity of any third party claims, such litigation
could result in significant expense to the Company and divert the efforts of
the Company's technical and management personnel, whether or not such
litigation is determined in favor of the Company.
<PAGE> 9
Volatility of the Company's Common Stock. Market prices for securities of
software companies have generally been volatile. In particular, the market price
of the Company's Common Stock has been and may continue to be subject to
significant fluctuations. These fluctuations may be due to factors specific to
the Company (including those described above) or to factors affecting the
computer industry or the securities markets in general.
1993 compared to 1992
- ---------------------
Worldwide revenue increased 9% in 1993 as compared to 1992. Desktop revenue was
essentially unchanged in 1993, while communications-related revenue grew
approximately 55%.
Revenue from desktop applications was 79% of total revenue in 1993 and 84%
of total revnue in 1992. In 1993, users continued to migrate from DOS-based
applications to Windows-based applications. As a result, Windows revenue more
than doubled as compared to 1992, while DOS-based revenue, particularly
spreadsheets, declined approximately $215 million. Due to the full-fledged
emergence of desktop "suites" in 1993, the Company's suite offering, SmartSuite,
grew to represent approximately one-third of total 1993 Windows desktop
applications revenue. Pricing declined during the first half of 1993, but
remained relatively stable during the second half of 1993.
Significant new Windows desktop products released in 1993 included 1-2-3 for
Windows Release 4.0, Improv for Windows Release 2.0, Freelance Graphics for
Windows Release 2.0, Lotus Organizer for Windows Release 1.1 and SmartSuite for
Windows Release 2.0. Also released in 1993 were 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.
Communications products and services represented 19% of total revenue in
1993 as compared to 13% in 1992. Notes revenue more than doubled over 1992 and
cc:Mail revenue grew considerably in 1993 as well. Consulting services revenue
also increased significantly, resulting from internal growth and from the
acquisition of several consulting businesses. New versions of Notes 3.0 were
shipped for the Windows, Macintosh and OS/2 operating platforms in May 1993.
Revenue outside the United States grew by 12% during 1993 and accounted for
51% of worldwide revenue in 1993 as compared to 49% in 1992. The impact of
foreign currency fluctuations on international revenue was insignificant in
1993 and in 1992.
Gross margin as a percentage of sales increased to 79% in 1993 compared with
78% in 1992. The rate was favorably affected by 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 increase in operating expenses in 1993 reflected higher spending
associated with the development and enhancement of the communications products
as well as a substantial investment in the sales and marketing of the
communications business and SmartSuite. During 1993, research and development
expenses increased 7% compared with 1992, and sales and marketing expenses
increased 9% compared with 1992. General and administrative expenses increased
only 1% and reflected the Company's continued efforts to control infrastructure
and fixed costs.
Interest income was higher in 1993 than 1992 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 Software 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 non-tax
deductible charge to the Company's 1993 operations. 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. The restructuring charge related
principally to plans initiated by the Company in the fourth quarter of 1992 to
close its Puerto Rican manufacturing subsidiary and to reorganize and
centralize its North American and European operations related to logistics,
distribution and support. Earnings for 1992, excluding the gain and the
restructuring charge, were $57.2 million or $1.33 per share.
The effective tax rate for 1993 was 38% compared with 33% in 1992. The
increase in the tax rate reflected 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.
<PAGE> 10
Liquidity and Capital Resources
Cash and short-term investments decreased $40 million to $376 million at
December 31, 1994. The two primary sources of cash flow in 1994 were $97 million
of cash generated by operations and $56 million in proceeds from the issuance
of common stock under the Company's employee stock plans. The primary uses of
cash flow for investing and financing activities were $44 million for the
purchase of property and equipment, $39 million for payments for software and
other intangibles, $66 million for acquisition payments, $28 million for the
scheduled repayment of debt and $13 million to repurchase the Company's common
stock under a previously announced buyback program.
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, for which taxes have been provided.
The Company's financial resources are represented by cash, short-term
investments and unused portions of credit facilities. The Company believes its
financial resources and funds provided by ongoing operations are adequate to
meet future liquidity requirements.
<PAGE> 11
<TABLE>
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
- -----------------------------------------------------------------------------------------
Years ended December 31,
(In thousands, except per share data) 1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $970,723 $981,168 $900,149
Cost of sales 172,325 202,443 200,103
- -----------------------------------------------------------------------------------------
Gross margin 798,398 778,725 700,046
Expenses:
Research and development 158,669 126,884 118,308
Sales and marketing 497,396 462,658 423,813
General and administrative 68,520 70,057 69,103
Other (income)/expense, net (Note J) 68,214 17,357 (31,183)
- -----------------------------------------------------------------------------------------
Total expenses 792,799 676,956 580,041
- -----------------------------------------------------------------------------------------
Income before provision for income taxes 5,599 101,769 120,005
Provision for income taxes (Note H) 26,478 46,234 39,602
- -----------------------------------------------------------------------------------------
Net income (loss) ($20,879) $55,535 $80,403
=========================================================================================
Net income (loss) per share ($0.44) $1.24 $1.87
=========================================================================================
Shares used in calculation of net
income (loss) per share 47,013 44,721 42,994
=========================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 12
<TABLE>
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
- -----------------------------------------------------------------------------------------
December 31,
(In thousands) 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
- -----------------------------------------------------------------------------------------
Current assets:
Cash and short-term investments (Note B) $376,218 $416,693
Accounts receivable, net of allowances of
$37,971 and $30,002 230,977 217,336
Inventory (Note C) 20,711 21,220
Other current assets 24,452 20,817
- -----------------------------------------------------------------------------------------
Total current assets 652,358 676,066
- -----------------------------------------------------------------------------------------
Property and equipment, net of accumulated
depreciation and amortization of $185,286
and $153,768 (Note D) 138,664 127,437
Software and other intangibles, net of accumulated
amortization of $128,140 and $123,016 (Note B) 96,228 88,625
Other assets (Note E) 16,829 13,217
- -----------------------------------------------------------------------------------------
Total assets $904,079 $905,345
=========================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
<PAGE> 13
- -----------------------------------------------------------------------------------------
December 31,
(In thousands, except per share data) 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt (Note I) $ - $28,480
Accounts payable 44,815 45,914
Accrued compensation and benefits 35,674 36,368
Accrued and deferred income taxes (Note H) 35,219 49,017
Other accrued expenses 74,516 77,648
Deferred revenue 70,130 39,996
- -----------------------------------------------------------------------------------------
Total current liabilities 260,354 277,423
- -----------------------------------------------------------------------------------------
Deferred income taxes (Note H) 39,595 49,531
Long-term debt (Note I) 50,000 50,000
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, 200,000 and
100,000 shares authorized; 63,575 and 62,152
issued; and 47,849 and 44,928 outstanding 636 622
Additional paid-in capital 280,815 251,414
Retained earnings 507,380 526,554
Treasury stock, 15,726 and 17,224 shares at an
average cost of $14.95 and $14.44 per share (235,047) (248,728)
Translation adjustment 346 (1,471)
- -----------------------------------------------------------------------------------------
Total stockholders' equity 554,130 528,391
- -----------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $904,079 $905,345
=========================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 14
<TABLE>
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
- -----------------------------------------------------------------------------------------
Years ended December 31,
(In thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ($20,879) $55,535 $80,403
Gain on sale of investment in Sybase, Inc. - - (49,706)
Charge for purchased research and development 67,944 19,900 -
Depreciation and amortization 87,392 86,973 84,319
Change in assets and liabilities, net of
effects from acquisitions:
(Increase) decrease in accounts receivable 1,031 (42,000) (11,031)
Decrease in inventory 3,237 3,207 7,681
Increase (decrease) in accounts payable
and accrued expenses (24,986) 10,832 (1,295)
Increase (decrease) in accrued and
deferred income taxes (30,075) 11,892 20,620
Increase in deferred revenue 20,263 15,601 521
Net change in other working capital items (6,532) 259 (3,170)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 97,395 162,199 128,342
- ------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (44,413) (30,587) (34,042)
Payments for software and other intangibles (39,265) (36,771) (39,315)
Proceeds from sale of investment in
Sybase, Inc. - - 77,719
Proceeds from sales (purchases) of
short-term investments, net 84,702 (79,883) (31,551)
Payments for acquisitions, net of
cash received (66,345) (15,455) (8,725)
Other, net (2,449) 2,002 1,364
- ------------------------------------------------------------------------------------------
Net cash used for investing activities (67,770) (160,694) (34,550)
- ------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of long-term debt (28,480) (30,260) (30,260)
Purchase of common stock for treasury (12,625) (8,107) (35,876)
Issuance of common stock, including
tax benefit thereon 55,707 81,708 32,244
Decrease in short-term borrowings - (1,130) (23,167)
- ------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities 14,602 42,211 (57,059)
- ------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 44,227 43,716 36,733
Cash and cash equivalents, beginning of year 164,849 121,133 84,400
- ------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year 209,076 164,849 121,133
Short-term investments 167,142 251,844 171,961
- ------------------------------------------------------------------------------------------
Cash and short-term investments $376,218 $416,693 $293,094
==========================================================================================
</TABLE>
<TABLE>
Supplemental Cash Flow Information
<CAPTION>
- ------------------------------------------------------------------------------------------
(In thousands) 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest received $17,062 $9,971 $10,952
Interest paid $5,765 $8,702 $13,970
Income taxes paid $56,238 $24,698 $18,982
==========================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 15
<TABLE>
LOTUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years ended December 31, 1992, 1993, and 1994 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, 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
- --------------------------------------------------------------------------------------------------------------------
Net loss - - (20,879) - - (20,879)
Pooling of interests with Iris Associates,
Inc. (Note K) 14 - 1,705 - - 1,719
Acquisition of 323 shares of common stock - - - (12,625) - (12,625)
Issuance of 286 shares of common stock under
employee stock purchase plan - 6,807 - 4,135 - 10,942
Exercise of 1,535 non-qualified stock options - 13,270 - 22,171 - 35,441
Income tax benefit related to exercise of
stock options - 9,324 - - - 9,324
Currency translation effect - - - - 1,817 1,817
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $636 $280,815 $507,380 ($235,047) $346 $554,130
====================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE> 16
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. Certain amounts in the
financial statements of prior years have been reclassified to conform with
the current year presentation.
