-----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, NIooSjYmdoQqCpeO+glcM6zxsqTG8Hn6gzoM/xUrtGrJ69WNxnuMguAxB2jP+8Ng edkW7/oezleUVF0dkP48/w== 0000711761-94-000018.txt : 19941021 0000711761-94-000018.hdr.sgml : 19941021 ACCESSION NUMBER: 0000711761-94-000018 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19941019 SROS: NASD 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-11626 FILM NUMBER: 94553954 BUSINESS ADDRESS: STREET 1: 55 CAMBRIDGE PWY CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6175778500 10-K/A 1 FORM 10-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1993 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from to Commission File Number 0-11626 LOTUS DEVELOPMENT CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-2757702 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 55 Cambridge Parkway, Cambridge, Massachusetts 02142 (Address of principal executive offices) (Zip Code) (617) 577-8500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Preferred Share Purchase Rights (Titles of classes) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 26, 1994 was $3,027,666,709. The number of shares outstanding of the registrant's common stock as of February 26, 1994 was 45,468,282. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1993 Annual Report to Shareholders are incorporated by reference in Parts II and IV. Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held May 25, 1994 are incorporated by reference into Part III. - - ------------------------------------------------------------------------------- LOTUS DEVELOPMENT CORPORATION 1993 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Page ---- Item 1. Business........................................... 1 Item 2. Properties......................................... 12 Item 3. Legal Proceedings.................................. 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters....................... 14 Item 6. Selected Financial Data............................ 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 15 Item 8. Financial Statements and Supplementary Data........ 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 21 PART III Item 10. Directors and Executive Officers of the Registrant. 22 Item 11. Executive Compensation............................. 23 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 23 Item 13. Certain Relationships and Related Transactions..... 23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................... 24 Signatures .................................................... 27 2 - - ------------------------------------------------------------------------------- PART I - - ------------------------------------------------------------------------------- Item 1. Business GENERAL Lotus Development Corporation (the "Company" or "Lotus") was incorporated in Delaware in April 1982. The Company and its subsidiaries are engaged in the development, manufacturing, marketing and support of applications software and services that meet the evolving technology and business application requirements of individuals, work groups, and entire organizations. The Company's products and services consist primarily of desktop applications, which include spreadsheets, word processing, graphics, end-user database and personal information management software, and communications products and services, which include Lotus Notes, cc:Mail and consulting services. These products and services comprise the Company's "Working Together strategy"; that strategy is defined by products which have common user interfaces, which are integrated with each other, which work across multiple platforms, and which help people work together more productively. The centerpiece of this strategy is communications products which facilitate workgroup computing and make the Company's desktop applications more productive through group-enabling and ease-of-use features. The Company markets its products in more than 80 countries worldwide and provides support services through its consulting services group and its worldwide support centers. Lotus' initial product, Lotus 1-2-3, was shipped in January 1983. 1-2-3 is a software product which combines spreadsheet, database and graphing capabilities into a single program for use with most personal computers. According to industry reports, soon after its introduction, 1-2-3 became the personal computer software industry's best selling business applications software product. Since its release in 1983, 1-2-3 has been continually updated to incorporate new technological advances, increased functionality, ease-of-use, and compatibility with major operating system and hardware platforms. By the end of 1993, the Company had shipped approximately 15 million units of 1-2-3. The Company has added to its established spreadsheet products in an effort to build a strong presence in each of the predominant desktop applications categories. Lotus has developed or acquired presentation graphics (Freelance Graphics), word processing (Ami Pro), end-user database (Lotus Approach) and personal information management software (Lotus Organizer) products. In 1992, the Company introduced SmartSuite, an integrated suite of the Company's desktop applications. The Company introduced Lotus Notes in 1990 and acquired cc:Mail, Inc. in 1991 to position itself to capitalize on the trend toward networked computing, information sharing and organizational computing. Lotus Notes has been widely acclaimed for its ability to enable workgroups to access, track, share, route and organize information across diverse computing platforms and geographical boundaries. Notes is the preeminent client-server product for developing and deploying groupware applications, including those found in customer service, sales and account management and product development. Since its introduction, the Company has shipped approximately 600,000 seats of Notes. The combination of Notes and cc:Mail, the leading LAN (Local Area Network)-based electronic mail product, has established the Company as a leader in PC-based communications software. The Company has also integrated Notes with its desktop products to enable them to take advantage of workgroup computing environments. 1 The Company's aim is to develop and market the best desktop applications in the industry and to play a leadership role in the rapidly growing communications market. Improving organizational productivity for its customers in today's networked computing environment is a primary objective. The Company has developed and adopted cross-product standards for most Lotus products that enhance user value in areas such as user interface design, database access methods, international character sets, networking, mail enabling, customization and extensibility. When appropriate, the Company has worked with other major software and hardware companies to develop these standards. Furthermore, as networked computing environments become more prevalent, the Company has focused on providing customers with communications products capable of being used across a broad range of hardware systems and operating environments. This provides customers with the ability to easily share information among users, to more readily move users between computing platforms, and to exercise greater flexibility in selecting computing environments. The Company believes this approach is of significant value to customers because it preserves their existing investment while allowing them to take advantage of new technologies. The Company also believes this approach is necessary to maintain its competitive position. See "Competition". PRODUCTS AND SERVICES Desktop Products - - ---------------- SmartSuite SmartSuite is the Company's suite of desktop applications. Each of the applications in SmartSuite is closely integrated and shares common user interface elements, including consistent menu structure, common Lotus SmartIcons, a live status bar, consistent right mouse button access to product functions and one click access to Help. SmartSuite was the first group-enabled suite, which includes features that are mail-enabled and facilitate collaborative work. In September 1993, the Company shipped SmartSuite for Windows Release 2.1 which comprises Lotus' award-winning desktop applications, including Lotus 1-2-3, Lotus Ami Pro, Freelance Graphics, Lotus Approach and Lotus Organizer. In November 1993, Lotus shipped SmartSuite for OS/2, the first complete desktop suite of applications for IBM's OS/2 operating system. This suite comprises 32-bit versions of 1-2-3, Ami Pro, Freelance Graphics and cc:Mail, which exploit IBM's OS/2 Workplace Shell graphical environment and 32-bit technology. Products Under Development - The Company is currently developing enhanced versions of SmartSuite for Windows and OS/2. Spreadsheet Products Lotus 1-2-3 is the Company's best selling product and the world's most widely used spreadsheet. The Company's spreadsheets are designed to deliver performance, usability, innovation, integration with other Lotus applications, and workgroup enabling features. 1-2-3 is currently available across all of the most popular hardware and operating platforms, including Windows, OS/2, DOS, UNIX and Macintosh operating systems. As of December 31, 1993, versions of 1-2-3 were available in approximately 27 different languages. 2 In June 1993, the Company shipped 1-2-3 for Windows Release 4.0, an award-winning version that provides users with exceptional usability, increased productivity and advanced workgroup capabilities. Lotus has designed this product with intuitive access to all its functions and features to make it easier to create, present and maintain spreadsheets. Some of these features include in-cell editing, intelligent chart composition, drag-and-drop editing, worksheet tabs and fill-by-example functionality. 1-2-3 for Windows Release 4.0 incorporates an array of powerful data analysis and programming tools to maximize users' productivity. There are more than 120 new formula functions to perform calendar, database, engineering, financial, logical, information lookup, mathematical and statistical calculations. The product also features a significantly improved cell engine, the computational foundation of the spreadsheet, resulting in improved recalculation performance, and three- dimensional worksheet capabilities. The new spreadsheet also includes a unique Version Manager which allows individuals and workgroups to better manage what-if analysis, track modifications to spreadsheets and effectively share spreadsheet data. 1-2-3 for Windows Release 4.0 is the first Notes-enabled spreadsheet that permits users to collaborate while working within the product. 1-2-3 for Windows Release 4.0 has a common appearance and behavior with Lotus' other Windows applications by sharing components such as SmartIcons, Smart Status bar and a common user interface. In February 1993, the Company shipped Improv for Windows, the first spread- sheet for Windows that provides powerful ways to dynamically view and analyze spreadsheet data, giving users the ability to examine business information in many different ways not practical with conventional Windows spreadsheets. Improv for Windows combines familiar spreadsheet components, such as cells and formulas, what-if analysis, and business graphics with a multidimensional structure and natural language formulas that are easy to understand. In June 1993, the Company shipped Improv for Windows Release 2.1, an upgrade which delivers network-ready installation, external data access capabilities and compatibility with the 1-2-3 for Windows Release 4.0 file format. Lotus introduced 1-2-3 DOS Release 2.4 and Release 3.4 in 1992. These upgrades of the leading DOS spreadsheet feature performance enhancements and SmartIcons, while maintaining compatibility with earlier versions of 1-2-3. The Company's DOS spreadsheets combine an interactive WYSIWYG ("what you see is what you get") display and the ability to turn analyses into presentation quality output with powerful analytic capabilities. In addition, these products feature file viewing, Solver technology and spreadsheet auditing capabilities. 1-2-3 for DOS Release 2.4 is designed to run on most IBM compatible PCs, while Release 3.4 is targeted for users with more powerful PCs and more advanced spreadsheet requirements. Additional features offered with Release 3.4 include three- dimensional spreadsheets, advanced relational database with access to external data via the Company's DataLens product, and expanded memory support for building larger spreadsheets. In February 1993, Lotus shipped 1-2-3 for OS/2 Release 2.0. This version of the spreadsheet allows users to exploit OS/2's Workplace Shell graphical environment and 32-bit technology, providing users with significant usability and productivity gains through features such as drag-and-drop editing, faster navigation, quicker screen refresh and multi-threading. 1-2-3 for OS/2 delivers three-dimensional capabilities, Solver and BackSolver advanced goal- seeking tools, and external data access capabilities through DataLens. Products Under Development - Several enhanced spreadsheet products for the Windows, DOS and OS/2 operating platforms are currently under development and are expected to ship in 1994. 3 Presentation Graphics Products The Company's presentation graphics product, Freelance Graphics, is designed to facilitate the creation and display of graphical information, including display of data generated or manipulated by Lotus 1-2-3. Freelance Graphics provides a comprehensive set of graphics capabilities including bullet charts, flexible drawing and editing tools, powerful charting capability, and the ability to quickly and easily create presentations. Lotus currently markets Windows, OS/2 and DOS versions of Freelance Graphics. In February 1993, the Company began shipping Freelance Graphics for Windows Release 2.0. This major release enhances the product's overall usability and builds on the success of the earlier version, which delivered such easy to use and innovative features as an on-line tutorial, dozens of pre-designed SmartMaster presentation templates and page layouts, and an unique fill-in-the blank approach to creating presentations. Freelance Graphics for Windows Release 2.0 also delivers tight integration with other Lotus applications and innovative new multimedia screenshow capabilities. In February 1993, the Company also began shipping Freelance Graphics for OS/2 Release 2.0. This version brings the features of Freelance Graphics for Windows to the OS/2 operating platform. In addition to SmartMasters and other presentation management features, Freelance Graphics for OS/2 provides complete charting capabilities, extensive drawing and editing tools and seamless integration with 1-2-3. The Company also sells Freelance Graphics for DOS Release 4.0. Key features include a graphical WYSIWYG working environment, a customized outliner, enhanced presentation management tools, charting capabilities and master presentation backgrounds. In March 1992, the Company began shipping SmartPics for Windows, an extensive clip-art library with browser for Windows applications. With more than 2,000 pieces of quality artwork, SmartPics is designed to provide users with the easiest and fastest means for adding memorable visuals to Windows Documents and presentation materials. The Company offers versions of Freelance Graphics in 10 different languages. Products Under Development - The Company is currently developing enhanced versions of its Windows and OS/2 based presentation graphics products. Word Processing Products The Company's principal product offering in the word processing market, Lotus Ami Pro, provides desktop publishing functionality and graphics incorporation for personal computers and area local networks. Ami Pro for Windows Release 3.01, the Company's award-winning word processing product, combines traditional features, such as a thesaurus and interactive drawing and charting capability, with advanced functionality and ease-of-use. Ami Pro pioneered the use of SmartIcons for single-click access to menu commands and includes fast format, drag-and-drop text editing, automated envelope printing, document and style sheet viewers, and a clean screen option. Working from Ami Pro for Windows, users can fully realize the power of the Lotus suite of Windows products, sharing and manipulating functionality and data across applications. In November 1993, Lotus introduced Ami Pro 3.0 for OS/2 which takes advantage of OS/2's multi-threading power and delivers seamless integration with the OS/2 Workplace Shell. Ami Pro 3.0 for OS/2 supports IBM's OS/2 programming language and features integration between system and application macros. 