-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RJExu2hbK8T8gqmWHWFTZLigIjYklTDXuNul08xJROfcckO5orFxJ2apce6IeL56 WaBxaJZYou87hYVvWHRb4g== 0000711761-94-000009.txt : 19940523 0000711761-94-000009.hdr.sgml : 19940523 ACCESSION NUMBER: 0000711761-94-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940402 FILED AS OF DATE: 19940517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOTUS DEVELOPMENT CORP CENTRAL INDEX KEY: 0000711761 STANDARD INDUSTRIAL CLASSIFICATION: 7372 IRS NUMBER: 042757702 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11626 FILM NUMBER: 94529123 BUSINESS ADDRESS: STREET 1: 55 CAMBRIDGE PWY CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6175778500 10-Q 1 Q1 1994 10Q FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended April 2, 1994 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from _____ to _____ Commission File Number 0-11626 LOTUS DEVELOPMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 04-2757702 (I.R.S. Employer Identification Number) 55 Cambridge Parkway, Cambridge, Massachusetts 02142 (Address of principal executive offices) (Zip Code) (617) 577-8500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class April 30, 1994 ------------- -------------- Common Stock, 45,931,026 $.01 par value shares 1 PART I. FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS LOTUS DEVELOPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended ----------------------------------- April 2, 1994 April 3, 1993 ------------- ------------- Net sales $246,992 $227,004 Cost of sales 46,408 50,379 -------------- ------------- Gross margin 200,584 176,625 Expenses: Research and development 34,484 31,820 Sales and marketing 117,820 106,112 General and administrative 16,248 17,970 Other (income) / expense, net (Note D) (1,314) (68) ------------- ------------- Total expenses 167,238 155,834 Income before provision for income taxes 33,346 20,791 Provision for income taxes 12,005 8,524 ------------- ------------- Net income $21,341 $12,267 ============= ============= Net income per share $0.45 $0.29 ============= ============= Weighted average common and common equivalent shares outstanding 47,707 42,598 ============= =========== The accompanying notes are an integral part of the consolidated financial statements. 2 LOTUS DEVELOPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS April 2, 1994 December 31,1993 (unaudited) -------------- ---------------- Current assets: Cash and short-term investments (Note B) $476,889 $416,693 Accounts receivable, net of allowances of $28,014 and $30,002 189,838 217,336 Inventory (Note C) 17,102 21,220 Other current assets 27,715 20,817 -------------- -------------- Total current assets 711,544 676,066 -------------- -------------- Property and equipment, net of accumulated depreciation and amortization of $158,024 and $153,768 124,298 127,437 Software and other intangibles, net of accumulated amortization of $135,140 and $123,016 84,538 88,625 Investments and other assets 13,541 13,217 ------------- ------------- Total assets $933,921 $905,345 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 1,526 $ -- Current portion of long-term debt 28,480 28,480 Accounts payable and accrued expenses 183,965 199,926 Accrued and deferred income taxes 51,555 49,017 ------------- ------------- Total current liabilities 265,526 277,423 ------------- ------------- Deferred income taxes 49,524 49,531 Long-term debt 50,000 50,000 Stockholders' equity: Preferred stock, $1.00 par value, 5,000 shares authorized, none issued -- -- Common stock, $.01 par value, 100,000 shares authorized; 62,152 shares issued; 45,736 and 44,928 shares outstanding 622 622 Additional paid-in capital 258,228 251,414 Retained earnings 547,895 526,554 Treasury stock, 16,416 and 17,224 shares at an average cost of $14.44 per share (237,067) (248,728) Translation adjustment (807) (1,471) -------------- ------------- Total stockholders' equity 568,871 528,391 -------------- ------------- Total liabilities and stockholders' equity $933,921 $905,345 ============== ============= The accompanying notes are an integral part of the consolidated financial statements. 3 LOTUS DEVELOPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended April 2, 1994 April 3, 1993 ------------- ------------- Cash flows from operating activities: Net income $21,341 $12,267 Depreciation and amortization 21,413 21,631 Decrease in accounts receivable 28,879 6,366 Decrease in inventory 4,459 4,552 Decrease in accounts payable and accrued expenses (16,533) (11,147) Increase in accrued and deferred income taxes 2,472 4,867 Net change in other working capital items (7,597) (737) ------------- ------------- Net cash provided by operating activities 54,434 37,799 ------------- ------------- Cash flows from investing activities: Purchases of property and equipment (5,871) (4,918) Payments for software and other intangibles (8,177) (11,636) Purchases