Revenue Recognition
- -------------------
Revenue from the sale of software products to distributors, resellers and
original equipment manufacturers is recognized when the products are shipped.
Revenue is recognized from the sale of software products under installation
agreements with end-users based upon the expected installation period, provided
that payment is due currently. Maintenance, service and subscription revenue
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.
Allowances for bad debts, which have not been material, are also provided.
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 or amortized cost, which
approximates market. Cash equivalents and short-term investments consist
primarily of certificates of deposit, repurchase agreements, commercial paper,
corporate bonds, Eurobonds, collateralized mortgage obligations and other
money market instruments.
In the first quarter of 1994, the Company adopted Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). The Company has the intent and ability to hold
to maturity all securities that mature in less than one year. Accordingly, these
"held-to-maturity" securities have been recorded at amortized cost. The Company
has categorized all other securities as "available-for-sale," since the
Company may liquidate these investments currently. FAS 115 requires that
unrealized gains and losses on available-for-sale securities be excluded from
earnings and reported in a separate component of stockholders' equity. At
December 31, 1994, the unrealized loss was immaterial.
The amortized cost of securities, which approximates fair value, consists of
the following at December 31, 1994:
- ----------------------------------------------------------------------------
(In thousands) Maturity
Less than One to
Type of security one year five years Total
- ----------------------------------------------------------------------------
Corporate bonds
and Eurobonds $18,441 $51,058 $69,499
Commercial paper 17,704 199 17,903
Collateralized mortgage
obligations 4,145 12,640 16,785
- ----------------------------------------------------------------------------
40,290 63,897 104,187
Cash, other cash
equivalents and other
short-term investments 272,031
- ----------------------------------------------------------------------------
Total cash and short-term
investments $376,218
============================================================================
Inventory
- ---------
Inventory is stated at cost, using the first-in, first-out (FIFO) 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 lives 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.
<PAGE> 17
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 $36.0
million, $25.0 million and $26.0 million were capitalized in 1994, 1993 and
1992. Related amortization charges of $29.1 million for 1994, $25.2 million
for 1993 and $22.2 million for 1992 are reflected in cost of sales. The net
amount of capitalized software was $53.6 million and $47.8 million as of
December 31, 1994 and 1993.
Intangible assets of $21.8 million capitalized in 1994 were largely
attributable to the acquisitions of Soft*Switch, Inc. and a consulting services
business. Intangible assets of $15.2 million and $22.1 million capitalized in
1993 and 1992 were primarily related to other acquisitions. These assets are
amortized on a straight-line basis, generally over a three to five year period.
Related amortization charges, the majority of which were reflected in cost of
sales, totaled $20.2 million in 1994, $22.5 million in 1993 and $19.2 million
in 1992.
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.
Income Taxes
- ------------
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis carrying amounts of assets and
liabilities using current statutory tax rates. A valuation reserve against
deferred tax assets is recorded 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.
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
Company's parent corporation in future years. Undistributed earnings of
foreign affiliates reinvested in those operations indefinitely, and for which
no U.S. taxes are provided, aggregated approximately $60 million and $40 million
at December 31, 1994 and 1993.
Net Income (Loss) per Share
- ---------------------------
Per share amounts are calculated using the weighted average number of common
shares and common share equivalents outstanding during periods of net income.
Common share equivalents are attributable to unexercised stock options and are
computed using the treasury stock method. Per share amounts are calculated using
only the weighted average number of common shares outstanding during periods of
net loss. Fully diluted net income per share is not materially different from
reported primary net income per share.
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 1994,
1993 and 1992.
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. The Company 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 totaling $55 million, primarily to exchange
foreign currencies for U.S. dollars, were outstanding at December 31, 1994.
These contracts are used to hedge asset and liability positions of foreign
subsidiaries. Gains and losses 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 1995. Forward exchange
contracts outstanding at December 31, 1993, totaling $50 million, matured
during 1994.
Foreign currency options are used to hedge certain anticipated transactions
denominated primarily in European currencies and Japanese yen. Potential losses
on such contracts are limited to the cost of the options. Gains on such options
are recorded in income only when realized, offsetting foreign exchange losses
of the related transactions. There were no option contracts outstanding at
December 31, 1994, and at December 31, 1993, the amount of option contracts
outstanding was $96 million.
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.
<PAGE> 18
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. The Company's currency options and forward contracts
are over-the-counter instruments.
Financial Instruments
- ---------------------
The fair values of financial instruments, including cash equivalents, short-term
investments, marketable securities, debt, options on foreign currencies and
forward exchange contracts, approximated their carrying values at December 31,
1994 and 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, 1994 and 1993, approximately 40% and 41% 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:
- --------------------------------------------------------------------
December 31,
(In thousands) 1994 1993
- --------------------------------------------------------------------
Finished goods $13,041 $13,962
Raw materials 7,670 7,258
- --------------------------------------------------------------------
Total $20,711 $21,220
====================================================================
D PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
- --------------------------------------------------------------------
December 31,
(In thousands) 1994 1993
- --------------------------------------------------------------------
Land $5,800 $7,395
Buildings and building improvements 58,185 55,463
Leasehold improvements 38,891 36,699
Computer equipment 139,964 111,045
Manufacturing and other equipment 49,841 44,191
Furniture and fixtures 31,269 26,412
- --------------------------------------------------------------------
323,950 281,205
Less accumulated depreciation
and amortization 185,286 153,768
- --------------------------------------------------------------------
Property and equipment, net $138,664 $127,437
====================================================================
E OTHER ASSETS
Other assets consist of the following:
- --------------------------------------------------------------------
December 31,
(In thousands) 1994 1993
- --------------------------------------------------------------------
Marketable securities $3,004 $3,004
Deposits and other 13,825 10,213
- --------------------------------------------------------------------
Total $16,829 $13,217
====================================================================
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 COMMITMENTS AND CONTINGENCIES
Lease Commitments
- -----------------
The Company leases certain facilities and equipment under various operating
leases. At December 31, 1994, future minimum lease payments under operating
leases with terms in excess of one year were as follows:
- --------------------------------------------------------------------
Year (In thousands)
- --------------------------------------------------------------------
1995 $37,027
1996 32,171
1997 21,287
1998 17,003
1999 12,931
Future years 42,795
- --------------------------------------------------------------------
Total $163,214
====================================================================
Total rental expense was approximately $43.7 million, $41.7 million and $40.2
million for the years ended December 31, 1994, 1993 and 1992.
<PAGE> 19
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, 1994, 2.6 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 options become exercisable over a four
year period and expire over a period not exceeding ten years. At December 31,
1994, 170,000 shares were available for grant.