4 The Company offers 24 different language versions of its word processing products. Products Under Development - The Company is currently developing enhanced versions of Ami Pro for the Windows and OS/2 operating environments. Database Management Products In June 1993, Lotus acquired Approach Software Corporation, a developer of end-user relational database applications for the Windows environment. Lotus Approach for Windows makes it easy to create stand-alone applications and manage and report on information. The product, based on client/server technology, comprises three components: a graphical user interface, a relational layer, and a series of data-access engines called PowerKeys. PowerKeys enable users to connect directly to Oracle SQL, Microsoft and Sybase SQL Server, DB2, FoxPro, Paradox, dBase and ODBC compliant databases. This feature provides users with quick access to data anywhere on a network without any conversion or intermediary file, and the ability to mix data from multiple file formats into single form or report. Products Under Development - The Company is currently developing an enhanced version of Approach for Windows, which is expected to ship during 1994. Personal Information Management Products Lotus Organizer is a Windows-based personal information management product which employs Lotus' core Windows product features, such as SmartIcons and mail- enabling. Lotus Organizer makes integrated calendaring, daily planning and organization, time management, referencing and updating contact lists, and random note taking easy. The Company offers 16 different language versions of Lotus Organizer. Organizer's intuitive personal calendaring is also the foundation of Lotus' group calendaring and scheduling strategy. In August 1993, Lotus introduced Organizer-based group scheduling for cc:Mail users. Group scheduling is designed to allow workers in different groups, departments or locations to automate and expedite the process of collaborative scheduling and communications, thereby improving organizational productivity. Future versions will support Notes and other mail systems. Products Under Development - Enhanced versions of Lotus Organizer are currently under development and are expected to ship in 1994. 5 Communications Products and Services - - ------------------------------------ Lotus' communications products include Notes, the premier workgroup computing product, and cc:Mail, the leading LAN-based electronic mail system. Both Notes and cc:Mail products take advantage of network computing to boost organizational effectiveness and improve communications across multiple network operating systems, hardware platforms and operating systems. They also provide the underlying messaging and shared document database layers for the deployment of enterprise-wide, shared information applications. The Company's consulting services group develops solutions and offers educational services to meet the information management needs of its clients. These services are primarily targeted at communications-based applications. Lotus Notes Notes enables users to create, store, route and access shared information across networked personal computers. The product addresses the needs of workgroups, such as those in corporate and government environments, to share information simultaneously at different locations and across different technologies. It is used for three basic categories of applications: disseminating information, such as news or reference materials; routing information, such as mail messages or forms; and interactive applications, such as discussions, project control or tracking systems. Customer installations range from multinational companies, installing several thousand copies of Notes, to very small workgroups focused on solving a particular business problem. In May 1993, the Company shipped Notes Release 3.0, a significantly updated version of the industry standard workgroup computing platform. Notes Release 3.0, which is available on the Windows, OS/2 and Macintosh platforms, features cross-platform support and new ease-of-use features, including full-text search, Automatic Document Versioning, Lotus SmartIcons, and a graphical install program. Notes Release 3.0 also provides improved integration with desktop applications from Lotus and other software developers. Notes Field Exchange (Notes/FX), an integrating technology developed by Lotus, allows users to exchange data between Notes and desktop applications, providing the ability to bidirectionally share field level information. This integration offers the ability for Notes and desktop tools to function as if they were designed to be part of the same application. Notes/FX allows desktop applications to function as "alternative editors" within the Notes environment. It improves organizational productivity through group collaboration and givers users the ability to share information from applications with other users. The Company has developed companion products with partner companies to extend the capabilities of Notes. In April 1993, Lotus introduced Lotus Notes: Document Imaging (LN:DI) Release 2.0, a product which allows users to scan textual and graphical documents into Notes so that they may be searched and edited. This release provides support for color and grayscale document images and enables users to scan, view and print color images. Additional companion products, including Lotus Notes Optical Character Recognition (OCR) server and Lotus Notes In-bound Fax Gateway, shipped in 1992. These imaging, OCR and FAX products allow users to integrate into Notes the vast amount of business information previously only accessible in paper form. The Company has made a significant investment to develop international versions of Notes. As of December 31, 1993, Notes was available in 12 different languages. Products under development: Notes products currently under development include enhanced versions, companion products and versions extending their use to additional operating environments. 6 cc:Mail cc:Mail is a comprehensive LAN-based electronic mail and messaging system. cc:Mail is available on more platforms today than any other mail system, including local and remote DOS, Windows, OS/2, Macintosh and UNIX, as well as all major LANs. The product provides transparent connectivity to all major public and private electronic mail systems and facsimile machines worldwide. It will also support wireless computing and other mobile platforms. By the end of 1993, cc:Mail products were being used by more than 4.3 million users worldwide, and versions were available in 19 different languages. The Company believes electronic mail represents a substantial opportunity in the software industry over the next several years. cc:Mail products, which are tightly integrated with the Lotus suite of products, put Lotus in a position to capitalize on the anticipated growth of electronic mail in networked computing environments. The Company also believes that because electronic mail has the potential for greater desktop penetration than any other application, cc:Mail products provide Lotus with an added opportunity to introduce customers to its entire suite of integrated products. Products under development - cc:Mail products currently under development include enhanced versions, companion products and versions extending their use to additional operating environments. Consulting Services The Company offers worldwide consulting services to its customers to assist them in utilizing their computing resources effectively in creating computing architectures that allow information to move freely and rapidly across organizational boundaries. The Company provides complete business solutions that enable customers to leverage their existing computing investment while taking advantage of emerging technologies. The ability to provide a total solution for customers enables them to realize greater organizational productivity. The Company offers a variety of services to its customers, including complete business needs analysis, comprehensive resource evaluation, project management for large-scale Notes deployment, system requirements analysis, and network design assistance. In addition, the Company offers extensive customized Notes consulting, including rapid prototyping of Notes applications, the design and development of tailored Notes applications, and training and education. Mobile Computing Lotus views communications as the driving force of mobile computing. The Company believes mobile users will be able to exploit the strengths of Notes and cc:Mail to break communications barriers while traveling. In June 1993, Lotus introduced cc:Mail Mobile for the HP 100LX palmtop computer, the first release of cc:Mail designed specifically for mobile computing environments. This product offers wireless functionality and unparalleled portability for cc:Mail users. Products Under Development - Lotus intends to extend Notes and cc:Mail to a variety of mobile computing technologies such as paging, two-way wireless and cellular telephony, and to provide links to value-added services. No assurance can be given that any of the development projects referred to will be successful or that announced shipping dates for new products will be met. 7 PRODUCT DEVELOPMENT The Company's product development activities are focused around delivering organizational productivity to its customers with a suite of desktop applications -- spreadsheets, graphics, word processing, end-user database and personal information management software products -- and communications products -- Notes and cc:Mail -- that capitalize on the advantages of a networked workgroup computing environment. Key development objectives of the Company include tightening integration across applications, furthering the networking and communications capability of all of its products, making applications more customizable, and introducing more of its products to the growing portable computing market. Furthermore, the Company continues to invest substantial resources to improve its quality assurance processes and documentation. Significant research and development is applied to both enhancement of existing products and the development of new technologies. Strategic acquisitions and relationships have focused on product line extensions and new market opportunities in the areas of end-user database, personal information management, word processing and communications products. Lotus' U.S. development organizations are located in Cambridge, Massachusetts; Atlanta, Georgia; Mountain View, California; and Redwood City, California. The Company supplements its U.S. based development activities with product development organizations in Ireland, England, Singapore and Japan which primarily produce localized versions of Lotus products and provide third-party support for existing products. Foreign development efforts are aimed at modifying products to permit operation in different natural languages, adding features which are tailored to local markets, and supporting hardware platforms and operating systems that are prevalent outside the U.S. During the years ended December 31, 1993, 1992 and 1991, research and development costs charged to operations were $126.9 million, $118.3 million and $116.6 million. The Company also charged $19.9 million to 1993 operations for purchased research and development in connection with the acquisition of Approach Software Corporation. Additionally, the Company capitalized internal software development costs and acquired technology intangibles of $32.8 million, $43.6 million and $60.2 million in 1993, 1992 and 1991. New product development schedules are difficult to predict, because software development, quality assurance testing and debugging are complex processes that often take longer than expected. Accordingly, although the Company estimates the shipment dates of proposed new products for internal purposes, such estimates are subject to frequent adjustment based on the Company's own periodic assessments of its progress in the development process. The Company believes that its experience regarding new product schedules and introductions has been comparable with that of other companies in the software industry. MARKETING AND SALES Lotus sells its products through four principal channels of distribution: the reseller channel, directly to end users, through original equipment manufacturers (OEMs), and through Lotus business partners, including value added resellers (VARs). The reseller channel is Lotus' principal means of distribution and consists of distributors and resellers who together represent approximately 8,000 sales locations in North America. To facilitate sales through this channel and provide a high level of sales support and product coverage to resellers and large corporate accounts, the Company has built a field sales organization comprising dedicated account teams to manage these business relationships. The Company sells some of its products and services through its own direct sales representatives. Specialized Lotus sales forces have been created to generate large volume sales to strategic accounts while consulting services are sold through a separate consultant sales force. The Company also engages in direct marketing programs focused on end-users, primarily for upgrade product versions. 8 Lotus has an OEM sales channel to sell its products to PC manufacturers. Lotus' aim is to seed new products and technology to first time users and to PC buyers who may not have otherwise purchased these products on a standalone basis. The Company has also established a network of business partners who provide networked computing solutions and services to their customer bases. As of December 31, 1993, the Company had arrangements with more than 1,200 business partners worldwide, of which approximately 1,000 were located in North America. At December 31, 1993, Lotus maintained 91 sales offices throughout the world. In North America, there were 39 sales offices with a sales and sales support staff of approximately 600. The Company also has a direct presence in countries throughout Europe, South America, Central America, Asia, Africa, and the Pacific Rim. Lotus maintained 52 foreign sales offices in 36 countries with a sales and sales support staff of approximately 525. In a manner similar to the U.S. market, the Company sells its products internationally primarily through resellers and distributors. In countries where the Company has not established a presence of its own, it sells its products through authorized distributors. In addition, the consulting services business employed approximately 200 consultants worldwide at December 31, 1993. Lotus does not believe that the loss of any distributor would have a materially adverse effect on its operations. Lotus offers various credit terms to its resellers and distributors that it believes are typical for the personal computer software industry. The Company's practice is to ship its products promptly upon receipt of purchase orders from its customers and, as a result, backlog is not meaningful. Two of the Company's distributors, Ingram Micro and Merisel, accounted for 12% and 11% of worldwide sales in 1993. No one customer was responsible for more than 10% of worldwide sales in 1992 or 1991. The Company continues to invest in its worldwide customer support organization, which now numbers more than 850 people. The Company's aim is to manage globally its support organization to provide consistently high quality support around the world. Support and maintenance is an important part of Lotus' product offerings and will continue to play a key role in delivering organizational productivity to the Company's customers. Additional information with respect to foreign and domestic operations and export sales may be found in Note M on page 18 of the Financial Section of the Annual Report to Shareholders (Exhibit 13 to this Form 10-K), which Note is incorporated herein by reference. MANUFACTURING AND DISTRIBUTION The Company has principal manufacturing and distribution facilities in North Reading, Massachusetts; Dublin, Ireland; and Singapore. The Massachusetts facility manufactures products sold in North America. During 1993, the Company closed its Puerto Rican manufacturing facility and transferred those operations to North Reading. The Ireland facility principally manufactures products that are sold by the Company's European, South American, Central American, African and Middle Eastern subsidiaries and branches. In 1994, the Company will transfer the manufacturing of products for the South American and Central American markets to North Reading. The Singapore facility manufactures products that are sold by the Company's Japanese, Pacific Rim, and other Asian subsidiaries and branches. The Company's manufacturing operations involve the duplication of diskettes, assembly of purchased parts and packaging. The chief raw materials and components used include diskettes and printed text. Raw materials for the Company's products are in adequate supply and available from a number of alternative suppliers. At present, the Company does not anticipate difficulty in securing the raw materials it will require in 9 connection with its operations. The Company believes that its inventories are adequate to meet the expected demand. COMPETITION The personal computer industry, in both the hardware and software segments, has been subject to rapid change, which can be expected to continue. The applications software business is highly competitive. The Company's products compete with software products offered by major independent software companies, such as Microsoft, WordPerfect, Borland, and Software Publishing. In addition, certain products offered by the Company are directed at operating environments or business applications in which these companies were early entrants and enjoy significant product acceptance and market share. As consolidation in the software industry continues, the Company believes that it must offer an integrated suite of desktop applications in order to be competitive. Furthermore, the Company expects that in the future a greater proportion of desktop revenues will be derived from suite revenues. The principal considerations for purchasers of personal computer applications software include product reliability and performance, compatibility with presently owned hardware and software, ease-of-use, functionality, price, availability across multiple operating environments, network capability, workgroup enabling, degree of integration across applications, vendor reputation, and quality of support and training services. Competition in the Company's industry has intensified with greater marketing program activities, increased discounts, low-priced upgrades and special prices on introductory product offers and multi-product purchases. Competitors' marketing efforts also include price offers targeted at Lotus customers through direct mail telemarketing and in-channel promotions. The Company also competes with other companies in the personal computer applications software market for resellers and other product distribution channels. In addition to the factors listed above, the principal considerations for resellers and distributors in determining which products to offer include profit margins, marketing programs, product support and service, and credit terms. PRODUCT PROTECTION The Company regards its applications as proprietary and attempts to protect it by relying upon copyrights, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosure and transferability that are incorporated into its agreements with other parties. In cases where, despite these protections, others have unlawfully attempted to copy aspects of the Company's products or otherwise obtain information which the Company regards as proprietary, the Company has taken action to enforce its legal rights. Moreover, the Company actively seeks to enforce its intellectual property rights in countries around the world against the unauthorized duplication of its products by end-users and resellers. See "Legal Proceedings". 