of short-term investments, net (8,168) (6,483) Other (141) 1,797 -------------- -------------- Net cash used for investing activities (22,357) (21,240) -------------- -------------- Cash flows from financing activities: Issuance of common stock 18,475 4,250 Increase (decrease) in short-term borrowings 1,476 (819) ------------- -------------- Net cash provided by financing activities 19,951 3,431 ------------- -------------- Net increase in cash and cash equivalents 52,028 19,990 Cash and cash equivalents, beginning of year 164,849 121,133 ------------- -------------- Cash and cash equivalents, end of first quarter $216,877 $141,123 ============= ============== Supplemental Cash Flow Information Three Months Ended April 2, 1994 April 3, 1993 ------------- ------------- Interest received $3,238 $946 Interest paid $887 $1,224 Income taxes paid $9,474 $3,959 The accompanying notes are an integral part of the consolidated financial statements. 4 LOTUS DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) A) Basis of Presentation The accompanying unaudited consolidated balance sheets, statements of operations, and statements of cash flows reflect all adjustments (consisting only of normal recurring items) which are, in the opinion of management, necessary for a fair statement of the consolidated financial position at April 2, 1994, and of consolidated operations and cash flows for the interim periods ended April 2, 1994 and April 3, 1993. The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions for Form 10-Q and therefore do not include all information and footnotes necessary for a complete presentation of operations, the financial position, and cash flows of the Company, in conformity with generally accepted accounting principles. The Company filed audited consolidated financial statements which included all information and footnotes necessary for such presentation for the years ended December 31, 1993 and December 31, 1992 in conjunction with its 1993 Annual Report on Form 10-K. The results of operations for the interim period ended April 2, 1994 are not necessarily indicative of the results to be expected for the year. B) Cash and Short-term Investments Cash and short-term investments consist of the following: April 2, 1994 December 31, 1993 ------------- ----------------- Cash and cash equivalents $216,877 $164,849 Short-term investments 260,012 251,844 ------------- ----------------- Cash and short-term investments $476,899 $416,693 ============= ================= The Company's investment portfolio is diversified and consists of cash equivalents and investments placed with high credit qualified institutions. The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FAS 115") at the beginning of 1994. The Company has the intent and ability to hold until maturity all securities that mature in less than one year. Accordingly, these "held-to-maturity" securities have been recorded at amortized cost. The Company has categorized all other securities as "available-for-sale", since the Company may liquidate these investments currently. FAS 115 requires that unrealized gains and losses on "available-for-sale" securities be excluded from earnings and reported in a separate component of stockholders' equity. In the first quarter of 1994, the unrealized loss was immaterial. 5 LOTUS DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands) B) Cash and Short-term Investments (continued) The amortized cost of securities, which approximates fair value, consists of the following at April 2, 1994:
Maturity Maturity Type of security Less than one year One to five years Total - - ---------------------- ------------------ ----------------- -------- Corporate bonds and Eurobonds $97,099 $36,031 $133,130 Commercial Paper 77,760 -- 77,760 Collateralized Mortgage Obligations 25,643 8,295 33,938 ----------------- ----------------- -------- $200,502 $44,326 244,828 ================= ================= Cash and other cash equivalents 232,071 -------- Total cash and short-term investments $476,899 ========
C) Inventory Inventory consists of the following: April 2, 1994 December 31, 1993 ------------- ----------------- Finished goods $11,066 $13,962 Raw materials 6,036 7,258 ------------- ----------------- Total $17,102 $21,220 ============= ================= D) Other (income) / expense , net Other (income) / expense consists of the following: Three Months Ended April 2, 1994 April 3, 1993 ------------- ------------- Interest income ($3,773) ($ 2,900) Interest expense 1,762 2,831 Other, net 697 1 ------------- ------------- Total ($1,314) ($ 68) ============= ============= 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Revenue for the first quarter of 1994 increased 9% over the comparable period in 1993. The Company's revenues are derived primarily from desktop applications and communications products and services. Lotus' desktop applications include spreadsheets, word