Activity in these plans was as follows:
- --------------------------------------------------------------------------
Years ended December 31,
(In thousands, except option prices) 1994 1993 1992
- --------------------------------------------------------------------------
Shares under option,
beginning of year 5,814 7,154 8,782
Options granted (at option
prices of $30.50 to $64.50
in 1994, $19.63 to $47.38
in 1993, and $17.38 to
$33.88 in 1992) 3,955(B) 2,453 788(A)
Options exercised (1,535) (2,937) (1,229)
Options cancelled (628) (856) (1,187)
- --------------------------------------------------------------------------
Shares under option, end of year
(at exercise prices of $16.00
to $64.50 in 1994, $16.00
to $47.38 in 1993, and $6.25
to $37.88 in 1992) 7,606 5,814 7,154
- --------------------------------------------------------------------------
Average price of
options exercised $23.09 $22.09 $20.74
- --------------------------------------------------------------------------
Shares exercisable 1,936 1,412 2,919
- --------------------------------------------------------------------------
Average option price of
shares exercisable $23.16 $23.71 $22.49
==========================================================================
(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 at the date of the grant. The remaining 1.0 million
options were granted at 120% of fair market value on the date of grant.
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 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. Purchases are limited to ten percent of an employee's eligible
compensation, subject to an annual maximum as defined in the plan. Through
December 31, 1994, approximately 2.5 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.
- ---------------------------------------------------------------------------
Years ended December 31,
(In thousands, except per share data) 1994 1993 1992
- ---------------------------------------------------------------------------
Number of shares 286 360 395
Proceeds $10,942 $8,033 $6,826
Average price per share $38.21 $22.34 $17.29
===========================================================================
H INCOME TAXES
The components of the provision for income taxes were
as follows:
- ---------------------------------------------------------------------------
Years ended December 31,
(In thousands) 1994 1993 1992
- ---------------------------------------------------------------------------
Domestic:
Current $22,450 $18,437 $7,970
Deferred (9,119) 7,581 17,902
- ---------------------------------------------------------------------------
13,331 26,018 25,872
- ---------------------------------------------------------------------------
Foreign:
Current 13,862 19,763 9,470
Deferred (2,215) (347) 3,460
- ---------------------------------------------------------------------------
11,647 19,416 12,930
- ---------------------------------------------------------------------------
State:
Current 1,500 800 800
Deferred - - -
- ---------------------------------------------------------------------------
1,500 800 800
- ---------------------------------------------------------------------------
Total:
Current 37,812 39,000 18,240
Deferred (11,334) 7,234 21,362
- ---------------------------------------------------------------------------
Total income taxes $26,478 $46,234 $39,602
===========================================================================
Income before provision for income taxes from domestic and foreign operations
was as follows:
- ---------------------------------------------------------------------------
Years ended December 31,
(In thousands) 1994 1993 1992
- ---------------------------------------------------------------------------
Domestic $37,080 $37,337 $72,622
Foreign (31,481) 64,432 47,383
- ---------------------------------------------------------------------------
Total $5,599 $101,769 $120,005
===========================================================================
<PAGE> 20
Provisions for income taxes were at rates other than the U.S. Federal statutory
tax rate for the following reasons:
- ---------------------------------------------------------------------------
Years ended December 31,
1994 1993 1992
- ---------------------------------------------------------------------------
U.S. Federal statutory tax rate 35.0% 35.0% 34.0%
Foreign operations 1.3 4.4 (0.8)
Research and development credit (5.0) (4.5) (4.0)
Impact of U.S. Federal statutory
rate increase on beginning
deferred taxes - 2.0 -
Tax exempt interest income - (0.6) (0.9)
Non-deductible amortization 2.2 2.0 3.7
State taxes 1.6 0.8 0.7
Other, net 0.9 (1.1) 0.3
- ---------------------------------------------------------------------------
Subtotal 36.0 38.0 33.0
Non-deductible charges for
purchased research and
development 436.9 7.4 -
- ---------------------------------------------------------------------------
Effective tax rate 472.9% 45.4% 33.0%
===========================================================================
Consolidated results of operations in 1994 include results of manufacturing
operations in Ireland and Singapore. In 1993 and 1992, net income also included
income from the Company's Puerto Rican manufacturing subsidiary. Income from
the sale and licensing of products manufactured or developed 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. 1993 and 1992 income
from products manufactured in Puerto Rico, which was not subject to U.S.
Federal income tax, was 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 1994, 1993 and 1992.
For U.S. Federal income tax purposes, at December 31, 1994, the Company has
tax credit carryforwards of approximately $41 million and a net operating loss
carryforward of $16 million, which expire between 1996 and 2009. The net
operating loss carryforward and approximately $1 million of tax credit
carryforwards represent tax benefits resulting from the acquisition of
Soft*Switch, Inc.
The Internal Revenue Service ("IRS") has proposed adjustments to the
Company's U.S. income tax returns for the years 1985 through 1989. The Company
will appeal these adjustments and believes that any sustained adjustments will
not be material to the financial statements. The IRS has 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.
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 1994, 1993 and 1992, and the effect of each on the
tax provision, were as follows:
- ---------------------------------------------------------------------------
Years ended December 31,
(In thousands) 1994 1993 1992
- ---------------------------------------------------------------------------
Unrepatriated foreign
earnings, net ($8,101) $14,110 $11,911
Depreciation (980) (1,130) (1,769)
Compensation (1,048) (1,423) 4,338
Capitalized software costs 566 1,590 557
Charges to (provision for)
reserves (268) (1,654) 2,031
Deferred revenue - (2,171) 3,628
Other, net (1,503) (2,088) 666
- ---------------------------------------------------------------------------
Total ($11,334) $7,234 $21,362
===========================================================================
The components of the net deferred tax liability are as follows:
- --------------------------------------------------------------
December 31,
(In thousands) 1994 1993
- --------------------------------------------------------------
Deferred tax assets:
Reserves $13,587 $16,352
Depreciation 5,072 5,871
Tax credits against unrepatriated
foreign earnings 85,045 77,363
Tax return carryforwards 47,131 48,233
Deferred revenue 2,770 2,574
Other 12,458 11,934
- --------------------------------------------------------------
Total 166,063 162,327
- --------------------------------------------------------------
Valuation allowances (A) 49,162 35,794
- --------------------------------------------------------------
Net deferred tax assets 116,901 126,533
- --------------------------------------------------------------
Deferred tax liabilities:
Capitalized software costs 10,947 10,381
Unrepatriated foreign earnings 114,832 130,417
Compensation 99 2,972
Other 4,601 6,389
- --------------------------------------------------------------
Total 130,479 150,159
- --------------------------------------------------------------
Net deferred tax liability $13,578 $23,626
==============================================================
(A) The valuation allowance at December 31, 1994 and 1993 includes $10 million
for foreign tax benefits. During 1994, a $7 million valuation allowance
was established for tax benefits resulting from the acquisition of
Soft*Switch, Inc. due to the limitations imposed by U.S. tax rules on the
use of tax benefits following certain changes in ownership. In addition,
valuation allowances of $32.2 million and $25.8 million at December 31,
1994 and 1993 have been established for tax return carryforwards resulting
from stock option compensation deductions. The tax benefit associated
with the stock option compensation deductions will be credited to equity
when realized.
<PAGE> 21
I DEBT
Long-term Debt
- --------------
Long-term debt consists of the following:
- ------------------------------------------------------------------
December 31,
(In thousands) 1994 1993
- ------------------------------------------------------------------
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
- ------------------------------------------------------------------
Total debt 50,000 78,480
- ------------------------------------------------------------------
Less current portion - 28,480
- ------------------------------------------------------------------
Long-term debt $50,000 $50,000
==================================================================
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
was paid in June 1994.
The Company renegotiated its revolving credit agreements during 1994 and now
maintains one multi-currency revolving credit agreement with a group of
domestic and international banks. The agreement, which expires June 1997,
commits the participating banks, subject to certain terms and conditions, to
lend an aggregate of $150 million. There were no borrowings under this credit
agreement as of December 31, 1994. Interest rates on borrowings are set under
a number of bid options not exceeding .425% over LIBOR. Commitment fees are
payable on unborrowed amounts at a maximum rate of 1/8% per annum. The Company
is required to maintain a minimum level of net worth as well as a maximum debt
to net worth ratio, among other things specified in the revolving credit
agreement. The Company was in compliance with the covenants of its credit
agreement at December 31, 1994.