10 EMPLOYEES At December 31, 1993, the Company employed 4,738 people, of which 1,678 were outside the United States. Of the total, 1,151 were in product research and development, 2,560 in sales, marketing, and support, 492 in manufacturing, and 535 in finance, information systems and administration. As necessary, the Company supplements its regular employees with temporary and contract personnel. The Company believes that its ability to attract and retain qualified employees is an important factor in its growth and development and its future success. To date, the Company has been successful in recruiting and retaining sufficient numbers of qualified personnel to conduct its business successfully. None of the Company's employees is subject to a collective bargaining agreement, and the Company believes that its employee relations are favorable. 11 Item 2. Properties The Company has two principal office facilities located in Cambridge, Massachusetts. The Lotus Development Building (260,000 sq.ft.) houses the Company's corporate domestic sales and marketing organizations in addition to its corporate headquarters' staff. The building is occupied under lease agreements which commenced in 1985 and run for a period of ten years with options to renew for two five-year periods. The Company's Rogers Street facility (265,000 sq.ft.) is located adjacent to the Lotus Development Building in Cambridge. The building is owned by the Company and is occupied by the research and development organization. During 1993, the Company commenced a construction project to expand the building by approximately 115,000 square feet. This project is expected to be completed by mid-1995. In 1992, the Company relocated its manufacturing, distribution and warehousing operations, as well as its customer support and service organization from Cambridge to two leased buildings (350,000 sq.ft.) in North Reading, Massachusetts. The leases, which commenced in 1992, run for a period of ten years with options to renew for two five-year periods. The majority of the vacated Cambridge space was leased, and the leases expired concurrently with the relocation. The one owned manufacturing facility that was vacated in the move was sold in January 1994. In 1993, the Company also vacated 87,000 square feet of office space located in two separate buildings in Cambridge. One building, where the Company leased approximately 41,000 square feet, was vacated as a result of the sale of its One Source business. The lease expired approximately one month subsequent to the sale of the One Source business. The remaining 46,000 square feet in the other building was sublet through the expiration date of the lease in 1995. The Company also leases approximately 30,000 square feet of warehouse and distribution space in one building in Cambridge. In 1993, the Company began leasing approximately 35,000 square feet of office space in Austin, Texas which has been used to expand its customer support and service organization. The Company also leases manufacturing and/or office facilities in Dublin, Ireland; Staines, England; Tokyo, Japan; and Singapore. The two European facilities have lease terms through 1994 and 1999, respectively, with options to renew through 2017 and 2014, respectively. The Japan and Singapore facilities have lease terms which expire in 1997 and 1994, respectively. The Company also maintains 91 sales offices worldwide, including those in North America, Europe, Central and South America, Asia and the Pacific Rim. 12 Item 3. Legal Proceedings The Company commenced an action on July 2, 1990 in the U.S. District Court in Boston against Borland International, Inc. ("Borland") (Civ. Action No. 90-11662-K), alleging infringement of its copyrights in the Lotus 1-2-3 software program by Borland's "Quattro" and "Quattro Pro" software products. The action against Borland alleges that the "1-2-3 compatible modes" of Quattro and Quattro Pro identically recreate substantial and significant elements of 1-2-3's user interface, including its menu structure and command choices. The action sought an injunction preventing further sale of the infringing products and seeks an award of damages, attorney's fees and costs. On July 31, 1992, the Court found that Borland has infringed the Company's copyrights by copying the menu commands, menu command structure, macro language and keystroke sequences of Lotus 1-2-3. On June 30, 1993, the Court ruled in the Company's favor on all of the remaining copyright issues in the case except the Company's claim that the macro key reader for Quattro Pro for DOS and Quattro Pro for Windows infringes the Company's copyrights in 1-2-3. On August 19, 1993, the Court found that the macro key reader for the Quattro Pro products has infringed the Company's copyrights. On August 19, 1993, the Court enjoined permanently Borland from developing, manufacturing or selling versions of Quattro Pro, Quattro Pro SE and Quattro Pro for Windows that include Borland's "1-2-3 emulation" interface and/or its "Key Reader" facility and set a date in October of 1994 for a trial by jury to determine the amount of damages Borland owes the Company because of its infringements. On September 10, 1993, Borland appealed the Court's decisions that it has infringed the Company's copyrights and the permanent injunction pertaining to such products to the United States Court of Appeals for the First Circuit. A suit was filed against the Company on July 27, 1989, in the U.S. District Court in New York City by REFAC International, Ltd. ("REFAC"). The suit alleges that the Company has committed patent infringement with respect to a U.S. patent issued in 1983 entitled "A Process and Apparatus for Converting A Source Program Into An Object Program". The Court has determined to resolve issues concerning validity of the patent before addressing the alleged infringement. In July 1993, a trial was held on one of those issues, the Company's claim that the patent is unenforceable by reason of inequitable conduct in front of the Patent Office. That issue is pending the judge's decision. If the Company prevails on this issue, judgment will be entered on its behalf. If it does not prevail, the Company intends to file one or more motions for summary judgment on other grounds claiming that the subject patent is invalid or unenforceable. The Company believes that the claim of infringement is without merit. Item 4. Submission of Matters to a Vote of Security Holder No matters were submitted to a vote of security holders during the fourth quarter of 1993. 13 - - ------------------------------------------------------------------------------ PART II - - ------------------------------------------------------------------------------ Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information with respect to this item may be found in the section captioned "Quarterly Results of Operations" appearing on page 20 of the Financial section of the Annual Report to Shareholders for the year ended December 31, 1993. Such information is incorporated herein by reference. Item 6. Selected Financial Data The following selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes thereto appearing elsewhere in this Report.
Five-Year Summary of Selected Financial Data (In thousands, except per share data) 1993 1992 1991 1990 1989 - - -------------------------------------------------------------------------------- Net sales $981,168 $900,149 $828,895 $692,242 $556,033 Income before income taxes and cumulative effect of change in accounting principle 101,769 120,005 67,686 52,826 84,951 Net income 55,535 80,403 33,116 23,254 67,961 Net income per share 1.24 1.87 0.75 0.54 1.61 Total assets 905,345 763,444 725,537 656,807 604,277 Cash and short-term investments 416,693 293,094 224,810 245,386 274,977 Working capital 398,643 296,166 207,670 226,961 299,958 Long-term debt 50,000 108,740 139,000 160,000 202,440 Stockholders' equity 528,391 399,438 323,113 309,439 278,305
Notes to Selected Financial Data: (1) 1993 amounts reflect a charge to operations of $19.9 million, or $0.45 per share, in the second quarter for purchased research and development related to the Approach Software Corporation acquisition. (2) 1992 amounts include pre-tax gains on the sale of the Company's investment in Sybase, Inc. of $34.6 million in the third quarter and $15.1 million in the fourth quarter with a total gain for the year of $49.7 million on a pre-tax basis and $33.3 million, or $0.77 per share, on an after-tax basis. 1992 amounts also include a restructuring charge in the fourth quarter of $15 million on a pre-tax basis and $10.1 million, or $0.23 per share, on an after-tax basis. (3) 1991 amounts include a fourth quarter restructuring charge of $23 million on a pre-tax basis and $18.6 million, or $0.42 per share, on an after-tax basis. (4) 1990 amounts reflect a charge to operations of $53 million, or $1.23 per share, in the fourth quarter for purchased research and development related to the Samna acquisition. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations As an aid to understanding the Company's operating results, the table below indicates the percentage relationships of income and expense items included in the Consolidated Statements of Operations for the three years ended December 31, 1993 and the percentage changes in those items for the two years ended December 31, 1993.
Items as a percentage Percent changes year to year of net sales 1993-92 1992-91 Income and expense items 1993 1992 1991 - - -------------------------------------------------------------------------------------- 9% 9% Net sales 100.0% 100.0% 100.0% 1% 15% Cost of sales 20.6% 22.2% 21.0% 11% 7% Gross margin 79.4% 77.8% 79.0% - - -------------------------------------------------------------------------------------- Expenses: 7% 1% Research and development 12.9% 13.1% 14.1% 9% 14% Sales and marketing 47.2% 47.1% 44.7% 1% (1%) General and administrative 7.1% 7.7% 8.4% -- -- Other (income)/expense, net (A) 1.8% (3.4%) 3.6% 17% (1%) Total expenses 69.0% 64.5% 70.8% - - -------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of (15%) 77% change in accounting principle 10.4% 13.3% 8.2% 17% 61% Provision for income taxes 4.7% 4.4% 3.0% - - -------------------------------------------------------------------------------------- Income before cumulative effect (31%) 86% of change in accounting principle 5.7% 8.9% 5.2% Cumulative effect of change -- (100%) in accounting principle -- -- 1.2% (31%) 143% Net income 5.7% 8.9% 4.0% - - -------------------------------------------------------------------------------------- Per share: Income before cumulative effect (34%) 91% of change in accounting principle $1.24 $1.87 $0.98 Cumulative effect of change - - -- (100%) in accounting principle -- -- 0.23 (34%) 149% Net income per share $1.24 $1.87 $0.75 ======================================================================================
Note (A): 1993, 1992 and 1991 amounts include significant non-recurring income and expense items which are set forth in Footnote J to the financial statements. 15 RESULTS OF OPERATIONS 1993 compared to 1992 ...................... Revenues In 1993, Lotus continued to execute its "Working Together" strategy. That strategy is defined by products which have common user interfaces, which are integrated with each other, which work across multiple platforms and which help people work together more productively. The centerpiece of this strategy is communications products which facilitate workgroup computing and make the Company's desktop applications more productive through group-enabling and ease-of-use features. Lotus' worldwide revenues increased 9% to $981 million in 1993. This revenue increase comprises distinctly different growth rates for desktop applications as compared to communications products and services. Desktop revenues were essentially unchanged in 1993, while communications related revenues grew approximately 55%. Consequently, revenue from communications products and services continues to represent a growing proportion of total revenue. Desktop Applications Revenue Lotus' desktop applications include spreadsheets, word processing, graphics, end-user database and personal information management software products. Revenues from desktop applications were 79% of total revenue in 1993, as compared to 84% in 1992. In 1993, users continued to migrate from DOS-based applications to Windows-based applications. Lotus'desktop revenue reflects this trend as Windows revenues more than doubled from the prior year, while DOS-based revenues, particularly spreadsheets, declined approximately $215 million. The desktop applications market also experienced the full-fledged emergence of desktop "suites" in 1993. A few major software publishers have combined and integrated their standalone applications into attractively-priced suites of Windows products. Lotus' competitive offering in the suite category, SmartSuite, represented one-third of total Windows desktop applications revenue in 1993. The Company believes that SmartSuite revenues were driven by growing market demand for desktop suites, its highly-rated individual applications, particularly 1-2-3 for Windows, and the high degree of integration among the products in its suite. The Company believes that sales of SmartSuite generate greater revenue per user desktop and do not significantly reduce gross margins, despite imputed lower sales prices per application, because users of the suite purchase applications that they would not otherwise purchase on a standalone basis. While competition for market share remains intense for Windows desktop applications and prices have declined year over year, pricing remained relatively stable during the second half of 1993. The Company anticipates that downward pressure on 16 pricing for Windows applications will continue in 1994. Significant new Windows desktop products released in 1993 include 1-2-3 for Windows Release 4.0, Improv Release 2.0, Freelance Graphics for Windows Release 2.0, Organizer Release 1.1 and SmartSuite for Windows Release 2.0. In addition, in June 1993, the Company acquired Approach Software Corporation, developers of end-user relational database applications for the Windows environment. The Company also released 1-2-3 for OS/2 Release 2.0, Freelance Graphics for OS/2 Release 1.0, Ami Pro for OS/2 Release 3.0 and an OS/2 SmartSuite during 1993. Communications Products and Services Revenue Communications products and services include Notes, cc:Mail and consulting services. Revenues from communications products and services increased substantially, reflecting the growing momentum behind workgroup computing, and represented 19% of total revenue in 1993 as compared to 13% in 1992. Revenue from Notes, the Company's innovative workgroup computing product, more than doubled over the prior year. Contributing to Notes growth were market related factors, such as an expanding client-server market and a greater availability of networked and portable computing applications. Revenue gains were also driven by the shipment of Notes 3.0 in May 1993, the Company's broadening of distribution through its network of distributors and resellers and an expansion of the number of business partners selling and developing applications for Notes. New versions of Notes 3.0 were shipped for the Windows, Macintosh and OS/2 platforms in May 1993. cc:Mail revenues grew considerably, primarily on the strength of new products for the Windows and OS/2 platforms and the continued growth of the market for PC-based networked electronic mail systems. Consulting services revenue also increased significantly resulting from internal growth and from the acquisition of several consulting businesses. International Revenue Revenues outside the United States, most of which are collectible in foreign currencies, grew by 12% during 1993 and accounted for 51% of worldwide revenues in 1993 and 49% in 1992. International sales growth was primarily propelled by sales gains in the United Kingdom, Germany, Italy and the Asia Pacific region. The impact of foreign currency fluctuations on international revenues was insignificant in 1993 as the impact of the strengthening U.S. dollar in Europe was neutralized by the weakening of the U.S. dollar