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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
Commission File Number 0-27084
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2275152
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6400 NW 6th Way
Fort Lauderdale, Florida 33309
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (954) 267-3000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)
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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 9, 1999 (based on the last reported sale price on The
Nasdaq National Market as of such date) was $3,803,457,002. As of March 9,
1999 there were 43,249,339 shares of the registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December
31, 1998. Portions of such proxy statement are incorporated by reference into
Part III of this report.
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ITEM 1. BUSINESS
General
Citrix Systems, Inc. ("Citrix" or the "Company") is a leading supplier of
server-based computing products and technologies that enable the effective and
efficient enterprise-wide deployment and management of applications designed
for Microsoft Corporation ("Microsoft") Windows(R) operating systems. The
Company's MetaFrame(TM) and WinFrame(R) product lines, developed under license
and strategic alliance agreements with Microsoft, permit organizations to
deploy and manage Windows applications without regard to location, network
connection, or type of client hardware platform. These product lines utilize
the Company's proprietary Independent Computing Architecture (ICA(R)), which
allows an application's graphical user interface to be displayed on a client
while its logic is executed on a server, thereby providing a bandwidth-
efficient solution. The Company was incorporated in April 1989, and shipped
its initial products in 1991.
Industry Background
New information technologies have enabled enterprises to provide their
employees with broad access to business-critical information, including sales,
technical, human resources, vendor and supplier information. Because of their
many diverse end-user requirements, enterprises have made significant
investments in information systems infrastructure, frequently incorporating a
variety of software operating environments, computing platforms and
communications protocols. Business-critical enterprise applications and
personal productivity tools typically have been supplied by a variety of
different vendors, often resulting in incompatible systems and applications
within and among company locations. As a result of this proliferation of
technology, demand has increased for systems that offer users a standard
interface, transparent communications and the ability to deliver enterprise
and personal productivity applications to local and remote enterprise users.
Organizations seeking to broadly deploy business applications are faced with
a diverse set of challenges, including:
. Platform Diversity. In addition to Microsoft Windows operating systems,
the preferred environment for enterprise applications, desktop-computing
systems within an enterprise may include DOS systems, UNIX workstations,
X-Terminals, Macintosh systems and OS/2 workstations. These systems
typically do not support 32-bit Windows applications.
. Client Diversity. Certain organizations require simpler, relatively low-
cost devices, such as personal digital assistants ("PDAs"), information
kiosks and fixed function terminals for certain enterprise applications,
but these devices currently cannot be effectively utilized because full
Windows support is generally not available.
. Remote Users. The diversity of network connection types, protocols and
transmission speeds limits the ability of organizations to deploy
Windows, Java and web-based applications on a cost-effective and
efficient basis among remote users such as mobile workers, telecommuters
and branch office personnel.
. Extended Enterprise. The extension of enterprise information systems to
suppliers, distributors, customers and prospects creates Windows
application deployment issues that are outside the control of information
systems managers, such as the quality and security of the network
connection, the client platform involved and the technical expertise of
the external user.
The Company believes that these challenges have impeded effective deployment
of Windows enterprise applications to many essential user communities.
The Citrix Solution
Citrix develops, markets, sells and supports innovative client and
application server software that enables the effective and efficient
enterprise-wide deployment and management of Windows business applications.
The Company's MetaFrame and WinFrame product lines permit organizations to
deploy and manage Windows
2
applications without regard to location or type of client hardware platforms.
These products operate by executing the Windows applications on a multi-user
server and provide end-users access to the server from a variety of client
platforms through the Company's ICA protocol. This approach minimizes the
memory and processing requirements of the client system, resulting in a highly
scaleable, bandwidth-efficient solution for deployment and management of
enterprise Windows applications across a range of platforms and network
environments.
The Company's products enable the broad deployment of Windows applications
in a variety of environments, including:
. Low bandwidth connections, such as dial-up, wide area networks ("WAN")
and wireless;
. The Internet, accessed through widely-available browser technology;
. Existing Intel-based computer systems, such as 386, 486 and Pentium
computers and laptops;
. Non-Intel platforms, such as UNIX workstations, Java, X-Terminals and
Macintosh systems;
. Emerging platforms, such as hand-held wireless devices, PDAs, information
kiosks, Windows-based terminals and network computers.
To address deployment in these diverse environments, the Company has
developed two key technologies: (i) ICA and (ii) multi-user Windows NT
extensions developed under a source code license from Microsoft.
ICA. The Company's ICA enables the separation of an application's graphical
user interface from the application logic, allowing the user interface to be
displayed on a client while the application logic itself is executed on a
server. This distributed architecture allows 16- and 32-bit Windows
applications to run remotely over a wide range of connection speeds, including
low bandwidth connections.