Short-term Debt
- ---------------
The Company occasionally borrows under unsecured credit facilities with several
domestic and international banks in order to meet short-term domestic and
international cash requirements. There were no such borrowings at December 31,
1994 and 1993. As of December 31, 1994, the Company had unused short-term
credit facilities of $29 million.
J OTHER (INCOME)/EXPENSE, NET
Other (income)/expense consists of the following:
- ---------------------------------------------------------------------------
Years ended December 31,
(In thousands) 1994 1993 1992
- ---------------------------------------------------------------------------
Charges for purchased
research and development (Note K) $67,944 $19,900 $ -
Restructuring charges 9,000 - 15,000
Gain on sale of investment
in Sybase, Inc. - - (49,706)
Interest income (16,442) (11,890) (10,679)
Interest expense 5,295 8,525 13,547
Other, net 2,417 822 655
- ---------------------------------------------------------------------------
Total other (income)/
expense, net $68,214 $17,357 ($31,183)
===========================================================================
In the third quarter of 1994, the Company acquired all outstanding shares of
Soft*Switch, Inc. and Edge Research, Inc. A significant portion of the purchase
price of these acquisitions, $67.9 million, was allocated to purchased research
and development. This amount, which is not deductible for tax purposes, was
charged to operations in the third quarter of 1994.
In the third quarter of 1994, the Company recorded a $9 million
restructuring charge related to its European operations and the discontinuation
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.
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, the Company recorded a restructuring charge of $15 million
for employee separations and related facilities consolidations and equipment
write-downs associated with the closing of its Puerto Rican manufacturing
facility and the restructuring of operations in North America and Europe.
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.
<PAGE> 22
K ACQUISITIONS AND DISPOSITIONS
Iris Associates, Inc.
- ---------------------
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 paid royalties to
Iris based upon product sales.
Soft*Switch, Inc.
- -----------------
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 mainframe-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 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 the Company. 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.
Edge Research, Inc.
- -------------------
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.
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 that
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 and is being amortized over
three years.
Purchased research and development that 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 the Company.
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.
<PAGE> 23
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.
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 $6.9 million, $11.1 million and
$7.1 million in 1994, 1993 and 1992.
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 1994, 1993 and 1992.
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 $4.3 million in
1994, $3.8 million in 1993 and $3.2 million in 1992.
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 $4.0 million in 1994,
$3.4 million in 1993 and $3.2 million in 1992.
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
North Asia Europe/
(In thousands) America Pacific Other Eliminations Consolidated
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994:
Net sales $544,486 $173,026 $258,461 ($5,250) $970,723
- ------------------------------------------------------------------------------------------
Operating income (loss):
By area 55,453 45,162 (24,796) 1,803 77,622
Corporate
expenses (80,753)
Other income/
(expense) 8,730
Income before --------
provision for
income taxes 5,599
- ------------------------------------------------------------------------------------------
Total assets $526,525 $179,097 $213,670 ($15,213) $904,079
==========================================================================================
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
==========================================================================================
</TABLE>
<PAGE> 24
Sales between geographic areas presented are insignificant. For this
presentation, corporate expenses includes certain expenses incurred at the
Company's corporate offices and charges for purchased research and development.
U.S. research and development expenses were 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 the sale
of investment in Sybase, Inc.
The decrease in operating income in the Europe/Other region in 1994 as
compared to 1993 and 1992 was attributable to a decline in desktop applications
revenue, which resulted from severe competition in Europe. The decrease in
assets in the Europe/Other region in 1994 as compared to 1993 was due to lower
cash and receivable balances, which resulted from the decline in revenue and
the operating loss in Europe. 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 $470.2 million for 1994, $485.9 million for the year 1993
and $434.9 million for the year 1992. In 1994, one customer accounted for 13%
of worldwide sales. In 1993, one customer accounted for 12% of worldwide sales
and a second customer accounted for 11% of such sales. No one customer accounted
for more than 10% of worldwide sales in 1992.
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.
<PAGE> 25
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, 1994 and 1993, and the related
consolidated statements of operations, cash flows, and stockholders' equity
for each of the three years in the period ended December 31, 1994. 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 as of December 31, 1994 and 1993, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1994, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 24, 1995
<PAGE> 26
LOTUS SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Five-Year Summary of Selected Financial Data
- -------------------------------------------------------------------------------------------
(In thousands, except per share data) 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $970,723 $981,168 $900,149 $828,895 $692,242
Income before provision for income taxes 5,599 101,769 120,005 67,686 52,826
Net income (loss) (20,879) 55,535 80,403 33,116 23,254
Net income (loss) per share (0.44) 1.24 1.87 0.75 0.54
Total assets 904,079 905,345 763,444 725,537 656,807
Cash and short-term investments 376,218 416,693 293,094 224,810 245,386
Working capital 392,004 398,643 296,166 207,670 226,961
Long-term debt 50,000 50,000 108,740 139,000 160,000
Stockholders' equity 554,130 528,391 399,438 323,113 309,439
==========================================================================================
</TABLE>
<TABLE>
Quarterly Results of Operations
(Unaudited)
<CAPTION>
- -----------------------------------------------------------------------------------
(In thousands, except 1994, Three Months Ended
per share data) April 2 July 2 Oct 1 Dec 31 Year
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $246,992 $224,009 $235,246 $264,476 $970,723
Gross margin 200,584 185,141 192,516 220,157 798,398
Income (loss)
before provision
for income
taxes 33,346 15,186 (65,504) 22,571 5,599
Net income
(loss) 21,341 9,719 (66,385) 14,446 (20,879)
Net income
(loss) per share $0.45 $0.20 ($1.39) $0.30 ($0.44)
- -----------------------------------------------------------------------------------
Common stock prices
High 86 1/2 73 1/2 46 1/2 46 1/4 86 1/2
Low 51 3/4 33 29 3/4 34 29 3/4
===================================================================================
- -----------------------------------------------------------------------------------
(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
(loss) 12,267 (4,649) 18,304 29,613 55,535
Net income
(loss) per share $0.29 ($0.11) $0.41 $0.64 $1.24
- -----------------------------------------------------------------------------------
Common stock prices
High 28 1/2 37 48 1/4 58 3/4 58 3/4
Low 18 3/4 23 1/2 30 1/4 41 3/4 18 3/4
===================================================================================
</TABLE>
The Company has historically not paid cash dividends on its common stock and
has retained earnings for use in its business.
At the end of 1994, the number of shareholders of the Company's common stock
was approximately 46,000.
Notes to Supplemental Financial Information and
Quarterly Results of Operations:
(1) 1994 amounts include a charge to operations of $67.9 million, or $1.40 per
share, in the third quarter for purchased research and development related
to the acquisitions of Soft*Switch, Inc. and Edge Research, Inc. 1994
amounts also include a restructuring charge in the third quarter of $9
million on a pre-tax basis and $5.8 million, or $0.12 per share, on an
after-tax basis.
(2) 1993 amounts include 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 acquisition of Approach Software Corporation.
(3) 1992 amounts include 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 resulting in 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.
(4) 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.
(5) 1990 amounts include a charge to operations of $53 million, or $1.23 per
share, in the fourth quarter for purchased research and development related
to the acquisition of Samna Corporation.
(6) The Company's common stock is traded on the over-the-counter market and is
quoted on the NASDAQ National Market System under the symbol LOTS.