in Japan. Foreign currency fluctuations did not significantly impact revenue in 1992. Expenses and Profit Margins Gross margin as a percentage of sales increased to 79% in 1993 compared with 78% in 1992. The rate was favorably affected by 17 the achievement of manufacturing efficiencies resulting from higher production volumes, the closing of the Company's Puerto Rican manufacturing plant and material cost reductions. The margin improvement is also attributable to a greater proportion of higher margin communication products in the sales mix and to reduced manufacturing and delivery costs resulting from an increase in license sales. The Company continues to make investments in research and development to maintain a strong competitive desktop position and to continue to improve its communications products. Research and development expenses increased 7% to $127 million in 1993, reflecting a constant level of desktop development spending year over year and significantly higher spending associated with development and enhancement of the Company's communications products and working together technology. Historically, the primary activities of the development organizations outside the U.S. were to translate and localize products for international markets. In the current year, international development organizations initiated efforts to develop products in parallel with the development in U.S. with the goal of achieving simultaneous release of various language versions of new products. Going forward, the Company plans to continue this effort in 1994 and expects to reach its goal within the next few years. Sales and marketing expenses increased 9% to $463 million in 1993 driven by the Company's substantial investment in its communications business and in SmartSuite. Increased spending on advertising and marketing programs for SmartSuite reflects the market shift from standalone applications to integrated suites. The increase is also attributable to the Company's continued efforts to attract users transitioning from DOS to Windows, the expansion of worldwide support organizations and the growth of the consulting services business. General and administrative expenses increased 1% to $70 million in 1993. The relatively minor change reflects the Company's continued efforts to control infrastructure and fixed costs. Despite declining interest rates, interest income was higher in 1993 because of higher average cash and short-term investment balances. Interest expense declined primarily due to scheduled repayments of long-term debt obligations. In June 1993, the Company acquired Approach Database Corporation. The purchase price consisted of approximately $23 million of cash consideration and assumed liabilities. A significant portion of the purchase price was allocated to purchased research and development, resulting in a $19.9 million charge to the Company's 1993 operations. See Note K of Notes to Consolidated Financial Statements. This charge, which is reflected in other income and expense, is not deductible for tax purposes. Upon the acquisition, the Company initiated substantial development projects designed to make Approach products more competitive in a rapidly changing environment. These development efforts are focused on improving the user interface, conforming the technology to the Company's cross-product standards, and integrating the technology into the Company's suite of desktop applications and are expected to involve extensive rewriting of the code and the addition of significant new product features. The Company expects to invest at least $20 million through 1996 to complete and continue the development of the ultimate technology using the purchased research and development. Earnings for 1993, excluding the charge for purchased research and development, were $75.4 million or $1.69 per share. Other income and expense in 1992 included a pre-tax gain of $49.7 million from the sale of the Company's investment in Sybase, Inc., offset by a restructuring charge of $15 million. Earnings for 1992, excluding the gain and the restructuring charge, were $57.2 million or $1.33 per share. 18 The effective tax rate for 1993, excluding the effect of a non-deductible charge for purchased research and development related to the acquisition of Approach, was 38% compared with 33% in 1992. In 1993, the Company adopted Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes, ("FAS 109") retroactive to January 1, 1991. The increase in the tax rate in 1993 reflects the effect of the loss of tax benefits associated with the closing of the Company's Puerto Rican manufacturing plant, a one percentage point increase in the U.S. federal statutory tax rate and the impact of the statutory rate change on deferred taxes in accordance with FAS 109. Looking forward, the Company expects the dominant 1993 trends to continue in 1994. The communications business is expected to grow significantly and will continue to represent a greater proportion of total revenue. The Company also anticipates that sales of suites will continue to displace sales of standalone applications as the market demand for integrated desktop applications continues to grow. As a result, SmartSuite revenues are expected to account for a greater percentage of Windows desktop revenue. While Windows desktop revenues are expected to increase in 1994, these gains will be partially offset by further declines of DOS-based revenues. The Company believes that the magnitude of the decline in DOS-based revenues in 1994 should not be as dramatic as that experienced in 1993 as DOS-based revenues continue to represent a smaller share of overall revenue. 1992 compared to 1991 The 9% increase in worldwide revenue in 1992 compared to 1991 reflected strong volume growth across all desktop applications for the Windows platform and in communications products and services, partially offset by the loss of $135 million of DOS-based revenues. New releases in 1992 included 1-2-3 for Windows Release 1.1, 1-2-3 Release 2.4 and 3.4 for DOS, and Ami Pro Release 3.0. Revenues from communications products and services doubled in 1992 and grew to 13% of total revenue. International revenues grew by 6% during 1992 and accounted for 49% of worldwide revenue in 1992 compared with 51% in 1991. Gross margins declined by 1% from 1991 to 1992, attributable to higher amortization charges for software and other intangibles and lower selling prices. This decline was partially offset by more cost effective product packaging and the achievement of favorable manufacturing efficiencies. The growth in operating expenses in 1992 reflected higher sales and marketing spending to gain market share during a critical period of user migration from DOS to Windows. Spending increases resulted from advertising and marketing campaigns to promote the Company's Windows-based products, expansion of customer support organizations and growth in the consulting services business. Research and development expenses were essentially unchanged from 1991 as steps were initiated in 1992 to increase the effectiveness of development spending through 19 improved focus of development activities, reduced headcount and lower infrastructure costs. In order to implement plans to improve its cost structure, the Company recorded restructuring charges of $15 million in 1992 and $23 million in 1991. The 1992 restructuring charge related principally to plans initiated by the Company in the fourth quarter to close its Puerto Rican manufacturing subsidiary and to reorganize and centralize its North American and European operations related to logistics, distribution and support. These plans resulted in the establishment of approximately $9 million of reserves related to employee separations and $6 million of reserves related to facilities consolidations, asset retirements, relocation and other costs. Substantially all of the amounts accrued were paid during 1992. As a result of these restructuring activities, the Company maintained gross margins in light of declining sales prices through the reduction of excess manufacturing capacity, improved distribution and selling efficiency in Europe, and lowered customer support costs in North America. The 1991 restructuring charge related principally to plans introduced in December to adjust spending growth in research, development, sales and marketing to overall revenue growth. These plans resulted in the establishment of approximately $12 million of reserves related to employee separations and $11 million of reserves related to facilities consolidations, asset retirements, relocation and other costs. During 1992, these reserves were fully utilized. Cash expenditures were approximately $20 million for employee-related activities and facility-related actions. The Company also recorded noncash write-offs of $3 million related to leasehold improvements on vacated facilities. As a result of these restructuring activities, the Company streamlined its North American marketing organization, focused its software development projects on market opportunities, and outsourced certain administrative activities. During 1992, the Company sold its investment in Sybase, Inc. for $77.7 million, resulting in a pre-tax gain of $49.7 million which is included in other income and expense. After tax, the gain was $33.3 million or $0.77 per share. Interest income was lower in 1992 because of declining interest rates. Interest expense declined primarily due to scheduled repayments of long-term debt obligations. The effective tax rate was 33% in 1992 compared to 36.3% in 1991. Most of the improvement resulted from the utilization of research and development credit carryforwards. Liquidity and Capital Reserves Cash and short-term investments increased $124 million to $417 million at December 31, 1993. The two primary sources of cash flow in 1993 were $162 million of cash generated by operations and $82 million in proceeds from the issuance of common stock under the Company's employee stock plans and tax benefits thereon. The Company used a portion of the cash for investing and 20 financing activities, including $31 million for the purchase of property and equipment, $37 million for payments for software and other intangibles, $15 million for the acquisition of Approach Software Corporation and $30 million for the scheduled repayment of long-term debt. A substantial portion of the Company's cash and short-term investments are either deposited in financial institutions located in Puerto Rico or held by subsidiaries outside the United States. These investments can be readily transferred to the United States as required, subject to income and/or withholding taxes upon repatriation. Taxes have already been provided for the tax liability which would result. The Company's financial reserves are represented by short-term investments and unused portions of credit facilities. During 1993, the Company increased its revolving credit facilities with domestic and international banks by $25 million to $150 million. The Company believes its financial reserves and funds provided by ongoing operations are adequate to meet future liquidity requirements. Item 8. Financial Statements and Supplementary Data The consolidated financial statements of the Company required by this Item are included in this Report at pages F-1 through F-22. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 21 - - ------------------------------------------------------------------------------ PART III - - ------------------------------------------------------------------------------ Item 10. Directors and Executive Officers of the Registrant Information with respect to Directors and compliance with Section 16(a) of the Exchange Act may be found in the sections captioned "Proposal No. 1 - Election of Directors" and "Executive Compensation and Other Information Concerning Directors and Executive Officers" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on Wednesday, May 25, 1994. Such information is incorporated herein by reference. Executive Officers of the Registrant The executive officers of the Company as of February 28, 1994 are: Name Age Position - - ---- --- -------- Jim P. Manzi 42 Chairman of the Board, President and Chief Executive Officer Kc Branscomb 38 Senior Vice President, Business Development Edwin J. Gillis 45 Senior Vice President, Finance and Operations and Chief Financial Officer John B. Landry 46 Senior Vice President, Development and Chief Technology Officer June L. Rokoff 44 Senior Vice President, Development Robert P. Schechter 45 Senior Vice President, International Business Group Robert K. Weiler 43 Senior Vice President, North American Business Group Mr. Manzi has served as President since October 1984 and was named Chief Executive Officer in April 1986. In July 1986 he was appointed Chairman of the Board upon the resignation of the former Chairman and founder of the Company, Mitchell Kapor. Mr. Manzi joined Lotus in May 1983 as Director of Corporate Marketing and was named Vice President of Marketing and Sales in September 1983. Ms. Branscomb joined Lotus in October 1992 as Senior Vice President of Business Development. From November 1991 until joining Lotus, Ms. Branscomb was the Chief Executive Officer of IntelliCorp, Inc. She had previously held the position of Chief Operating Officer since late 1988. Prior to joining ItelliCorp, Ms. Branscomb was Senior Vice President of Sales and Marketing at Aion Corporation, founding Principal and Vice President of Metaphor Computer Systems and a consultant with the Boston Consulting Group Inc. Mr. Gillis joined Lotus in July 1991 as Senior Vice President of Finance and Administration and Chief Financial Officer and in February 1994 Mr. Gillis was named Senior Vice President of Finance and Operations and Chief Financial Officer. Mr. Gillis came to Lotus after 15 years at Coopers and Lybrand, an international accounting and consulting firm, where he was a partner and served as chairman of the software industry group. Mr. Landry joined Lotus in December 1991 as Senior Vice President of Software Development and Chief Technology Officer. From December 1990 until joining Lotus, Mr. Landry was Executive Vice President and Chief Technology Officer of Dun & Bradstreet Software. Prior to joining Dun & Bradstreet, Mr. Landry was Chairman and Chief Executive Officer of Agility Systems, Inc., which he formed in September 1989. Previously, he served as executive vice president and 22 a member of the Board of Directors of Cullinet Software. Mr. Landry joined Cullinet Software in 1987 when it acquired Distribution Management Systems where he was Chairman. Ms. Rokoff was named Senior Vice President of Development in May 1992. She had previously held the positions of Senior Vice President of the Consulting and Information Services Group since November 1991, and Vice President of the Communications and Information Services Group since June 1990. Ms. Rokoff came to Lotus in 1986 as Director of Development for the Information Services Division. She has held several executive positions since joining Lotus including Vice President of the Graphics and Information Management Group and general manager of both the Workstation Products Group and 1-2-3 Release 3.0. Mr. Schechter was named Senior Vice President of the International Business Group in May 1991. Mr. Schechter joined Lotus in August 1987 as Vice President of Finance and Operations and Chief Financial Officer and became Senior Vice President of Finance and Operations in October 1987. Mr. Schechter came to Lotus after 14 years at Coopers & Lybrand, where he was a partner and served as Northeast regional chairman of the High Technology Industry Group. Mr. Weiler joined Lotus in 1991 as Senior Vice President of Sales and Marketing, and was named Senior Vice President of the North American Business Group in November 1991. From 1989 until joining Lotus, Mr. Weiler was President and Chief Operating Officer of Interleaf, Inc. Prior to joining Interleaf, Mr. Weiler served as Executive Vice President of North American Sales and Client Service of Cullinet Software before being appointed President and Chief Operating Officer. Mr. Weiler joined Cullinet in 1987 when it acquired Distribution Management Systems where he was President and Chief Operating Officer. Item 11. Executive Compensation Information with respect to this item may be found in the sections captioned "Executive Compensation and Other Information Concerning Directors and Executive Officers" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on Wednesday, May 25, 1994. Such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to this item may be found in the section captioned "Principal Holders of Voting Securities" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on Wednesday, May 25, 1994. Such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information with respect to this item may be found in the sections captioned "Proposal No. 1 - Election of Directors, Certain Transactions" appearing in the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on Wednesday, May 25, 1994. Such information is incorporated herein by reference. 23 - - -------------------------------------------------------------------------------- PART IV - - -------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Documents Filed as Part of Form 10-K 1. Financial Statements The following financial statements are contained in this Report: Page Number ----------- Report of Independent Accountants F-1 Consolidated Statements of Operations for each of the three years ended December 31, 1993 F-2 Consolidated Balance Sheets as of December 31, 1993 and 1992 F-3 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1993 F-4 Consolidated Statements of Stockholders' Equity for each of the three years ended December 31, 1993 F-5 Notes to Consolidated Financial Statements F-6 Supplemental Financial Information F-22 2. Financial Statement Schedules Page Number or Location ----------- Report of Independent Accountants 28 Schedule I - Marketable Securities-Other Security Investments 29 Schedule VIII - Valuation and Qualifying Accounts * Schedule X - Supplementary Income Statement Information * Schedules other than those listed above have been omitted since they are either not required or not applicable or the information is otherwise included. - - -------- * Filed as part of the Company's Annual Report on Form 10-K for the year ended December 31, 1993, filed March 30, 1994, and incorporated herein by reference. 24 3. Exhibits