Multi-user Windows NT Extensions. The Company's multi-user Windows NT
extensions allow multiple users to share an application server, with each user
receiving a "virtual" Windows environment through a dedicated ICA session. The
systems management and security extensions are fully integrated with the
standard Windows NT administrative features, allowing for consistent and
integrated multi-user server management facilities. These extensions were
developed under source code license and strategic alliance agreements with
Microsoft.
Products
MetaFrame. MetaFrame software is an enhancement to Microsoft Windows NT
Server 4.0, Terminal Server Edition ("NT Terminal Server"). MetaFrame is
system software that incorporates Citrix's ICA protocol and extends NT
Terminal Server with additional client and server functionality, including
support for heterogeneous computing environments, enterprise-scale management
and seamless desktop integration. The Company's MetaFrame software, in
conjunction with NT Terminal Server, delivers a comprehensive server-based
computing solution for the entire enterprise. The MetaFrame product line
enables organizations to better deploy, manage and access applications across
the extended enterprise to a variety of client devices, operating platforms or
network connections, including low bandwidth environments. MetaFrame, which
first shipped in June 1998, constituted 21% of the Company's revenues in 1998.
WinFrame. WinFrame is Windows application server software based on Windows
NT 3.51 that allows customers to deploy advanced Windows applications
remotely, provide Windows applications to a broad array of client platforms
and publish enterprise applications on a corporate intranet. The WinFrame
product family consists of a version targeted for the corporate enterprise and
a version targeted at departmental or workgroup environments. First shipped in
August 1995, WinFrame software constituted 28% of the Company's revenues in
1998, 49% in 1997 and 63% in 1996.
System Options Products. The Company also markets a number of enhancements
to MetaFrame and WinFrame server software, including Load Balancing, which
provides scalability, and Secure ICA, which
3
provides 128-bit encryption. In addition, the Company offers additional user
license packs to increase the number of users who can access WinFrame and
MetaFrame server software. Collectively, these products accounted for 24% of
the Company's revenues in 1998 and 19% of the Company's revenues in 1997.
The MetaFrame and WinFrame product lines consist of the following two
components:
Server-Based Computing Services Software. MetaFrame and WinFrame server
software runs on industry-standard server hardware containing one or more
Intel processors. These software products, which were created using source
code licenses for Microsoft Windows NT operating systems, provide three areas
of functionality: (i) operating system extensions that allow each user to
receive a "virtual" Windows environment; (ii) communications support to allow
the Company's ICA protocol n a variety of analog and digital network
connections; and (iii) configuration management software. The server software
is configured at the time of sale to support a pre-specified number of
concurrent users. This number can be increased easily with the purchase of
additional concurrent user licenses, sold as add-on kits.
Multi-platform Client Software. Each client that accesses a MetaFrame/NT
Terminal Server or WinFrame server requires hardware that runs the ICA client
software. The client establishes a communications link with the server over
dial-up, local area network ("LAN"), WAN or Internet connections, and has two
basic functions: (i) establishing a server connection over the specified
network connection; and (ii) sending and receiving data over the network link.
ICA client software is available for all the common desktop platforms,
including DOS, Windows 3.x, Windows for Workgroups, Windows 95 and 98, Windows
CE, Windows NT, Java, UNIX and Macintosh.
Target Markets
Enterprise Windows Deployments. The Company's products enable the deployment
and management of Windows business applications in large-scale Windows, non-
Windows and heterogeneous environments. These deployments often involve
complex applications running on multiple servers and supporting numerous
clients. As a result, the following key features of the Company's products are
required for effective deployment of these applications:
. ICA. MetaFrame and WinFrame incorporate the Company's ICA technology
which allows for the deployment in a bandwidth-efficient manner of
enterprise applications with the necessary scalability, performance and
reliability.
. Integrated Management Tools. The Company's MetaFrame and WinFrame product
lines incorporated sophisticated management tools, such as application
publication services, help desk support features, support for desktop
peripherals and other features which permit the centralized management
and support of server-based computing applications.
. Load Balancing. The Company's Load Balancing system option optimizes the
use of multiple servers.
. Secure ICA. The Company's Secure ICA system option provides 128-bit
encryption for client access to MetaFrame and WinFrame installations.
For example, customers deploying large-scale enterprise resource planning
applications, such as those offered by PeopleSoft, Oracle and SAP, among
others, as well as internally developed client/server applications developed
with languages such as VisualBasic and PowerBuilder, often require the
scalability, performance and reliability provided by the Company's products.