<PAGE> 27
BOARD OF DIRECTORS
Jim Manzi
President, CEO and Chairman of the Board
Lotus Development Corporation
Richard S. Braddock
Partner
Clayton, Dubilier, and Rice
Elaine L. Chao
President and CEO
United Way of America
William H. Gray, III
President and CEO
United Negro College Fund
Michael E. Porter
Professor of Business Administration
Harvard Business School
Henri A. Termeer
Chairman and CEO
Genzyme Corporation
EXECUTIVE AND CORPORATE OFFICERS
Jim Manzi
President and CEO
Kc Branscomb
Senior Vice President
Business Development
Edwin J. Gillis
Senior Vice President
Finance and Operations
Chief Financial Officer
John B. Landry
Senior Vice President
Communications Business Group
Chief Technology Officer
Ilene H. Lang
Senior Vice President
Desktop Business Group
June L. Rokoff
Senior Vice President
Worldwide Services Group
Robert K. Weiler
Senior Vice President
Worldwide Sales and Marketing
Thomas M. Lemberg
Vice President
General Counsel and Secretary
VICE PRESIDENTS
Jeffrey Beir
Vice President
Desktop Product Line
Deborah M. Besemer
Vice President
North, Central and South America
Russell J. Campanello
Vice President
Human Resources
Allen Carney
Vice President
Desktop Marketing
Kevin Cavanaugh
Vice President
International Product Development
David Champagne
Vice President
Worldwide Customer Service and Support
Hemang D. Dave
Vice President
Strategic Alliances
Tim Davenport
Vice President
Developer Tools Group
James Fieger
Vice President
Lotus Development Europe, Middle East, Africa
Charles B. Hamlin
Vice President
Corporate Marketing
Stuart C. Kazin
Vice President
Worldwide Operations and Information Systems
Saburo Kikuchi
President
Lotus Development Japan
Steve King
Vice President
Lotus Development Asia Pacific
Jack Martin
Vice President
Communications Products Group
Finance and Business Development
Larry Moore
Vice President
Inter-enterprise Communications Division
Ray Ozzie
President
Iris Associates
Jeffrey P. Papows
Vice President
Communications Products Group
Ian Richmond
Vice President
Lotus Consulting
Eileen Rudden
Vice President
Inter-enterprise Communications Division
John C. Throckmorton
Vice President
Word Processing Division
Michael Wyzga
Vice President
Worldwide Sales and Marketing
Plans and Controls
Michael Zisman
Vice President
Communications Products Group
<PAGE> 28
SHAREHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Shareholders will be held on Tuesday, May 2, 1995 at
10:00 a.m. at the following location:
Museum of Transportation
Larz Anderson Park
15 Newton Street
Brookline, Massachusetts
Copies of Lotus' Annual Report on Form 10-K are available, without charge,
upon request from:
Kay Waxman
Director of Investor Relations
Lotus Development Corporation
55 Cambridge Parkway
Cambridge, Massachusetts 02142
To request further information about
Lotus Development Corporation, please contact
the Investor Relations Information Line at
(617) 693-1900.
Common Stock
Lotus' common stock is traded over the
counter on the NASDAQ National Market
System - symbol LOTS.
Auditors
Coopers & Lybrand L.L.P.
Boston, Massachusetts
Legal Counsel
Baker & Botts, L.L.P.
New York, New York
Transfer Agent
Bank of Boston
Boston, Massachusetts
(617) 575-2900
CORPORATE DIRECTORY
Corporate Headquarters
55 Cambridge Parkway
Cambridge, Massachusetts 02142
(617) 577-8500
Lotus North American Offices
Phoenix, Arizona
Irvine, California
Los Angeles, California
Mountain View, California
San Francisco, California
Denver, Colorado
Farmington, Connecticut
Del Ray Beach, Florida
Key Largo, Florida
Miami, Florida
Orlando, Florida
Atlanta, Georgia
Chicago, Illinois
Overland Park, Kansas
Boston, Massachusetts
Detroit, Michigan
Grand Rapids, Michigan
Minneapolis, Minnesota
St. Louis, Missouri
Edison, New Jersey
Clifton Park, New York
New York, New York
Rochester, New York
Clemmons, North Carolina
Durham, North Carolina
Cincinnati, Ohio
Cleveland, Ohio
Columbus, Ohio
Bala Cynwyd, Pennsylvania
Pittsburgh, Pennsylvania
Wayne, Pennsylvania
Newport, Rhode Island
Chattanooga, Tennesee
Austin, Texas
Dallas, Texas
Houston, Texas
Arlington, Virginia
Seattle, Washington
Calgary, Alberta
Vancouver, B.C.
Ottawa, Ontario
Toronto, Ontario
Montreal, Quebec
Manufacturing and Distribution
Lotus Development Corporation
North Reading, Massachusetts
Lotus Development B.V.
Dublin, Ireland
Lotus Development Distribution Ltd.
Dublin, Ireland
Lotus Development B.V.
Singapore, Republic of Singapore
International Locations
Lotus Development Pty. Ltd.
Sydney, Melbourne, Canberra, Brisbane and
Perth, Australia
Lotus Development GmbH
Vienna, Austria
Lotus Development Benelux BV
Brussels, Belgium
Lotus Desenvolvimento de Software Ltda.
Sao Paulo and Rio de Janeiro, Brazil
Lotus Development SOLA
(Argentina, Bolivia, Chile, Paraguay,
Peru, Uruguay)
Santiago, Chile
Lotus Development Czech Republic
Prague, Czech Republic
Lotus Development Denmark A/S
Horsholm, Denmark
Lotus Development Finland
Helsinki, Finland
Lotus Development SA
Paris, France
Lotus Development GmbH
Berlin, Dusseldorf, Frankfurt, Hamburg
Stuttgart and Munich, Germany
Lotus Development Software
(Hong Kong) Ltd.
Hong Kong
Lotus Development Hungary
Budapest, Hungary
Lotus Development India
New Delhi, India
Lotus Development European Corporation
Jakarta, Indonesia
Lotus Development Ireland
Dublin, Ireland
Lotus Development Italia SPA
Milan and Rome, Italy
Lotus Development Software, Ltd.
Tel Aviv, Israel
Lotus Development Japan, Ltd.
Tokyo, Japan
Lotus Sales and Services Sdn Bhd
Kuala Lumpur, Malaysia
Lotus Development Corporation de Mexico,
S.A. de C.V.
Mexico City, Mexico
Lotus Development Benelux BV
Diemen, The Netherlands
Lotus Development B.V.
Curacao, Netherlands Antilles
Lotus Development Pty. Ltd.
Auckland and Wellington, New Zealand
Lotus Development Norway
Oslo, Norway
Lotus Development Pte. Ltd.
Beijing, People's Republic of China
Lotus Development, Office Warsaw
Warsaw, Poland
Lotus Development European Corporation
Lisbon, Portugal
Lotus Development Russia
Moscow, Russia
Lotus Development B.V.
Singapore, Republic of Singapore
Lotus Development SA Pty. Ltd.
Johannesburg, South Africa
Lotus Development Korea Ltd.
Seoul, South Korea
Lotus Development Iberica S.A.
Barcelona and Madrid, Spain
Lotus Development Nordic AB
Stockholm, Sweden
Lotus Development (Schweiz) AG
Glattbrugg, Switzerland
Lotus Development European Corporation
Taipei, Taiwan
Lotus Development Middle East Office
Dubai, United Arab Emirates
Lotus Development U.K. Ltd.
Staines, Slough, Manchester and
Edinburgh, U.K.
Lotus Development Corporation
Caracas, Venezuela
Lotus is represented by authorized
distributors in the following countries:
Argentina
Botswana
Bulgaria
Byelorussia
Colombia
Costa Rica
Croatia
Egypt
Greece
Hungary
Kazakhstan
Mauritius
Morocco
Nepal
Pakistan
Philippines
Poland
Romania
Slovak Republic
Thailand
Turkey
Ukraine
Uruguay
Lotus, 1-2-3, Lotus Notes, SmartSuite, Freelance Graphics, Approach and Ami Pro
are registered trademarks and Organizer and Notes are trademarks of Lotus
Development Corporation. cc:Mail is a trademark of cc:Mail, Inc., a
wholly-owned subsidiary of Lotus Development Corporation.
_______________________________________________________________________________
APPENDIX TO 1994 REPORT TO SHAREHOLDERS
GRAPHIC AND IMAGE MATERIAL
CONTAINED IN PRESIDENT'S LETTER AND STORY
Figure/Image Description
1 Photo of Jim Manzi, President and CEO
2 Graphic text reads across the top of all pages
in the story as follows:
Today we have more than 5,000 customers and 1.35
million users of Notes. An entire industry has built
up around Notes, with more than 8,000 business
partners offering new products and services. cc:Mail,
the industry's leading mail product, now has 6.5
million users.
For Lotus, the information superhighway is not
something on the drawing boards, or under
construction. We have ten years of development
experience and five years of in-market experience with
our communications products, and people are using it
to get places. In early 1994, IDC announced the
results of a study showing that companies deploying
Notes are realizing returns on investment averaging
179 percent.
This past year, we've been joined by several
partners in broadening the scope of Notes in the
marketplace, including AT&T, Hewlett-Packard, and IBM.
Our communications strategy has clearly given us a
fast lane for growth - with revenues increasing 94
percent this past year.
We have built a great road. We are out in front
with Notes. No competitor has anything like it. Our
customers are reaching destinations in terms of return
on investment and achieving business goals. But in
another sense, we are still on our way. Our customers
continue to face difficult technology and investment
choices, and no one is going to get there all at once.