Exhibit No. Description of Exhibit ---------- ----------------------------------------------------------- 3(a) Restated Certificate of Incorporation of the Company, as amended (filed as Exhibit 3(a) to Registration Statement 2-85675 on Form S-1 and incorporated herein by reference). 3(a)(1) Amendments to Exhibit 3(a) adopted April 27, 1987, concerning limitation of directors' liability, indemnification and by-law amendments (filed as Exhibit 3(a)(i) to the Annual Report on Form 10-K for the year ended December 31, 1987 and incorporated herein by reference). 3(b) By-Laws of the Company as amended October 19, 1992 filed as Exhibit 3(b) to the Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. 4(a) Form of Note Agreements dated as of May 25, 1989, between the Company and the respective purchasers listed in the Purchasers Schedule thereto (filed as Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 1, 1989 and incorporated herein by reference). 4(b) Lotus Development Corporation Defined Contribution Restoration Plan dated as of January 1, 1990 (filed as Exhibit 4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and incorporated herein by reference). 4(c) Rights Agreement dated as of November 7, 1988, between the Company and The First National Bank of Boston as Rights Agent in respect of Preferred Share Purchase Rights (filed as Exhibit 1 to the Company's Registration Statement on Form 8-A filed November 10, 1988, and incorporated herein by reference). 4(d)(1) Amendment dated as of April 5, 1990 between the Company and The First National Bank of Boston to the Rights Agreement dated as of November 7, 1988 (filed as Exhibit 28(a) to the Company's Current Report on Form 8-K dated April 5, 1990 and incorporated herein by reference). 4(d)(2) Amendment dated as of September 16, 1991 between the Company and the First National Bank of Boston as Rights Agent in respect of Preferred Share Purchase Rights (Filed as Exhibit 28(a) to the Company's Current Report on Form 8-K dated September 16, 1991 and incorporated herein by reference). 4(e) Authorizing resolutions adopted by the Board of Directors of the Company on November 7, 1988, in respect of Preferred Share Purchase Rights (filed as Exhibit 4(c)(2) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by reference). 10(a) 1986 Stock Option Plan for Non-Employee Directors and form of Stock Option Agreement thereunder (filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference). 10(b) Lease for Riverside Place, Cambridge, Massachusetts, between the Company and Cabot, Cabot and Forbes dated October 20, 1983 (filed as Exhibit 10(f) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988 and incorporated herein by reference). 10(b)(1) Amendment of Lease dated as of July 12, 1984, between the Company and the Trustees of CC&F Cambridge Parkway Trust (filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1988 and incorporated herein by reference). 10(b)(2) Schedule setting forth the material details of the leases for Riverside Place (Lotus Development Building) between the Company, and Cabot, Cabot and Forbes which have been omitted per Sec.229.601 (a) (filed as Exhibit 10(o) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985 and incorporated herein by reference). 10(b)(3) Amendment to Lease dated as of July 1, 1990 between the Company and CC&F Cambridge Parkway Trust (filed as Exhibit 10 (f)(3) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 and incorporated herein by reference). 10(c) Net Lease dated as of July 25, 1990 between Lotus Rogers Street
25 Corporation, as Landlord, and the Company, as Tenant (filed as Exhibit 4(n) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 29, 1990 and incorporated herein by reference). 10(d) Form of Indemnification Agreement between the Company and each of its officers and directors pursuant to Article VII of the Company's By-Laws (filed as Exhibit 10(k) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 and incorporated herein by reference). 10(e)* Resolution adopted by the Board of Directors of the Company on November 30 and December 1, 1993 concerning compensation of Directors. 10(f) Lease Agreement dated October 25, 1990 by and between the Trustees of River Park 93 Realty Trust, as Landlord, and the Company, as Tenant, pertaining to Lot 3A, Riverside Park Drive, North Reading, Massachusetts (filed as Exhibit (10)(l) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). 10(g) Lease Agreement dated October 25, 1990 by and between the Trustees of River Park 93 Realty Trust, as Landlord, and the Company, as Tenant, pertaining to Lot 4A, Riverside Park Drive, North Reading, Massachusetts (filed as Exhibit (10)(m) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference). 11* Computation of Earnings Per Share. 13** Annual Report to Shareholders for the year ended December 31, 1993.
With the exception of the information incorporated by reference in Item 5 of this Form 10-K, the Annual Report to Shareholders for the year ended December 31, 1993 is not deemed filed as part of this report. 22* Subsidiaries of the Registrant. 24* Consent of Independent Accountants.
(NOTE: The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of any instrument with respect to long-term debt of the Company or any of its subsidiaries which is not filed herewith or listed herein since it relates to outstanding debt in an amount not greater than 10% of the total assets of the Company and its subsidiaries on a consolidated basis.) _______________ *Filed herewith. **Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, filed March 30, 1994, and incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fiscal quarter ended December 31, 1993. 26 SIGNATURES Pursuant of the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LOTUS DEVELOPMENT CORPORATION (Registrant) By /s/ Edwin J. Gillis ----------------------------------------- Edwin J. Gillis, Senior Vice President, Finance and Operations Date: October 17, 1994 27 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of Lotus Development Corporation has been incorporated by reference in this Form 10-K, as amended by Amendment No. 2 to the Annual Report on Form 10-K/A, and is included in the Financial section of the 1993 Annual Report to Shareholders of Lotus Development Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in Item 14(a)2 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND Boston, Massachusetts January 26, 1994 28 Schedule I LOTUS DEVELOPMENT CORPORATION Marketable Securities--Other Security Investments December 31, 1993 (In thousands)
Number of shares Carrying amount or units -- Market value of in the Name of issuer and principal amount Cost of each issue at December 31, 1993 title of each issue of bonds or notes each issue December 31, 1993 balance sheet - - ------------------------------ ----------------- ---------- ----------------- ---------------- Corporate bonds and Eurobonds: 7 World Trade Financial Inc $5,000 $4,997 $4,998 $4,997 Abbey National $5,000 $5,099 $5,079 $5,073 American General Corporation $3,645 $3,832 $3,781 $3,784 Banque Nationale de Paris $2,000 $2,103 $2,053 $2,052 Compagnie Bancaire $4,500 $4,726 $4,579 $4,563 Credit Agricole $850 $882 $854 $853 Credit Lyonnais $2,500 $2,574 $2,554 $2,559 Credit National $6,860 $7,134 $6,945 $6,939 E. I. DuPont De Nemour $2,000 $2,129 $2,054 $2,049 General Electric Capital Corporation $1,250 $1,319 $1,281 $1,281 Guiness Finance BV $3,000 $3,144 $3,063 $3,055 IMI Bank International $10,480 $11,007 $10,766 $10,764 Japan Airlines Co. Ltd. $2,920 $3,048 $2,972 $2,962 Kimberly-Clark Corporation $2,515 $2,715 $2,688 $2,694 McDonalds Corporation $665 $657 $663 $662 Panasonic Finance $2,000 $2,113 $2,022 $2,020 Reed Publishing $5,360 $5,686 $5,597 $5,589 Salomon Inc. $5,000 $5,000 $4,997 $5,000 Toyota Motor Credit $5,000 $5,250 $5,097 $5,091 ------- ------- ------- Subtotal $73,415 $72,043 $71,987 Government bonds: Export Development Corporation $3,000 $3,153 $3,071 $3,064 Finnish Export Credit $3,504 $3,567 $3,563 $3,566 Italy, Republic of $7,000 $7,359 $7,267 $7,249 Japan Development Bank $3,245 $3,396 $3,296 $3,288 New Zealand $2,000 $2,134 $2,064 $2,057 Oesterreichische Kontrol Bank $2,000 $2,134 $2,051 $2,047 Svensk Exportkredit $4,000 $3,838 $3,974 $3,971 Swedish National Housing Authority $11,020 $11,716 $11,549 $11,548 ------- ------- ------- Subtotal $37,297 $36,835 $36,790 Municipal bonds: AFICA-1988 Series M (H. I. Mayaguez Hotel Project) $2,118 $2,175 $2,128 $2,128 San Juan Cement Co. $1,000 $1,056 $1,000 $1,000 ------- ------- ------- Subtotal $3,231 $3,128 $3,128 Collateralized mortgage obligations: Banco Santander de Puerto Rico Grantor Trust $5,502 $5,718 $5,510 $5,510 Bank Trust Mortgage Trust $3,558 $3,558 $3,558 $3,558 First Financial Mortgage Trust $4,637 $4,637 $4,637 $4,637 GNMA Backed Mortgage Pass Thru Trust $3,251 $3,251 $3,251 $3,251 Investors in Mortgage Certificates Trust $2,967 $2,968 $2,967 $2,967 R&G Federal Mortgage Trust $4,231 $4,231 $4,231 $4,231 R&G Federal Savings Bank Grantor Trust $5,353 $5,450 $5,413 $5,413 ------- ------- ------- Subtotal $29,813 $29,567 $29,567
29 Schedule I LOTUS DEVELOPMENT CORPORATION Marketable Securities--Other Security Investments (continued) December 31, 1993 (In thousands)
Number of shares Carrying amount or units -- Market value of in the Name of issuer and principal amount Cost of each issue at December 31, 1993 title of each issue of bonds or notes each issue December 31, 1993 balance sheet - - --------------------------- ------------------ ---------- ----------------- ----------------- Corporate commercial paper: Alpha Finance $3,000 $2,966 $2,979 $2,979 Broadway Capital Corporation $2,000 $1,981 $1,984 $1,984 Heller International Corporation $2,000 $1,981 $1,984 $1,984 Idemitsu International $5,000 $4,956 $4,983 $4,982 Mortgage Asset European Securitization No 1 PLC $3,000 $2,962 $2,980 $2,980 Mitsubishi Electric $3,000 $2,975 $2,996 $2,995 Strait Capital Corporation $1,436 $1,424 $1,425 $1,424 ------- ------- ------- Subtotal $19,245 $19,331 $19,328 Government commercial paper: Government Development Bank for Puerto Rico $17,520 $17,520 $17,520 $17,520 Certificates of deposit: $32,459 $32,457 $32,460 $32,457 Repurchase agreements: $27,782 $27,782 $27,782 $27,782 Time deposits: $9,000 $9,000 $9,000 $9,000 Other investments: $4,285 $4,285 $4,285 $4,285 -------- -------- -------- Total short-term investments $254,045 $251,951 $251,844 ========= ======== ========
30 - - ------------------------------------------------------------------------------ REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Lotus Development Corporation We have audited the accompanying consolidated balance sheets of Lotus Development Corporation as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lotus Development Corporation at December 31, 1993 and 1992, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Notes B and H to the consolidated financial statements, effective January 1, 1991, the Company changed its method of accounting for income taxes. Coopers & Lybrand Boston, Massachusetts January 26, 1994 F-1 LOTUS DEVELOPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, (In thousands, except for per share data) 1993 1992 1991 - - ------------------------------------------------------------------------------- Net sales $981,168 $900,149 $828,895 Cost of sales 202,443 200,103 174,209 -------- -------- -------- Gross margin 778,725 700,046 654,686 Expenses: Research and development (Note B) 126,884 118,308 116,586 Sales and marketing 462,658 423,813 370,635 General and administrative 70,057 69,103 69,955 Other (income) / expense, net (Note J) 17,357 (31,183) 29,824 -------- -------- -------- Total expenses 676,956 580,041 587,000 Income before income taxes and cumulative effect of change in accounting principle 101,769 120,005 67,686 Provision for income taxes (Note H) 46,234 39,602 24,570 -------- -------- -------- Income before cumulative effect of change in accounting principle 55,535 80,403 43,116 Cumulative effect of change in accounting principle (Notes B and H) -- -- 10,000 -------- -------- -------- Net income $ 55,535 $ 80,403 $ 33,116 ======== ======== ======== Per share: Income before cumulative effect of change in accounting principle $1.24 $1.87 $0.98 Cumulative effect of change in accounting principle (Notes B and H) -- -- 0.23 -------- -------- -------- Net income per share $1.24 $1.87 $0.75 ======== ======== ======== Weighted average common and common equivalent shares outstanding 44,721 42,994 43,952 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-2 LOTUS DEVELOPMENT CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, (In thousands) 1993 1992 - - ------------------------------------------------------------------------- Assets Current assets: Cash and short-term investments (Note B) $ 416,693 $ 293,094 Accounts receivable, net of allowances of $30,002 and $25,326 217,336 178,340 Inventory (Note C) 21,220 23,560 Other current assets 20,817 19,040 --------- --------- Total current assets 676,066 514,034 Property and equipment, net of accumulated depreciation and amortization of $153,768 and $165,973 (Note D) 127,437 135,667 Software and other intangibles, net of accumulated amortization of $123,016 and $110,715 (Note B) 88,625 99,299 Investments and other assets (Note E) 13,217 14,444 --------- --------- Total assets $ 905,345 $ 763,444 ========= ========= Liabilities and Stockholders' Equity Current liabilities: Notes payable to banks (Note I) $ -- $ 1,130 Current portion of long-term debt (Note I) 28,480 -- Accounts payable 45,914 40,922 Accrued compensation and benefits 36,368 27,180 Accrued and deferred income taxes (Note H) 49,017 48,790 Other accrued expenses 77,648 75,363 Deferred revenue (Note B) 39,996 24,483 --------- --------- Total current liabilities 277,423 217,868 Deferred income taxes (Note H) 49,531 37,398 Long-term debt (Note I) 50,000 108,740 Commitments and contingencies (Note F) Stockholders' equity (Note G): Preferred stock, $1.00 par value, 5,000 shares authorized, none issued -- -- Common stock, $.01 par value, 100,000 shares authorized; 62,152 issued; and 44,928 and 41,881 outstanding 622 622 Additional paid-in capital 251,414 216,740 Retained earnings 526,554 471,019 Treasury stock, 17,224 and 20,271 shares at an average cost of $14.44 and $14.19 per share (248,728) (287,655) Translation adjustment (1,471) (1,288) --------- --------- Total stockholders' equity 528,391 399,438 --------- --------- Total liabilities and stockholders' equity $ 905,345 $ 763,444 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-3 LOTUS DEVELOPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, (In thousands) 1993 1992 1991 - - ----------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 55,535 $ 80,403 $ 33,116 Gain on sale of investment in Sybase, Inc. -- (49,706) -- Charge for purchased research and development 19,900 -- -- Depreciation and amortization 86,973 84,319 70,625 Cumulative effect of change in accounting principle -- -- 10,000 Change in assets and liabilities, net of effects from acquisitions: (Increase) in accounts receivable (42,000) (11,031) (49,514) (Increase) decrease in inventory 3,207 7,681 (9,077) Increase (decrease) in accounts payable and accrued expenses 10,832 (1,295) 37,651 Increase in accrued and deferred income taxes 11,892 20,620 634 Increase in deferred revenue 15,601 521 7,819 Net change in other working capital items 259 (3,170) (2,780) --------- --------- --------- Net cash provided by operating activities 162,199 128,342 98,474 --------- --------- --------- Cash flows from investing activities: Purchases of property and equipment (30,587) (34,042) (38,806) Payments for software and other intangibles (36,771) (39,315) (32,618) Proceeds from sale of investment in Sybase, Inc. -- 77,719 -- Purchases of short-term investments, net (79,883) (31,551) (55,118) Acquisitions (15,455) (8,725) (31,592) Other 2,002 1,364 4,114 --------- --------- --------- Net cash used for investing activities (160,694) (34,550) (154,020) -------- --------- --------- Cash flows from financing activities: Repayment of long-term debt (30,260) (30,260) (21,000) Purchase of common stock for treasury (8,107) (35,876) (55,397) Issuance of common stock, including tax benefit thereon 81,708 32,244 37,364 Increase (decrease) in short-term borrowings (1,130) (23,167) 18,885 --------- --------- --------- Net cash provided by (used for) financing activities 42,211 (57,059) (20,148) --------- --------- --------- Net increase (decrease) in cash and cash equivalents 43,716 36,733 (75,694) --------- --------- --------- Cash and cash equivalents, beginning of year 121,133 84,400 160,094 Cash and cash equivalents, end of year $ 164,849 $ 121,133 $ 84,400 ========= ========= =========
Supplemental Cash Flow Information