Remote Computing. In the remote computing market, the Company's products are
used to deploy applications across the enterprise whose scale, performance,
reliability and security requirements are more demanding than those associated
with simple remote access. The remote computing market includes dial-in remote
access for large field workforces, branch office locations and deployment of
applications over an enterprise WAN. Without the use of MetaFrame/NT Terminal
Server or WinFrame, remote deployment of these applications can be slow and
expensive because LAN applications typically require a substantial amount of
memory and fast processors on the desktop and relatively high-speed
communication bandwidth.
4
Web Computing. As use of the Internet and corporate intranets continues to
increase, companies often need to integrate web technologies and Windows
applications. The Company's MetaFrame or WinFrame server software, when used
in conjunction with a web server, provides Internet and intranet access to
standard and custom developed Windows applications. For example, using the
Company's products, an organization could add secure interactive access to a
large Lotus Notes database directly from a web page without developing any new
programs or changing the existing Lotus Notes application program or database.
Windows-based Terminals and Network Computers. Citrix has licensed its ICA
technology to companies such as IBM, Wyse Technology and Boundless
Technologies to enable the development of low-cost Windows-based terminals. In
addition, the Company intends to continue to develop strategic relationships
and work with key strategic partners to deploy Windows applications on point
of sale terminals and information kiosks. The Company believes that its line
of server products, when coupled with these new devices, will provide an
effective alternative to character-based UNIX implementations and will
capitalize on existing Windows applications, tools and development facilities.
Hand-held PCs, PDAs and Information Appliances. Many device manufacturers,
including Apple, Motorola, Sharp, Symbol Technologies and 3Com, have begun
shipping low cost portable devices which offer features such as extended
battery life and wireless connectivity to remote servers. However, the latest
generation of Windows applications and Windows development tools require
substantial RAM, processing power and communications bandwidth for adequate
performance, requirements that may limit the functionality of these wireless
devices. Incorporating the Company's technology into these devices will enable
them to more effectively utilize the latest generation of Windows
applications. To date, Citrix has licensed technology to Motorola, Sharp,
Symbol Technologies, Telxon Corporation, Psion Software PLC and others for
this purpose.
UNIX, X-Terminal, DOS and Macintosh Support for Windows. The introduction of
Windows 95 and 98 has caused major changes in the Windows application software
market. As independent software vendors move to develop applications which
capitalize on the new features of the Windows 95 and 98 operating systems,
organizations are upgrading client systems in order to run these applications.
However, many organizations employ a heterogeneous mix of computing platforms,
including DOS systems, Windows 3.x systems, UNIX workstations, Java devices,
X-Terminals and Macintosh computers, which are incapable of running such
applications. Citrix's family of products can deliver Windows 32-bit
applications, running on the server, to most types of network-attached client
systems, including DOS, Windows 3.x, Windows for Workgroups, Windows 95 and
98, Windows NT, Windows CE, OS/2, UNIX, Java and Macintosh systems.
Strategic Relationships
The Company has entered into a number of strategic relationships to develop
its existing and future product lines, develop markets for the application of
its technology and broaden deployment and acceptance of ICA as an emerging
industry standard protocol for distributed Windows applications.
Microsoft. Since inception, the Company has had a number of license
agreements with Microsoft, including licenses relating to Microsoft OS/2,
Windows 3.x, Windows for Workgroups and Windows NT. These agreements have
provided access to certain Microsoft source and object code, technical support
and other materials. In addition, the Company is permitted to license and
distribute Microsoft Windows NT 3.51 server software as a part of its WinFrame
line of products, pursuant to which the Company pays royalties to Microsoft.
The license agreements had an initial term which expired in September 1994 and
were subsequently extended until September 2001. In July 1996, the Company
entered into a license, development and marketing agreement with Microsoft
relating to the inclusion of ICA as an embedded component in future versions
of Windows 95, Windows 98, Windows NT and the Internet Explorer for Windows.
Pursuant to this agreement, the Company licenses its ICA technology to
Microsoft, royalty-free, for inclusion in the above Microsoft Windows family
of products.
5
In May 1997, the Company entered into a five year joint license, development
and marketing agreement with Microsoft, as amended, (the "Development
Agreement") pursuant to which the Company licensed its multi-user Windows NT
extensions to Microsoft for inclusion in future versions of Windows NT 4.x and
5.x server software. Pursuant to the Development Agreement, the Company's
multi-user Windows NT extensions technology was incorporated into Microsoft's
NT Terminal Server, which was released in July 1998. The Company has
developed, marketed, licensed and supported ICA client software for use with
the Microsoft terminal server. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
Additional Strategic Relationships. During 1998, the Company entered into
ICA license agreements with more than 50 companies, including Network
Computer, Inc., Motorola, Compaq, Hewlett Packard, Samsung and Sharp. These
new licensees joined the Company's existing ICA licensees, including, among
others, IBM, Wyse and Boundless.