processing, graphics, end-user database and personal information management software products. Lotus' communications products and services include Notes, cc:Mail and consulting services. Worldwide revenue from desktop applications was essentially unchanged in the first quarter of 1994 compared to the prior year period. Revenue from the Company's Windows desktop applications grew significantly compared to the prior year period, while revenue from DOS desktop applications continued to decline, but at a rate slower than that experienced in the prior year. Sales of SmartSuite, the Company's comprehensive suite of Windows desktop applications, more than quadrupled from the prior year period and represented 44% of total Windows desktop applications revenue in the first quarter of 1994, compared to 13% in the first quarter of 1993. This substantial increase reflects the market shift from standalone desktop applications to integrated suites. Prices for Windows desktop applications decreased compared to the same quarter in the prior year as competition for Windows desktop applications intensified. The Company anticipates that downward pressure on pricing for Windows desktop applications will continue in 1994. Revenue from communications products and services more than doubled compared with the first quarter of 1993 and represented 29% of total revenue in the first quarter of 1994 compared to 14% in the first quarter of 1993. Increased sales of communications products and services reflect the growing momentum behind workgroup and networked computing. Revenue outside the U.S. accounted for 55% of worldwide revenue and compared with 51% for the same period in 1993. The impact of foreign currency fluctuations on international revenues was insignificant. The gross margin percentage of 81% for the first quarter of 1994 compares with 78% for the same period in 1993. The rate was favorably affected by the achievement of manufacturing efficiencies resulting from higher production volumes, the closing of the Puerto Rican manufacturing plant in mid-1993, and material cost reductions. The margin improvement was also attributable to a greater proportion of higher margin communication products in the sales mix and to reduced manufacturing and delivery costs resulting from an increase in license sales. The 8% increase in research and development reflects a constant level of desktop development spending quarter over quarter and significantly higher spending associated with the development and enhancement of the Company's communications products and Working Together technology. To a lesser degree, higher spending was driven by development efforts to translate and localize products for international markets. Capitalized software costs for the first quarter of 1994 were $7.0 million compared with $6.0 million for the same period in 1993. 7 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations (continued) Sales and marketing expenses grew 11% in the first quarter of 1994 compared with the same 1993 period. The growth was driven by the Company's investment in its communications business and in SmartSuite. Increased spending on advertising and marketing programs for SmartSuite reflects the market shift from standalone applications to integrated suites. In addition, the Company has continued its efforts to attract users transitioning from DOS to Windows, to expand the worldwide support organization, and to grow the consulting services business. Other income and expense consists primarily of interest income and interest expense. Despite declining interest rates, interest income was higher in the first quarter of 1994 compared with the first quarter of 1993 because of higher average cash and short-term investment balances. Interest expense declined primarily due to scheduled repayments of long-term debt obligations. The estimated tax rate for 1994 of 36% compares with 41% for the first quarter of 1993. The decrease in the rate reflects the benefit from the reinstatement of the research and development credit in the second half of 1993 and benefits derived from the Company's manufacturing operations in Dublin, Ireland. Financial Condition Cash and short-term investments increased $60 million to $477 million at April 2, 1994. The two primary sources of cash flow in the first quarter of 1994 were $54 million of cash generated by operations and $18 million in proceeds from the issuance of common stock under the Company's employee stock plans. The Company used a portion of the cash for investing activities, including $6 million for the purchase of property and equipment and $8 million for payments for software and other intangibles. A substantial portion of the Company's cash and short-term investments are either deposited in financial institutions located in Puerto Rico or held by subsidiaries outside the United States. These investments can be readily transferred to the United States as required, subject to income and/or withholding taxes upon repatriation. Taxes have already been provided for the tax liability which would result. The Company's financial reserves are represented by cash, short-term investments and unused portions of credit facilities. The Company believes its financial reserves and funds provided by ongoing operations are adequate to meet future liquidity requirements. 