Our job is to help them manage the journey.
3 Photo of a portion of a yellow line in road.
4 The words "STARTING OUT" appear in a vertical format going
up the left side of the page.
5 Photo of a "Pedestrians Crossing" street sign.
6 Photo of a pair of binoculars in lower right corner of page.
7 Photo of tire tread marks in road.
8 The words "ROADS PRECEDE MAPS" appear in a vertical format
going up the left side of the page.
9 Photo of a bridge overpass.
10 Photo of a globe in lower right corner of page.
11 An abstract photo of an interstate sign.
12 The words "ROADS ARE FOR COMMERCE" appear in a vertical
format going up the left side of the page.
13 Photo of the side of a truck.
14 Photo of a scale in lower right corner.
15 Photo of a 15-minute parking sign.
16 The words "YOU NEED TO GET THERE FROM HERE" appear in a
vertical format going up the left side of the page.
17 Photo of tire tread marks on road into the horizon.
18 Photo of a welcome mat in lower right corner of page.
____________________________________________________________________________
Exhibit 1
LOTUS DEVELOPMENT CORPORATION
1992 STOCK OPTION PLAN
1. Purpose of the Plan.
The purpose of the LOTUS DEVELOPMENT CORPORATION 1992
STOCK OPTION PLAN (the "Plan") is (i) to further the growth and
success of LOTUS DEVELOPMENT CORPORATION, a Delaware corporation
(the "Company"), and its Subsidiaries (as hereinafter defined) by
enabling officers, employees and consultants of the Company and
any of its Subsidiaries to acquire shares of Common Stock, $.01
par value (the "Common Stock"), of the Company, thereby
increasing their personal interest in such growth and success,
and (ii) to provide a means of rewarding outstanding performance
by such persons to the Company and/or its Subsidiaries. Options
granted under the Plan may be either "incentive stock options"
("ISOs"), intended to qualify as such under the provisions of
Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified stock options ("NSOs"). For purposes
of the Plan, the terms "Parent" and "Subsidiary" shall mean
"Parent Corporation" and "Subsidiary Corporation," respectively,
as such terms are defined in Sections 425(e) and (f) of the Code.
Unless the context otherwise requires, any ISO or NSO shall
hereinafter be referred to as an "Option."
2. Administration of the Plan.
a. Stock Option Committee.
The Plan shall be administered by a Stock Option
Committee (the "Committee") of the Board of Directors of the
Company (the "Board") consisting of two or more non-employee
directors who shall be ineligible to participate in the Plan and
who shall be appointed to such Committee from time to time by the
Board; provided, however, that, so long as the Plan shall be
required to comply with Rule 16b-3 ("Rule 16b-3") promulgated by
the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in
order to permit transactions pursuant to the Plan by officers and
employee directors of the Company to be exempt from the
provisions of Section 16(b) of the 1934 Act, each member of the
Committee, at the effective date of his or her appointment to the
Committee, shall be a "disinterested person" within the meaning
of Rule 16b-3. The members of the Committee may be removed at
any time either with or without cause by the Board. Any vacancy
on the Committee, whether due to action of the Board or any other
cause, shall be filled by the Board.
b. Procedures.
The Committee shall from time to time select a Chairman
from among its members and shall adopt such rules and regulations
as it shall deem appropriate concerning the holding of meetings
and the administration of the Plan. A majority of the entire
Committee shall constitute a quorum and the actions of a majority
of the members of the Committee present at a meeting at which a
quorum is present, or actions approved in writing by all of the
members of the Committee, shall be the actions of the Committee;
provided, however, that if the Committee consists of only two
members, both shall be required to constitute a quorum and to act
at a meeting or to approve actions in writing.
c. Interpretation.
Except as otherwise expressly provided in the Plan, the
Committee shall have all powers with respect to the
administration of the Plan, including, without limitation, full
power and authority to interpret the provisions of the Plan and
any Option Agreement (as defined in Section 5.b), and to resolve
all questions arising under the Plan. All decisions of the
Committee shall be conclusive and binding on all participants in
the Plan.
3. Shares of Stock Subject to the Plan.
a. Number of Shares.
Subject to the provisions of Section 9 (relating to
adjustments upon changes in capital structure and other corporate
transactions), the number of shares of Common Stock subject at
any one time to Options granted under the Plan, plus the number
of shares of Common Stock theretofore issued and delivered
pursuant to the exercise of Options granted under the Plan, shall
not exceed 6,000,000 shares. If and to the extent that Options
granted under the Plan terminate, expire or are cancelled without
having been fully exercised, new Options may be granted under the
Plan with respect to the shares of Common Stock covered by the
unexercised portion of such terminated, expired or cancelled
Options.
b. Character of Shares.
The shares of Common Stock issuable upon exercise of an
Option granted under the Plan shall be (i) authorized but
unissued shares of Common Stock, (ii) shares of Common Stock held
in the Company's treasury, or (iii) a combination of the
foregoing.
c. Reservation of Shares.
The number of shares of Common Stock reserved for
issuance under the Plan shall at no time be less than the maximum
number of shares which may be purchased at any time pursuant to
outstanding Options.
4. Eligibility.
a. General.
ISOs may be granted by the Committee under the Plan
only to persons who are officers or employees (including
directors who are officers or employees) of the Company or any of
its Subsidiaries. NSOs may be granted by the Committee under the
Plan only to persons who are officers or employees (including
directors who are officers or employees) of the Company or any of
its Subsidiaries and to consultants (including natural persons
and entities) to the Company or any of its Subsidiaries. Options
granted under the Plan shall be, in the discretion of the
Committee, either ISOs or NSOs. Notwithstanding the foregoing,
Options may be conditionally granted to persons who are
prospective employees of the Company or any of its Subsidiaries;
provided, however, that any such conditional grant of an ISO to a
prospective employee shall, by its terms, become effective no
earlier than the date on which such person actually becomes an
employee.
b. Exceptions.
Notwithstanding anything contained in Section 4.a. to
the contrary:
(i) no ISO may be granted under the Plan to an
employee who owns, directly or indirectly (within the
meaning of Sections 422(b)(6) and 425(d) of the Code), stock
possessing more than 10% of the total combined voting power
of all classes of stock of the Company or of its Parent, if
any, unless (A) the Option Price (as defined in Section
6.a.) of the shares of Common Stock subject to such ISO is
fixed at not less than 110% of the Fair Market Value on the
date of grant (as determined in accordance with Section
6.b.) of such shares and (B) such ISO by its terms is not
exercisable after the expiration of five years from the date
it is granted; and
(ii) no Option may be granted to a person (A) who
has been appointed pursuant to Section 2.a. to serve on the
Committee effective as of a future date at any time during
the period from the date such appointment is made to the
date such appointment is to become effective or (B) who is
serving as a member of the Committee.
(iii) no individual participant under the Plan
may be granted Options to purchase more than 250,000 shares
of Common Stock in the aggregate during any calendar year.
5. Grant of Options.
a. General.
Options may be granted under the Plan at any time and
from time to time on or prior to the Expiration Date (as defined
in Section 12). Subject to the provisions of the Plan, the
Committee shall have plenary authority, in its sole discretion,
to determine:
(i) the person (from among the class of persons
eligible to receive Options under the Plan) to whom Options
shall be granted (the "Optionees");
(ii) the time or times at which Options shall be
granted;
(iii) the number of shares subject to each
Option;
(iv) the Option Price of the shares subject to
each Option, which price shall be not less than the minimum
specified in Section 4.b.(i) or 6.a. (as applicable); and
(v) the time or times when each Option shall
become exercisable and the duration of the exercise period.
b. Option Agreements.
Each Option granted under the Plan shall be designated
as an ISO or an NSO and shall be subject to the terms and
conditions applicable to ISOs and/or NSOs (as the case may be)
set forth in the Plan. In addition each Option shall be
evidenced by a written agreement (an "Option Agreement"),
containing such terms and conditions and in such form, not
inconsistent with the Plan, as the Committee shall, in its
discretion, provide. Each Option Agreement shall be executed by
the Company and the Optionee.
c. No Evidence of Employment.
Nothing contained in the Plan or in any Option
Agreement shall confer upon any Optionee any right with respect
to the continuation of his or her employment by the Company or
any of its Subsidiaries or interfere in any way with the right of
the Company or any such Subsidiary (subject to the terms of any
separate agreement to the contrary), at any time to terminate
such employment or to increase or decrease the compensation of
the Optionee from the rate in existence at the time of the grant
of an Option.
d. Date of Grant.