(In thousands) 1993 1992 1991 - - ----------------------------------------------------------------------------------- Interest received $ 9,971 $ 10,952 $ 13,138 Interest paid ($8,702) ($13,970) ($17,185) Income taxes paid ($24,698) ($18,982) ($23,973) - - ------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-4 LOTUS DEVELOPMENT CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1991, 1992, and 1993 (Note G) Additional Common Paid-In Retained Treasury Translation (In thousands) Stock Capital Earnings Stock Adjustment Total - - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1990 $591 $157,368 $357,500 ($206,587) $ 567 $309,439 Net Income -- -- 33,116 -- -- 33,116 Acquisition of 2,104 shares of common stock -- -- -- (55,397) -- (55,397) Issuance of 464 shares of common stock under employee stock purchase plan 5 7,797 -- -- -- 7,802 Exercise of 43 incentive stock options 1 474 -- -- -- 475 Exercise of 1,605 non-qualified stock options 16 29,071 -- -- -- 29,087 Currency translation effect -- -- -- -- (1,409) (1,409) ---- -------- -------- --------- ------- -------- Balance, December 31, 1991 613 194,710 390,616 (261,984) (842) 323,113 ---- -------- -------- --------- ------- -------- Net Income -- -- 80,403 -- -- 80,403 Acquisition of 1,968 shares of common stock -- -- -- (35,876) -- (35,876) Issuance of 395 shares of common stock under employee stock purchase plan -- 1,308 -- 5,518 -- 6,826 Exercise of 1,229 non-qualified stock options 9 20,722 -- 4,687 -- 25,418 Currency translation effect -- -- -- -- (446) (446) ---- -------- -------- --------- ------- -------- Balance, December 31, 1992 622 216,740 471,019 (287,655) (1,288) 399,438 ---- -------- -------- --------- ------- -------- Net Income -- -- 55,535 -- -- 55,535 Acquisition of 250 shares of common stock -- -- -- (8,107) -- (8,107) Issuance of 360 shares of common stock under employee stock purchase plan -- 2,894 -- 5,139 -- 8,033 Exercise of 2,937 non-qualified stock options -- 22,604 -- 41,895 -- 64,499 Income tax benefit related to exercise of stock options -- 9,176 -- -- -- 9,176 Currency translation effect -- -- -- -- (183) (183) ---- -------- -------- --------- ------- -------- Balance, December 31, 1993 $622 $251,414 $526,554 ($248,728) ($1,471) $528,391 ==== ======== ======== ========= ======= ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 LOTUS DEVELOPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A BUSINESS The Company and its subsidiaries are engaged in the development, manufacturing, marketing and support of applications software. The Company sells its products primarily through distributors and resellers. B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation ..................... The consolidated financial statements comprise those of the Company and its wholly owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition ................... Revenue from the sale of software products to distributors, resellers and original equipment manufacturers is recognized when the products are shipped. Revenue from the sale of software products under installation agreements with end-users is recognized upon expected installation by the customer, provided that payment is due currently. Maintenance, service and subscription revenues are recognized ratably over the term of the related sales contract or as services are performed. Allowances for estimated future product returns under the Company's agreements with its distributors and resellers for stock balancing and upgrade swaps are provided in the same period as the related revenue. At the time the Company recognizes revenue from the sale of software products, no significant vendor and postcontract support obligations remain, and the costs of insignificant support obligations are accrued. Cash and Short-term Investments ............................... All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents, and those with maturities greater than three months are considered to be short-term investments. Short-term investments are stated at cost, which approximates market. commercial paper and other money market instruments. Cash equivalents and short-term investments consist primarily of certificates of deposit, repurchase agreements, commercial paper and other money market instruments.
December 31, (In thousands) 1993 1992 - - ----------------------------------------------------- Cash and cash equivalents $164,849 $121,133 Short-term investments 251,844 171,961 - - ----------------------------------------------------- Cash and short-term investments $416,693 $293,094 - - -----------------------------------------------------
Inventory ......... Inventory is stated at cost, using the first-in, first-out (FIFO) F-6 method, but not in excess of net realizable value. Property, Equipment and Depreciation .................................... Property and equipment are stated at cost. Depreciation and amortization of property and equipment are computed using the straight-line method over the estimated useful life of the assets as follows: Buildings 30 years Computer Equipment 3- 5 years Manufacturing and other equipment 3- 5 years Furniture and fixtures 5 years Leasehold improvements Shorter of lease term or life of asset Building improvements Shorter of 10 years or life of asset Maintenance and repairs are expensed as incurred. The costs of retired assets are removed from asset accounts and related depreciation is removed from accumulated depreciation. Software and Other Intangibles .............................. Costs related to research, design and development of computer software are charged to research and development expense as incurred. The Company capitalizes eligible software costs upon establishing product technological feasibility and amortizes these costs on a product-by-product basis commencing upon general release of the products to customers. Capitalized software costs are amortized on a straight-line basis over the economic life of the product, generally three years. The straight-line method of amortization generally results in approximately the same amount of expense as that calculated using the ratio that current period gross product revenues bear to the total of current and anticipated future gross product revenues. Internal software costs of $25.0 million, $26.0 million and $27.7 million were capitalized in 1993, 1992 and 1991. Related amortization charges of $25.2 million for 1993, $22.2 million for 1992 and $13.9 million for 1991 are reflected in cost of sales. Intangible assets associated with acquisitions capitalized in 1993 of $15.2 million were largely attributable to the acquisitions of Approach Software Corporation and consulting services businesses. Intangible assets of $22.1 million and $32.5 million were acquired in 1992 and 1991. These assets are amortized on a straight-line basis, generally over a three to five year period. Related amortization charges, substantially all of which were reflected in cost of sales, totaled $22.5 million in 1993, $19.2 million in 1992 and $15.9 million in 1991. The Company evaluates the net realizable value of capitalized software and other intangibles on an ongoing basis relying on a number of factors including operating results, business plans, budgets and economic projections. In addition, the Company's evaluation considers non-financial data such as market trends, product development cycles, and changes in management's market emphasis. F-7 Income Taxes ............ The Company adopted Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes ("FAS 109"), retroactive to January 1, 1991. Prior to 1991, the Company accounted for income taxes under Accounting Principles Board Opinion No. 11. Under FAS 109, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using current statutory tax rates. FAS 109 also requires a valuation reserve against deferred tax assets if, based upon weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. (See Note H). U.S. Federal income taxes, net of applicable foreign tax credits, are provided on the portion of foreign earnings which may be remitted to the parent in future years. Undistributed earnings of foreign affiliates reinvested in those operations indefinitely, and for which no U.S. taxes have been provided, aggregated approximately $40 million at December 31, 1993 and 1992. Net Income per Share .................... Net income per share is calculated using the weighted average number of common shares and common share equivalents outstanding during the year. Common share equivalents are attributable to unexercised stock options. Foreign Currency Translation ............................ Assets and liabilities of foreign subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange during the year. Resulting translation adjustments are accumulated in a separate component of stockholders' equity. The effect of exchange rate changes on cash and cash equivalents was immaterial in 1993, 1992 and 1991. In an effort to minimize the effect of exchange rate fluctuations on the results of its operations and the asset and liability positions of foreign subsidiaries, the Company hedges certain portions of its foreign currency exposure through the use of forward exchange contracts and options on foreign currencies. It does not engage in foreign currency speculation. The cash flows related to the gains and losses on foreign currency hedges are classified in the statements of cash flows as part of cash flows from operating activities. Forward exchange contracts primarily to exchange foreign currencies for U.S. dollars totaling $50 million were outstanding at December 31, 1993. These contracts are used to hedge asset and liability positions of foreign subsidiaries. Gains and losses F-8 associated with currency rate changes on these contracts are recorded currently in income, offsetting losses and gains on the related assets and liabilities. All contracts, which primarily hedge European currencies and Japanese yen, mature during 1994. Foreign currency options are used to hedge certain anticipated transactions denominated primarily in European currencies and Japanese yen. At December 31, 1993, the amount of foreign currency options totaled $96 million. Potential losses are limited to the cost of the options and were immaterial. Gains on such options are recorded in income only when realized, offsetting foreign exchange losses of the related transactions. Deferred gains related to these short-term options were not significant. The market risk exposure from currency options is limited to the cost of such instruments. The market risk exposure from forward contracts is assessed in light of the underlying currency exposures and is controlled by the initiation of additional or offsetting foreign currency contracts. Credit risk exposure from currency options and forward contracts is minimized as these instruments are contracted with multiple financial institutions. The fair value of currency options is established by obtaining bids, based upon a hypothetical sale of the options, from banks that are authorized currency traders. Forward contracts are revalued monthly by comparing contract rates to month-end exchange rates. Such revalued amounts approximate fair values. The Company's currency options and forward contracts are OTC instruments. Financial Instruments ..................... The fair value of financial instruments, including cash equivalents, marketable securities, debt, options on foreign currencies and forward exchange contracts, approximated their carrying values at December 31, 1993. Fair values have been determined through information obtained from market sources and management estimates. Diversification of Credit Risk ............................... The Company's investment portfolio is diversified and consists of cash equivalents and short-term investments placed with high credit qualified institutions. At December 31, 1993 and 1992, approximately 41% and 38% of accounts receivable represented amounts due from ten customers. The credit risk in the Company's trade accounts receivable is substantially mitigated by the Company's credit evaluation process, reasonably short collection terms and the geographical dispersion of sales transactions. C INVENTORY Inventory consists of the following:
December 31, (In thousands) 1993 1992 - - --------------------------------------------------------------------------- Finished goods $ 13,962 $ 14,030 Raw materials 7,258 9,530 - - --------------------------------------------------------------------------- Total $21,220 $ 23,560 ===========================================================================
F-9 D PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, (In thousands) 1993 1992 - - --------------------------------------------------------------------------- Land $ 7,395 $ 3,892 Buildings and building improvements 55,463 54,959 Leasehold improvements 36,699 39,537 Computer equipment 111,045 126,482 Manufacturing and other equipment 44,191 47,794 Furniture and fixtures 26,412 28,976 - - --------------------------------------------------------------------------- 281,205 301,640 Less accumulated depreciation and amortization 153,768 165,973 - - --------------------------------------------------------------------------- Property and equipment, net $127,437 $135,667 ===========================================================================
E INVESTMENTS AND OTHER ASSETS Investments and other assets consist of the following:
December 31, (In thousands) 1993 1992 - - ----------------------------------------------------- Marketable securities $ 3,004 $ 5,829 Deposits and other 10,213 8,615 - - ----------------------------------------------------- Total $13,217 $14,444 =====================================================
Marketable securities represent investments in interest bearing securities held at a custodial institution in Puerto Rico. These securities are carried at cost, which approximates market. F LEASE OBLIGATIONS The Company leases certain facilities and equipment under various operating leases. At December 31, 1993, future minimum lease payments under operating leases with terms in excess of one year were as follows:
Year (In thousands) - - ----------------------------------- 1994 $ 40,715 1995 30,109 1996 23,086 1997 19,136 1998 17,254 Future years 37,424 - - ---------------------------------- Total $167,724 ==================================
Total rental expense was approximately $41.7 million, $40.2 million and $38.9 million for the years ended December 31, 1993, 1992 and 1991. F-10 G STOCK PLANS Stock Option Plans .................. The Company has stock option plans for employees and consultants which provide for non-qualified and incentive stock options. Options are granted at a price not less than the fair market value on the date of grant. The options generally become exercisable over a four-year period and expire over a period not exceeding ten years. At December 31, 1993, 6.0 million shares were available for grant. The Company also has a stock option plan for non-employee directors which provides that each independent director of the Company be granted annually an option to acquire 10,000 shares of common stock at a price equal to the fair market value on the date of grant. The term of each option is for a period not exceeding ten years. At December 31, 1993, 175,000 shares were available for grant. Activity in these plans was as follows:
Years ended December 31, (In thousands, except option prices) 1993 1992 1991 - - ---------------------------------------------------------------------------------- Shares under option, beginning of year 7,154 8,782 8,204 Options granted (at option prices of $19.63 to $47.38 in 1993, $17.38 to $33.88 in 1992 and $18.13 to $35.63 in 1991) 2,453(B) 788(A) 3,081 Options exercised (2,937) (1,229) (1,605) Options cancelled (856) (1,187) (898) - - ---------------------------------------------------------------------------------- Shares under option, end of year (at exercise prices of $16.00 to $47.38 in 1993 and $6.25 to $37.88 in 1992 and 1991) 5,814 7,154 8,782 - - ---------------------------------------------------------------------------------- Average price of options exercised $ 22.09 $ 20.74 $ 18.12 - - ---------------------------------------------------------------------------------- Shares exercisable 1,412 2,919 2,482 - - ---------------------------------------------------------------------------------- Average option price of shares Years ended December 31, (In thousands, except option prices) 1993 1992 1991 - - ---------------------------------------------------------------------------------- exercisable $ 23.71 $ 22.49 $ 21.92 ==================================================================================
(A) The Company's annual grant to employees, historically made in December, was moved to January 1993 to more closely link option grants to performance. In January 1993, the Company granted 1.8 million options at fair market value on the date of grant. (B) In January 1994, the Company granted a total of 2.6 million options to its employees. Of the total grant, 1.6 million options were granted at fair market value on the date of grant. The remaining 1.0 million options were granted at 120% of fair market value on the date of grant. F-11 Employee Stock Purchase Plan ............................ The Employee Stock Purchase Plan authorizes the Company to sell up to 4.1 million shares of common stock to employees on a limited basis through voluntary payroll withholdings. The stock price to employees is equal to 85% of the market price on the first or last day of each six-month withholding period, whichever is lower. Through December 31, 1993, approximately 2.2 million shares were purchased by employees pursuant to the plan. Shares issued to employees during the past three years are summarized in the table below.