8 PART II. OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS The Company commenced an action on July 2, 1990 in the U.S. District Court in Boston against Borland International, Inc. ("Borland") (Civ. Action No. 90-11662-K), alleging infringement of its copyrights in the Lotus 1-2-3 software program by Borland's "Quattro" and "Quattro Pro" software products. The action against Borland alleges that the "1-2-3 compatible modes" of Quattro and Quattro Pro identically recreate substantial and significant elements of 1-2-3's user interface, including its menu structure and command choices. The action sought an injunction preventing further sale of the infringing products and seeks an award of damages, attorney's fees and costs. On July 31, 1992, the Court found that Borland has infringed the Company's copyrights by copying the menu commands, menu command structure, macro language and keystroke sequences of Lotus 1-2-3. On June 30, 1993, the Court ruled in the Company's favor on all of the remaining copyright issues in the case except the Company's claim that the macro key reader for Quattro Pro for DOS and Quattro Pro for Windows infringes the Company's copyrights in 1-2-3. On August 19, 1993, the Court found that the macro key reader for the Quattro Pro products has infringed the Company's copyrights. On August 19, 1993, the Court enjoined permanently Borland from developing, manufacturing or selling versions of Quattro Pro, Quattro Pro SE and Quattro Pro for Windows that include Borland's "1-2-3 emulation" interface and/or its "Key Reader" facility and set a date in October of 1994 for a trial by jury to determine the amount of damages Borland owes the Company because of its infringements. On September 10, 1993, Borland appealed the Court's decisions that it has infringed the Company's copyrights and the permanent injunction pertaining to such products to the United States Court of Appeals for the First Circuit. This appeal was argued before the Court of Appeals on April 6, 1994. A suit was filed against the Company on July 27, 1989, in the U.S. District Court in New York City by REFAC International, Ltd. ("REFAC"). The suit alleges that the Company has committed patent infringement with respect to a U.S. patent issued in 1983 entitled "A Process and Apparatus for Converting A Source Program Into An Object Program". The Court has determined to resolve issues concerning validity of the patent before addressing the alleged infringement. In July 1993, a trial was held on one of those issues, the Company's claim that the patent is unenforceable by reason of inequitable conduct in front of the Patent Office. That issue is pending the judge's decision. If the Company prevails on this issue, judgment will be entered on its behalf. If it does not prevail, the Company intends to file one or more motions for summary judgment on other grounds claiming that the subject patent is invalid or unenforceable. The Company believes that the claim of infringement is without merit. 9 ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits Part I: Exhibit 11* - Computation of Primary and Fully Diluted Earnings per Share - page 10 Part II: None. (b) Reports on Form 8-K None. ___________________ *filed herewith SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LOTUS DEVELOPMENT CORPORATION (Registrant) By /s/ Edwin J. Gillis Edwin J. Gillis, Senior Vice President of Finance and Operations (Chief Financial Officer) By /s/ Lyn L. Benton Lyn L. Benton, Vice President of Finance and Corporate Services and Corporate Controller (Principal Accounting Officer) Date: May 16, 1994 10 EXHIBIT 11 LOTUS DEVELOPMENT CORPORATION COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (in thousands, except per share data) Three Months Ended April 2, 1994 April 3, 1993 ------------- ------------- Net income $21,341 $12,267 ============= ============= Weighted average shares outstanding during the period 45,290 41,963 Common stock equivalent shares 2,417 635 ------------- ------------- Common and common stock equivalent shares outstanding for purpose of calculating primary net income per share 47,707 42,598 Incremental shares to reflect full dilution 156 -- ------------- ------------- Total shares for purpose of calculating fully diluted net income per share 47,863 42,598 ============= ============= Primary net income per share $0.45 $0.29 ============= ============= Fully diluted net income per share $0.45 $0.29 ============= ============= -----END PRIVACY-ENHANCED MESSAGE-----