The date of grant of an Option under this Plan shall be
the date as of which the Committee approves the grant; provided,
however, that in the case of an ISO, the date of grant shall in
no event be earlier than the date as of which the Optionee
becomes an employee of the Company or one of its Subsidiaries.
6. Option Price.
a. General.
Subject to Section 9, the price (the "Option Price") at
which each share of Common Stock subject to an Option granted
under the Plan may be purchased shall be determined by the
Committee at the time the Option is granted; provided, however,
that (i) in the case of an ISO, subject to Section 4.b.(i), such
Option Price shall in no event be less than 100% of the Fair
Market Value on the date of grant (as determined in accordance
with Section 6.b.) of such share of Common Stock and (ii) in the
case of an NSO, such Option Price shall in no event be less than
100% of the Fair Market Value on the date of grant (as determined in
accordance with Section 6.b.) of such share of Common Stock.
b. Determination of Fair Market Value.
Subject to the requirements of Section 422 of the Code,
for purposes of the Plan, the "Fair Market Value" of shares of
Common Stock shall be equal to:
(i) if such shares are publicly traded, (x) the
closing price, if applicable, or the average of the last bid
and asked prices on the date of grant or, if lower, the
average of the daily closing prices (or the mean between the
last bid and asked prices for days on which no sales took
place) of the 30 business days immediately preceding the
date of grant, in the over-the-counter market as reported by
NASDAQ, or (y) if the Common Stock is then traded on a
national securities exchange or on the NASDAQ National
Market System, the average of the high and low prices on the
date of grant or, if the date of grant is not a day on which
the Common Stock is traded, the average of the high and low
prices on the next succeeding day on which the Common Stock
is traded; or
(ii) if there is no public trading market for
such shares, the fair value of such shares on the date of
grant as determined by the Committee after taking into
consideration all factors which it deems appropriate,
including, without limitation, recent sale and offer prices
of the Common Stock in private transactions negotiated at
arms' length.
Anything contained in the Plan to the contrary
notwithstanding, all determinations pursuant to Section 6.b.(ii)
shall be made without regard to any restriction other than a
restriction which, by its terms, will never lapse.
7. Exercisability of Options.
a. Committee Determination.
Each Option granted under the Plan shall be exercisable
at such time or times, or upon the occurrence of such event or
events, and for such number of shares subject to the Option, as
shall be determined by the Committee and set forth in the Option
Agreement evidencing such Option. If an Option is not at the
time of grant immediately exercisable, the Committee may (i) in
the Option Agreement evidencing such Option, provide for the
acceleration of the exercise date or dates of the subject Option
upon the occurrence of specified events and/or (ii) at any time
prior to the complete termination of such Option, accelerate the
exercise date or dates of such Option.
b. Automatic Termination.
The unexercised portion of any Option granted under the
Plan shall automatically terminate and shall become null and void
and be of no further force or effect upon the first to occur of
the following:
(i) the tenth anniversary of the date on which
such Option is granted or, in the case of any ISO granted to
a person described in Section 4.b.(i), the fifth anniversary
of the date on which such ISO is granted;
(ii) the expiration of six months from the date
that the Optionee ceases to be an officer or employee of the
Company or any of its Subsidiaries (other than as a result
of an Involuntary Termination (as defined in subparagraph
(iii) below) or a Termination For Cause (as defined in
subparagraph (iv) below)); provided, however, that if the
Optionee shall die during such six-month period, the time of
termination of the unexercised portion of such Option shall
be determined in accordance with subparagraph (iii) below;
(iii) the expiration of 12 months or such shorter
period as provided in the Option from the date that the
Optionee ceases to be an officer or employee of the Company
or any of its Subsidiaries, if such termination is due to
such Optionee's death or permanent and total disability
(within the meaning of Section 22(e)(3) of the Code) (an
"Involuntary Termination");
(iv) the expiration of three months from the
date that the Optionee ceases to be an officer or employee
of the Company or any of its Subsidiaries, if such
termination is for cause or is otherwise attributable to a
breach by the Optionee of an employment or other similar
agreement with the Company or any such Subsidiary (a
"Termination For Cause");
(v) the expiration of such period of time or the
occurrence of such event (including the expiration of
shorter periods of time with respect to the events described
in subparagraphs (i), (ii), (iii) and (iv) above) as the
Committee in its discretion may provide in the Option
Agreement;
(vi) the effective date of a Corporate
Transaction (as defined in Section 9.b.(i) to which Section
9.b.(ii) (relating to assumptions and substitutions of
Options) does not apply; provided, however, that an
Optionee's right to exercise any Option outstanding prior to
such effective date shall in all events be suspended during
the period commencing 10 days prior to the proposed
effective date of such Corporate Transaction and ending on
either the actual effective date of such Corporate
Transaction or upon receipt of notice from the Company that
such Corporate Transaction will not in fact occur; and
(vii) except to the extent permitted by Section
9.b.(ii), the date on which an Option or any part thereof or
right or privilege relating thereto is transferred
(otherwise than by will or the laws of descent and
distribution), assigned, pledged, hypothecated, attached or
otherwise disposed of by the Optionee.
The Committee shall have the power to determine what
constitutes a Termination For Cause, and the date upon which such
Termination For Cause shall occur. All such determinations shall
be final and conclusive and binding upon the Optionee.
Anything contained in the Plan to the contrary
notwithstanding, unless otherwise provided in an Option
Agreement, no Option granted under the Plan shall be affected by
any change of duties or position of the Optionee (including a
transfer to or from the Company or one of its Subsidiaries), so
long as such Optionee continues to be an officer or employee of
the Company or one of its Subsidiaries.
c. Limitations on Exercise.
Anything contained in the Plan to the contrary
notwithstanding, an ISO granted under the Plan to an Optionee
shall not be exercisable to the extent that the aggregate Fair
Market Value on the date of grant of such ISO (as determined in
accordance with Section 6.b.) of all stock with respect to which
incentive stock options are exercisable for the first time by
such Optionee during any calendar year (under all plans of the
Company and its Subsidiaries) exceeds $100,000.
8. Procedure for Exercise.
a. Payment.
At the time an Option is granted under the Plan, the
Committee shall, in its discretion, specify one or more of the
following forms of payment which may be used by an Optionee upon
exercise of his Option:
(i) cash or personal or certified check payable
to the Company in an amount equal to the aggregate Option
Price of the shares with respect to which the Option is
being exercised;
(ii) stock certificates (in negotiable form)
representing shares of Common Stock having a Fair Market
Value on the date of exercise (as determined in accordance
with Section 6.b. as if the date of exercise were the date
of grant) equal to the aggregate Option Price of the shares
with respect to which the Option is being exercised; or
(iii) a combination of the methods set forth in
clauses (i) and (ii).
b. Notice.
An Optionee (or other person, as provided in Section
10.b.) may exercise an Option granted under the Plan in whole or
in part (but for the purchase of whole shares only), as provided
in the Option Agreement evidencing his or her Option, by
delivering a written notice (the "Notice") to the Secretary of
the Company. The Notice shall:
(i) state that the Optionee elects to exercise
the Option;
(ii) state the number of shares with respect to
which the Option is being exercised (the "Optioned Shares");
(iii) state the method of payment for the
Optioned Shares (which method must be available to the
Optionee under the terms of his or her Option Agreement);
(iv) state the date upon which the Optionee
desires to consummate the purchase (which date must be prior
to the termination of such Option and no later than 30 days
from the delivery of such Notice);
(v) include any representations of the Optionee
required pursuant to Section 10.a.;
(vi) if the Option is exercised pursuant to
Section 10.b. by any person other than the Optionee, include
evidence to the satisfaction of the Committee of the right
of such person to exercise the Option; and
(vii) include such further provisions consistent
with the Plan as the Committee may from time to time
require.
The exercise date of an Option shall be the date on
which the Company receives the Notice from the Optionee.
Within 30 days of the exercise of the Option, the
Optionee shall deliver to the Company a copy of any election
filed by the Optionee with the Internal Revenue Service under
Section 83(b) of the Code.
c. Issuance of Certificates.
The Company shall issue a stock certificate in the name
of the Optionee (or such other person exercising the Option in
accordance with the provisions of Section 10.b.) for the Optioned
Shares as soon as practicable after receipt of the Notice and
payment of the aggregate Option Price for such shares. Neither
the Optionee nor any person exercising an Option in accordance
with the provisions of Section 10.b. shall have any privileges as
a stockholder of the Company with respect to any shares of stock
subject to an Option granted under the Plan until the date of
issuance of a stock certificate pursuant to this Section 8.c.