Years ended December 31, (In thousands, except per share data) 1993 1992 1991 - - --------------------------------------------------------------- Number of shares 360 395 464 Proceeds $8,033 $6,826 $7,802 Average price per share $22.34 $17.29 $16.82 ===============================================================
H INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE In the first quarter of 1993, the Company adopted Financial Accounting Standard No. 109, Accounting for Income Taxes ("FAS 109") which requires a change from an income statement to a balance sheet approach for accounting for income taxes. The Company has elected to apply the provisions of FAS 109 retroactively to January 1, 1991. Accordingly, the cumulative effect of this change decreased 1991 net income by $10 million or $0.23 per share relating to the establishment of a valuation reserve for foreign tax benefits. The effect of the adoption of FAS 109 on 1992 income was not significant. The components of the provision for income taxes were as follows: F-12
Years ended December 31, (In thousands) 1993 1992 1991 - - -------------------------------------------------------------------------------- Domestic: Current $18,437 $ 7,970 $ 6,915 Deferred 7,581 17,902 (2,354) - - -------------------------------------------------------------------------------- 26,018 25,872 4,561 - - -------------------------------------------------------------------------------- Foreign: Current 19,763 9,470 14,280 Deferred (347) 3,460 5,354 - - -------------------------------------------------------------------------------- 19,416 12,930 19,634 - - -------------------------------------------------------------------------------- State: Current 800 800 375 Deferred -- -- -- - - -------------------------------------------------------------------------------- 800 800 375 - - -------------------------------------------------------------------------------- Total: Current 39,000 18,240 21,570 Deferred 7,234 21,362 3,000 - - -------------------------------------------------------------------------------- Total income taxes $46,234 $ 39,602 $ 24,570 ================================================================================
Income before provision for income taxes and cumulative effect of a change in accounting principle from domestic and foreign operations was as follows:
Years ended December 31, (In thousands) 1993 1992 1991 - - -------------------------------------------------------------------------------- Domestic $37,337 $ 72,622 ($32,771) Foreign 64,432 47,383 100,457 - - -------------------------------------------------------------------------------- Total $101,769 $120,005 $ 67,686 ================================================================================
F-13 Provisions for income taxes were at rates other than the U.S. Federal statutory tax rate for the following reasons:
Years ended December 31, 1993 1992 1991 - - -------------------------------------------------------------------- U.S. Federal statutory tax rate 35.0% 34.0% 34.0% Foreign operations 4.4 (.8) (2.5) Research and development credit (4.5) (4.0) -- Impact of U.S. Federal statutory rate increase on beginning deferred taxes 2.0 -- -- Tax exempt interest income (.6) (.9) (2.8) Non-deductible amortization 2.0 3.7 5.6 Other, net (.3) 1.0 2.0 - - -------------------------------------------------------------------- Subtotal 38.0 33.0 36.3 Non-deductible charge for purchased research and development 7.4 -- -- - - -------------------------------------------------------------------- Effective tax rate 45.4% 33.0% 36.3% ====================================================================
Consolidated net income includes income of manufacturing subsidiaries operating in Ireland, Singapore and Puerto Rico. Income from the sale and licensing of products manufactured in Ireland is subject to a 10% tax rate through the year 2010. Income from Singapore operations is taxed at favorable rates, relative to U.S. statutory rates, until 1997 under a grant issued by the Singapore government. The income from products manufactured in Puerto Rico, which is not subject to U.S. Federal income tax, is subject to a local tax rate of approximately 5%. In addition, remitted Puerto Rico earnings may be subject to Puerto Rico withholding taxes at rates not in excess of 10%. The aggregate dollar and per share tax benefits from tax holidays were immaterial to the results of operations in 1993 and 1992. In 1991, aggregate tax benefits associated with the Company's Puerto Rican manufacturing operation were $7 million, or $0.16 per share. For U.S. Federal income tax purposes, at December 31, 1993, the Company has tax credit carryforwards of approximately $35 million and a net operating loss carryforward of $38 million, which expire between 1994 and 2008. The net operating loss carryforward includes tax deductions related to stock option activity. The Internal Revenue Service ("IRS") is examining the Company's U.S. income tax returns for the years 1985 through 1989. The IRS has notified the Company that it intends to propose adjustments to its income tax returns for that period. The Company will contest these adjustments and believes that any sustained adjustments from the IRS examination will not be material to the financial statements. Deferred taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. The sources of these temporary differences for 1993, 1992 and 1991, and the effect of each on the tax provision, were as follows:
Years ended December 31, (In thousands) 1993 1992 1991 - - ----------------------------------------------------------------------- Unrepatriated foreign earnings, net $14,110 $11,911 $ 17,237 Depreciation (1,130) (1,769) (2,616) Compensation (1,423) 4,338 1,849
F-14
Years ended December 31, (In thousands) 1993 1992 1991 - - ----------------------------------------------------------------------- Capitalized software costs 1,590 557 1,760 Charges to (provision for) reserves (1,654) 2,031 (11,276) Deferred revenue (2,171) 3,628 (3,418) Other, net (2,088) 666 (536) - - ----------------------------------------------------------------------- Total $ 7,234 $21,362 $ 3,000 =======================================================================
The components of the net deferred tax liability are as follows:
December 31, (In thousands) 1993 1992 - - ----------------------------------------------------------- Deferred tax assets: Reserves $ 16,352 $ 12,960 Depreciation 5,871 5,054 Tax credits against unrepatriated foreign earnings 77,363 58,038 Tax return carryforwards 48,233 49,438 Deferred revenue 2,574 391 Other 11,934 9,312 - - ----------------------------------------------------------- Total 162,327 135,193 - - ----------------------------------------------------------- Valuation allowances (A) 35,794 29,360 - - ----------------------------------------------------------- Net deferred tax assets 126,533 105,833 Deferred tax liabilities: Capitalized software costs 10,381 8,552 Unrepatriated foreign earnings 130,417 106,906 Compensation 2,972 4,269 Other 6,389 4,051 - - ----------------------------------------------------------- Total 150,159 123,778 - - ----------------------------------------------------------- Net deferred tax liability $ 23,626 $ 17,945 ===========================================================
(A) At December 31, 1993 and 1992, there is a $10.0 million valuation allowance for foreign tax benefits. In addition, valuation allowances of $25.8 million and $19.4 million at December 31, 1993 and 1992 have been established for tax return carryforwards resulting from stock option deductions. The tax benefit associated with the stock option deductions will be credited to equity when realized. F-15 I DEBT Long-term Debt .............. Long-term debt consists of the following:
December 31, (In thousands) 1993 1992 - - ----------------------------------------------------- Notes payable to banks, bearing interest at LIBOR plus 0.45% per annum $50,000 $ 50,000 Notes payable to insurance companies, bearing interest at 10.57% per annum 28,480 58,740 - - ----------------------------------------------------- Total debt 78,480 108,740 Less current portion 28,480 -- - - ----------------------------------------------------- Long-term debt $50,000 $108,740 =====================================================
In July 1990, the Company completed a $50 million floating rate financing with a group of banks collateralized by its office facility in Cambridge, Massachusetts. Principal payment of the notes is due in 1997. In May 1989, the Company arranged a $100 million private debt placement with a group of insurance companies. The final principal payment of $28 million is due in June 1994. The Company is required, among other things specified in the note agreements with insurance companies, to maintain a minimum level of net worth as well as specified debt to capitalization and fixed charge coverage ratios. The Company also maintains two multi-currency revolving credit agreements with groups of domestic and international banks. The agreements commit the participating banks, subject to certain terms and conditions, to lend an aggregate of $150 million at December 31, 1993. Of this aggregate commitment, $75 million expires in June 1994 and the remaining $75 million expires in June 1995. Interest rates on borrowings are set under a number of bid options not exceeding 5/8% over LIBOR. Commitment fees are payable on unborrowed amounts at a maximum rate of 1/4% per annum. The covenants of these facilities conform closely to the covenants in the insurance company note agreements. The Company was in compliance with the covenants of its debt agreements at December 31, 1993. exit Short-term debt ............... Notes payable to banks of $1.1 million at December 31, 1992 were borrowings under unsecured credit facilities with several domestic and international banks which are primarily used to meet short-term domestic and international cash requirements. There were no such borrowings outstanding at December 31, 1993. The F-16 average short-term borrowing was $0.7 million for 1993 compared with $2.2 million for 1992. The maximum aggregate amount outstanding at any month-end was $1.2 million for 1993 and $6.2 million for 1992. The weighted average interest rate was 7.1% during 1993, 9.1% during 1992 and 10.8% in 1991, and 11.1% and 7.1% at December 31, 1992 and 1991. As of December 31, 1993, the Company had unused short-term credit facilities of $36 million. J OTHER (INCOME)/EXPENSE, NET Other (income)/expense consists of the following:
Years ended December 31, (In thousands) 1993 1992 1991 - - --------------------------------------------------------------------- Charge for purchased research and development $ 19,900 $ -- $ -- Restructuring charges -- 15,000 23,000 Gain on sale of investment in Sybase, Inc. -- (49,706) -- Interest income (11,890) (10,679) (13,829) Interest expense 8,525 13,547 16,738 Other, net 822 655 3,915 - - --------------------------------------------------------------------- Total other (income)/expense, net $ 17,357 ($31,183) $ 29,824 =====================================================================
In June 1993, the Company acquired all outstanding shares of Approach Software Corporation. A significant portion of the purchase price, $19.9 million, was allocated to purchased research and development. This amount, which is not deductible for tax purposes, was charged to operations at the acquisition date. In December 1992 and 1991, the Company recorded restructuring charges of $15 million and $23 million. During 1993 and 1992, the Company took a number of actions consistent with the previously recorded reserves, including the closing of its Puerto Rican manufacturing facility, restructuring of operations in North America and Europe, employee separations and related facilities consolidations and equipment write-downs. At December 31, 1993 and 1992, accrued amounts of $1.1 million and $13.7 million, respectively, were included in other accrued expenses. In 1992, the Company sold its investment in Sybase, Inc., for cash consideration of $77.7 million, resulting in a pre-tax gain of $49.7 million. The investment of $28.0 million consisted of 2.5 million common shares and was accounted for at cost. F-17 K ACQUISITIONS AND DISPOSITIONS Approach Software Corporation ............................. In June 1993, the Company acquired all outstanding shares of Approach Software Corporation ("Approach"), a privately held developer of end-user relational database applications for the Windows environment. The purchase price consisted of approximately $23 million of cash consideration and assumed liabilities. The acquisition has been accounted for using the purchase method. The purchase price was allocated among the identifiable tangible and intangible assets based on the fair market value of those assets. After allocating the purchase price to net tangible assets, purchased software, which had reached technological feasibility and was principally represented by the technology comprising the database products being sold by Approach at the date of the acquisition, was valued using a risk adjusted cash flow model, under which future cash flows were discounted taking into account risks related to existing and future markets and an assessment of the life expectancy of the purchased software. This analysis resulted in an allocation of $3.4 million to purchased software, which was capitalized. The purchased software will be amortized over three years. Purchased research and development, which had not reached technological feasibility and which had no alternative future use, was valued using the same methodology. Expected future cash flows associated with in-process research and development were discounted considering risks and uncertainties related to the viability of and potential changes in future target markets and to the completion of the products that will ultimately be marketed by Lotus. This analysis resulted in an allocation of $19.9 million to purchased research and development expense. This amount, which is not deductible for tax purposes, was charged to operations at the acquisition date. Approach's operating results have been included in the consolidated financial statements from the date of acquisition. Pro forma statements of operations would not differ materially from reported results. One Source .......... Effective August 28, 1993, the Company sold its One Source business, a developer and marketer of CD-ROM information products. Total consideration received was immaterial and no gain or loss was recognized on the sale. The financial statements reflect the operations of One Source through the effective date. cc:Mail ........ In March 1991, the Company acquired all outstanding shares of cc:Mail, Inc. ("cc:Mail"), a privately held concern which developed and marketed the leading LAN-based electronic mail product, for $31.6 million and additional payments contingent upon future performance. In 1992, final contingent payments of F-18 $8.7 million were made. The acquisition has been accounted for using the purchase method. cc:Mail's operating results have been included in the consolidated financial statements from the date of acquisition. Pro forma statements of operations would not differ materially from reported results. L EMPLOYEE BENEFIT PLANS The Company maintains a discretionary, non-contributory profit sharing plan for its employees. Contributions are based on a percentage of consolidated operating profit and are allocated among employees on the basis of compensation received during the plan year. Profit sharing expense was $11.1 million, $7.1 million and $8.3 million in 1993, 1992 and 1991. In the U.S., the profit sharing plan was integrated with a pension plan which provided a minimum guaranteed defined benefit based on the employee's years of service and final average compensation. In June 1992, the Company elected to suspend the pension plan with the intent to terminate at a future date. The curtailment did not have a material impact on the Company's financial statements, nor will the expected termination. The actuarially determined pension cost related to the minimum guaranteed retirement benefit under the pension plan was not significant in 1993, 1992 and 1991. Additionally, the Company offers a savings plan which allows eligible U.S. employees to make tax-deferred contributions, a portion of which are matched by the Company. Company contributions under the savings plan were $3.8 million in 1993, $3.2 million in 1992 and $3.0 million in 1991. The Company also maintains retirement plans, principally defined contribution plans, covering substantially all of its international employees. Costs related to these plans amounted to approximately $3.4 million in 1993, $3.2 million in 1992 and $2.5 million in 1991. The Company does not offer postretirement benefits other than those described above. M INTERNATIONAL OPERATIONS Sales and marketing operations outside the United States are conducted principally through foreign sales subsidiaries and through various representative and distributorship arrangements. The Company's international manufacturing operations are located in Ireland and Singapore. The products of these manufacturing facilities are sold through the Company's foreign sales subsidiaries and, where the Company has not established a presence of its own, direct to distributors in those countries. Other financial information by geographical area is summarized below: F-19
(In thousands) North Asia/ Europe/ America Pacific Other Eliminations Consolidated - - -------------------------------------------------------------------------------------------- 1993: Net sales $531,536 $149,700 $308,938 ($9,006) $981,168 - - -------------------------------------------------------------------------------------------- Operating income: By area 51,151 34,085 46,659 (441) 131,454 Corporate expenses (32,228) Other income/ (expense) 2,543 --------- Income before provision for income taxes 101,769 - - -------------------------------------------------------------------------------------------- Total assets $489,419 $130,869 $299,577 ($14,520) $905,345 ============================================================================================ 1992: Net sales $494,592 $116,199 $300,049 ($10,691) $900,149 - - -------------------------------------------------------------------------------------------- Operating income: By area 34,972 25,066 26,019 (567) 85,490 Corporate expenses (11,668) Other income/ (expense) 46,183 --------- Income before provision for income taxes 120,005 - - -------------------------------------------------------------------------------------------- Total assets $431,487 $78,545 $266,017 ($12,605) $763,444 ============================================================================================ 1991: Net sales $455,802 $117,180 $263,826 ($7,913) $828,895 - - -------------------------------------------------------------------------------------------- Operating income: By area 584 34,539 53,793 (895) 88,021 Corporate expenses (13,511) Other income/ (expense) (6,824) --------- Income before provision for income taxes and cumulative effect of change in accounting principle 67,686 - - -------------------------------------------------------------------------------------------- Total assets $431,598 $45,131 $255,745 ($6,937) $725,537 ============================================================================================
F-20 Intersegment sales between geographic areas presented are insignificant. For this presentation, certain expenses incurred at the Company's corporate offices were classified as general corporate expenses, including the charge of $19.9 million for purchased research and development in 1993, or allocated to geographic areas on the basis of sales. Other income/(expense) includes interest income, interest expense, other expense, net, and in 1992, the $49.7 million gain on sale of investment in Sybase, Inc. The decrease in operating income in the Europe/Other region in 1993 and 1992 as compared to fiscal 1991 was due to increased marketing spending relating to the introduction of new communications products and in response to heightened European competition, particularly related to Windows-based applications. The decrease in earnings was also due to the expansion of the Company's international development organization in Ireland, where new efforts were undertaken to translate products into local language versions for use on the Windows platform. The increase of assets in the Asia/Pacific region is due to the accumulation of unremitted earnings of the region. Sales to unaffiliated customers outside the United States, including U.S. export sales, were $485.9 million for the year 1993, $434.9 million for the year 1992 and $421.0 million for the year 1991. In 1993, one customer accounted for 12% of world wide sales and a second customer accounted for 11% of such sales. No one customer accounted for more than 10% of worldwide sales in 1992 or 1991. N SHAREHOLDER RIGHTS PLAN The Company has a shareholder rights plan which grants to holders of record one stock purchase right per share of common stock upon the occurrence of certain triggering events. Such events would include the acquisition of Lotus shares through open market purchases or a tender offer that, in the aggregate, equal or exceed 15% of outstanding shares. Should a triggering event occur, holders of such rights would be entitled to purchase Lotus common stock (or stock of the acquiring entity, as the case may be) at a 50% discount from its then current market value. Each right entitles the holder to purchase shares with a market value aggregating $150 for a price of $75. Such rights do not extend to any holder whose action triggered the rights. The rights expire in November 1998 and may be redeemed prior to that time at the option of the Board of Directors for nominal consideration. Until a triggering event occurs, the rights will not trade separately from the related Lotus common stock. F-21 LOTUS SUPPLEMENTAL FINANCIAL INFORMATION QUARTERLY RESULTS OF OPERATIONS (Unaudited)
(In thousands, except 1993, Three Months Ended per share data) April 3 July 3 Oct 2 Dec 31 Year - - ----------------------------------------------------------------------------------- Net sales $227,004 $235,785 $240,104 $278,275 $981,168 Gross margin 176,625 184,751 193,295 224,054 778,725 Income before provision for income taxes 20,791 5,949 28,600 46,429 101,769 Net income 12,267 (4,649) 18,304 29,613 55,535 Net income per share $0.29 ($0.11) $0.41 $0.64 $1.24 (In thousands, except 1992, Three Months Ended per share data) March 28 June 27 Sept 26 Dec 31 Year - - ----------------------------------------------------------------------------------- Net sales $227,063 $220,319 $206,742 $246,025 $900,149 Gross margin 177,018 171,775 159,353 191,900 700,046 Income before provision for income taxes 31,006 22,299 44,937 21,763 120,005 Net income 20,774 14,940 30,108 14,581 80,403 Net income per share $0.47 $0.34 $0.72 $0.35 $1.87
Notes to Quarterly Results of Operations: (1) 1993 amounts reflect a charge to operations of $19.9 million, or $0.45 per share, in the second quarter for purchased research and development related to the Approach Software Corporation acquisition. (2) 1992 amounts include pre-tax gains on the sale of the Company's investment in Sybase, Inc. of $34.6 million in the third quarter and $15.1 million in the fourth quarter with a total gain for the year of $49.7 million on a pre-tax basis and $33.3 million, or $0.77 per share, on an after-tax basis. 1992 amounts also include a restructuring charge in the fourth quarter of $15 million on a pre-tax basis and $10.1 million, or $0.23 per share, on an after-tax basis. (3) 1991 amounts include a fourth quarter restructuring charge of $23 million on a pre-tax basis and $18.6 million, or $0.42 per share, on an after-tax basis. (4) 1990 amounts reflect a charge to operations of $53 million, or $1.23 per share, in the fourth quarter for purchased research and development related to the Samna acquisition. F-22 EX-10.E 2 RESOLUTION EXHIBIT 10(e) Mr. Manzi next proposed that the compensation for non-employee directors for 1994 be $24,000. After discussion, and upon motion duly made and seconded, it was unanimously: RESOLVED: That the compensation for the Corporation's non-employee directors for 1994 shall be the sum of $24,000. EX-11 3 COMPUTATION OF EARNINGS EXHIBIT 11 LOTUS DEVELOPMENT CORPORATION Computation of Primary and Fully Diluted Earnings Per Share (in thousands, except per share data)
Years Ended December 31, 1993 1992 1991 ------- ------- ------- Net income $55,535 $80,403 $33,116 Weighted average shares outstanding during the year 43,089 42,306 42,960 Common equivalent shares 1,632 688 992 ------- ------- ------- Common and common equivalent shares outstanding for purpose of calculating primary net income per share 44,721 42,994 43,952 Incremental shares to reflect full dilution 924 -- -- ------- ------- ------- Total shares for purpose of calculating fully diluted net income per share 45,645 42,994 43,952 ======= ======= ======= Primary net income per share $ 1.24 $ 1.87 $ 0.75 ======= ======= ======= Fully diluted net income per share $ 1.22 $ 1.87 $ 0.75 ======= ======= =======
EX-22 4 SUBSIDIARIES/REGISTRANT EXHIBIT 22 SUBSIDIARIES OF THE REGISTRANT Name of Organization Jurisdiction Aleph 2, S.N.C. France Approach Software Corporation California cc:Mail, Inc. California Lotus Assistance France Lotus Charles Park Corporation Massachusetts Lotus CSG Canada Limited Canada Lotus Desenvolvimento de Software Ltda. Brazil Lotus Development, B.V. Netherlands Lotus Development Benelux, B.V. Netherlands Lotus Development Canada Ltd. Canada Lotus Development Caribe Corporation Delaware Lotus Consulting Services Gmbh Germany Lotus Development Corporation Massachusetts Lotus Development Danmark AS Denmark Lotus Development Distribution Limited Ireland Lotus Development European Corporation Delaware Lotus Development Foreign Sales Corporation, Ltd. Jamaica Lotus Development Foundation, Inc. Massachusetts Lotus Development GmbH Austria Lotus Development Holdings, B.V. Netherlands Lotus Development Iberica Spain Lotus Development Italia SpA Italy Lotus Development Japan Ltd. Japan Lotus Development New Zealand, Ltd. New Zealand Lotus Development Nordic A.B. Sweden Lotus Development Norway AS Norway Lotus Development Pty, Ltd. Australia Lotus Development Russia Russia Lotus Development S.A. France Lotus Development S.A. (Pty.) Ltd. South Africa Lotus Development (Schweiz) A.G. Switzerland Lotus Development Security Corporation Delaware Lotus Development Singapore Pte. Ltd. Singapore Lotus Development (Software) Ltd. Israel Lotus Development Software (Hong Kong) Ltd. Hong Kong Lotus Development (U.K.), Ltd. United Kingdom Lotus Fulfilment Limited Ireland Lotus Korea Development Co. Ltd. Korea Lotus Rogers Street Corporation Delaware Lotus Club International S.A. (Pty.) Ltd. South Africa PS Publishing Corporation California Samna Corporation Georgia Vanguard Business Solutions, Inc. California EX-24 5 CONSENT/COOPERS & LYBRAND Exhibit 24 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Lotus Development Corporation on Form S-8 and related prospectuses with respect to the 1992 Stock Option Plan (No. 33-51263), Employee Stock Purchase Plan (Nos. 2-88906, 33-6366), 1986 Stock Option Plan for Non-Employee Directors (Nos. 33-35497, 33-55488), Amended and Restated 1983 Non-Qualified Stock Option Plan (Nos. 2-92360, 33-6702, 33-46652) and Soft-Switch, Inc. Amended and Restated Stock Option Plan (33-55077), of our reports dated January 26, 1994, on our audits of the consolidated financial statements and financial statement schedules of Lotus Development Corporation as of December 31, 1993 and 1992 and for each of the three years in the period ended December 31, 1993, which reports are included or incorporated by reference in this Annual Report on Form 10-K, as amended by Amendment No. 2 to the Annual Report on Form 10-K/A. COOPERS & LYBRAND Boston, Massachusetts October 17, 1994 -----END PRIVACY-ENHANCED MESSAGE-----