9. Adjustments.
a. Changes in Capital Structure.
Subject to Section 9.b., if the Common Stock is changed
by reason of a stock split, reverse stock split, stock dividend
or recapitalization, or converted into or exchanged for other
securities as a result of a merger, consolidation or
reorganization, the Committee shall make such adjustments in the
number and class of shares of stock with respect to which Options
may be granted under the Plan as shall be equitable and
appropriate in order to make such Options, as nearly as may be
practicable, corresponding adjustment changing the number and
class of shares allocated to, and the Option Price of, each
Option or portion thereof outstanding at the time of such change
shall likewise be made. Anything contained in the Plan to the
contrary notwithstanding, in the case of ISOs, no adjustment
under this Section 9.a. shall be appropriate if such adjustment
(i) would constitute a modification, extension or renewal of such
ISOs within the meaning of Sections 422 and 425 of the Code, and
the regulations promulgated by the Treasury Department
thereunder, or (ii) would, under Section 422 of the Code and the
regulations promulgated by the Treasury Department thereunder, be
considered the adoption of a new plan requiring stockholder
approval.
b. Corporate Transactions.
The following rules shall apply in connection with the
dissolution or liquidation of the Company, a reorganization,
merger or consolidation in which the Company is not the surviving
corporation, or a sale of all or substantially all of the assets
of the Company to another person or entity (a "Corporate
Transaction"):
(i) each holder of an Option outstanding at such
time shall be given (A) written notice of such Corporate
Transaction at least 20 days prior to its proposed effective
date (as specified in such notice) and (B) an opportunity,
during the period commencing with delivery of such notice
and ending 10 days prior to such proposed effective date, to
exercise the Option to the full extent to which such Option
would have been exercisable by the Optionee at the
expiration of such 20-day period; provided, however, that
upon the effective date of a Corporate Transaction, all
Options granted under the Plan not so exercised shall
automatically terminate; and
(ii) anything contained in the Plan to the
contrary notwithstanding, Section 9.b.(i) shall not be
applicable if provision shall be made in connection with
such Corporate Transaction for the assumption of outstanding
Options by, or the substitution for such Options of new
options covering the stock of, the surviving, successor or
purchasing corporation, or a parent or subsidiary thereof,
with appropriate adjustments as to the number, kind and
option prices of shares subject to such options; provided,
however, that in the case of ISOs, the Committee shall, to
the extent not inconsistent with the best interests of the
Company or its Subsidiaries (such best interests to be
determined in good faith by the Committee in its sole
discretion), use its best efforts to ensure that any such
assumption or substitution will not constitute a
modification, extension or renewal of the ISOs within the
meaning of Section 425(h) of the Code and the regulations
promulgated by the Treasury Department thereunder.
c. Special Rules.
The following rules shall apply in connection with
Section 9.a. and b. above:
(i) no fractional shares shall be issued as a
result of any such adjustment, and any fractional shares
resulting from the computations pursuant to Section 9.a. or
b. shall be eliminated without consideration from the
respective Options;
(ii) no adjustment shall be made for cash
dividends or the issuance to stockholders of rights to
subscribe for additional shares of Common Stock or other
securities; and
(iii) any adjustments referred to in Section 9.a.
or b. shall be made by the Committee in its sole discretion
and shall be conclusive and binding on all persons holding
Options granted under the Plan.
10. Restrictions on Options and Optioned Shares.
a. Compliance With Securities Laws.
No Options shall be granted under the Plan, and no
shares of Common Stock shall be issued and delivered upon the
exercise of Options granted under the Plan, unless and until the
Company and/or the Optionee shall have complied with all
applicable Federal or state registration, listing and/or
qualification requirements and all other requirements of law or
of any regulatory agencies having jurisdiction.
The Committee in its discretion may, as a condition to
the exercise of any Option granted under the Plan, require an
Optionee (i) to represent in writing that the shares of Common
Stock received upon exercise of an Option are being acquired for
investment and not with a view to distribution and (ii) to make
such other representations and warranties as are deemed
appropriate by counsel to the Company. Stock certificates
representing shares of Common Stock acquired upon the exercise of
Options that have not been registered under the Securities Act
shall, if required by the Committee, bear the following legend:
"the shares represented by this certificate have not
been registered under the securities act of 1933. The
shares have been acquired for investment and may not be
pledged, hypothecated, sold or transferred in the
absence of an effective registration statement for the
shares under the securities act of 1933 or an opinion
of counsel to the company that registration is not
required under said act."
b. Nonassignability of Option Rights.
No Option granted under this Plan shall be assignable
or otherwise transferable by the Optionee except by will or by
the laws of descent and distribution. An Option may be exercised
during the lifetime of the Optionee only by the Optionee. If an
Optionee dies, his or her Option shall thereafter be exercisable,
during the period specified in Section 7.b.(ii) or (iii) (as the
case may be), by his or her executors or administrators to the
full extent to which such Option was exercisable by the Optionee
at the time of his or her death.
11. Effective Date of Plan.
This Plan shall become effective on the date (the
"Effective Date") of its adoption by the Board; provided,
however, that no Option shall be exercisable by an Optionee
unless and until the Plan shall have been approved by the
stockholders of the Company in accordance with the provisions of
its Certificate of Incorporation and By-laws, which approval
shall be obtained within 12 months before or after the adoption
of the Plan by the Board.
12. Expiration and Termination of the Plan.
Except with respect to Options then outstanding, the
Plan shall expire on the date (the "Expiration Date") which is
the first to occur of (i) the tenth anniversary of the date on
which the Plan is adopted by the Board, (ii) the tenth
anniversary of the date on which the Plan is approved by the
stockholders of the Company and (iii) the date as of which the
Board, in its sole discretion, determines that the Plan shall
terminate. Any Options outstanding as of the Expiration Date
shall remain in effect until they have been exercised or
terminated or have expired by their respective terms.
13. Amendment of Plan.
The Board may at any time prior to the Expiration Date
modify and amend the Plan in any respect; provided, however, that
the approval of the holders of a majority of the votes that may
be cast by all of the holders of shares of Common Stock and
preferred stock of the Company, if any, entitled to vote (voting
as a single class) shall be obtained prior to any such amendment
becoming effective if such approval is required by law or is
necessary to comply with regulations promulgated by the SEC under
Section 16(b) of the 1934 Act or with Section 422 of the Code or
the regulations promulgated by the Treasury Department
thereunder.
14. Captions.
The use of captions in this Plan is for convenience.
The captions are not intended to provided substantive rights.
15. Disqualifying Dispositions.
If Optioned Shares acquired by exercise of an ISO
granted under this Plan are disposed of within two years
following the date of grant of the ISO or one year following the
transfer of the Optioned Shares to the Optionee (a "Disqualifying
Disposition"), the holder of the Optioned Shares shall,
immediately prior to such Disqualifying Disposition, notify the
Company in writing of the date and terms of such Disqualifying
Disposition and provide such other information regarding the
Disqualifying Disposition as the Company may reasonably require.
16. Withholding Taxes.
Whenever under the Plan shares of Common Stock are to
be delivered by an Optionee upon exercise of an NSO, the Company
shall be entitled to require as a condition of delivery that the
Optionee remit or, in appropriate cases, agree to remit when due,
an amount sufficient to satisfy all current or estimated future
Federal, state and local withholding tax and employment tax
requirements relating thereto. At the time of a Disqualifying
Disposition, the Optionee shall remit to the Company in cash the
amount of any applicable Federal, state and local withholding
taxes and employment taxes.
17. Other Provisions.
Each Option granted under the Plan may contain such
other terms and conditions not inconsistent with the Plan as may
be determined by the Committee, in its sole discretion.
Notwithstanding the foregoing, each ISO granted under the Plan
shall include those terms and conditions which are necessary to
qualify the ISO as an "incentive stock option" within the meaning
of Section 422 of the Code and the regulations thereunder and
shall not include any terms or conditions which are inconsistent
therewith.
18. Number and Gender.
With respect to words used in this Plan, the singular
form shall include the plural form, the masculine gender shall
include the feminine gender, and vise-versa, as the context
requires.
19. Governing Law.
The validity and construction of this Plan and the
instruments evidencing the Options granted hereunder shall be
governed by the laws of the State of Delaware.