Research and Development
The Company focuses its research and development efforts on developing new
products and core technologies for its markets and further enhancing the
functionality, reliability, performance and flexibility of existing products.
The Company solicits extensive input concerning product development from
users, both directly and indirectly through its channel distributors.
The Company believes that its software development team and core
technologies represent a significant competitive advantage for the Company.
The software development team includes a number of key members from the
engineering team that developed the original version of OS/2 at IBM. Since May
1993, this team has been involved in the development of system software
products utilizing Windows NT technology.
During 1998 and 1997 the Company recorded approximately $18.4 million and
$4.0 million, respectively, charges for acquired in-process research and
development that had not yet reached technological feasibility and had no
alternative future use.
Sales, Marketing and Support
Citrix markets its products through multiple indirect channels worldwide,
including distributors, value-added resellers, system integrators and OEM
licensees, as well as through a direct sales force. In January 1996, Citrix
announced its Citrix Solutions Network ("CSN"), which provides training and
certification to integrators, value-added resellers and consultants for a
full-range of MetaFrame and WinFrame based application deployment solutions
and services. In September 1998, Citrix officially launched the Citrix
Business Alliance ("CBA"), a coalition of industry-leading companies from
across the technology spectrum who work closely with Citrix to design and
market complementary solutions for Citrix and CBA customers. By the end of
1998, CBA included over 350 members including Apple, BMC Software, Compaq,
Computer Associates, IBM, JD Edwards, National Semiconductor, Novell,
PeopleSoft, Platinum Software, Progress Software, SAP and 3Com. As of December
31, 1998, the Company had sales and marketing relationships in the United
States with four national distributors, three regional distributors, 30 CSN
Authorized Platinum Solutions Providers, approximately 750 CSN Authorized Gold
Solutions Providers and approximately 2,500 CSN Authorized Silver Solutions
Providers. Internationally, the Company had relationships with approximately
80 distributors and approximately 1,200 CSN Providers. A number of the
Company's strategic partners and OEM licensees provide additional indirect
sales channels for Citrix products under either a Citrix brand or private
brand name.
Citrix's sales and marketing organization actively supports its distributors
and resellers. The Company's marketing department provides training, sales
event support, sales collateral, advertising, direct mail and public relations
coverage to its indirect channels to aid in market development and in
attracting new customers. The Company's sales organization consists of field-
based systems sales engineers and corporate sales professionals. These field
personnel are supported by additional sales personnel based in Fort
Lauderdale, Florida, London, England, Munich, Germany, Paris, France, Sydney,
Australia and Tokyo, Japan. These additional sales personnel
6
recruit prospective customers, provide technical advice with respect to Citrix
products and work closely with key distributors and resellers of the Company's
products. The Company plans to hire additional direct sales personnel to
market its products to large corporate enterprise accounts.
Citrix provides most of its distributors and resellers with product return
rights for stock balancing or limited product evaluation. Stock balancing
rights permit distributors to return products to Citrix for credit, within
specified limits and subject to ordering an equal dollar amount of other
Citrix products. Although the Company believes that it has adequate reserves
to cover product returns, there can be no assurance that Citrix will not
experience significant returns in the future or that such reserves will be
adequate. The Company also provides most of its distributors and resellers
with price protection rights. Price protection rights require that Citrix
grant retroactive price adjustments for inventories of Citrix products held by
distributors or resellers if Citrix lowers its prices for such products. In
the event that the Company determines to reduce its prices, it will establish
a reserve to cover exposure to distributor inventory.
The majority of Citrix's services and support activities are related to
software and network integration issues. Using Citrix's own "Shadowing"
technology, support representatives are able to troubleshoot user issues
remotely from Citrix call centers located in the United States, United Kingdom
and Australia. Citrix also provides technical support to channel and strategic
partners, who are utilized as first line support for their customers.
Additionally, users can choose from a comprehensive fee-based support program
ranging from one-time incident charges to an annual support agreement covering
multiple sites and servers. Training for resellers is provided at the
Company's Citrix Authorized Learning Centers ("CALCs"), which include a number
of the world's leading IT training organizations. CALCs are staffed with
Citrix Certified Instructors, who teach Citrix-developed courseware. In
addition, Citrix provides technical advice through its on-line services,
quarterly Solution Search CD-ROM and fax services.
Citrix conducts its sales, marketing and support activities from its
principal offices in Fort Lauderdale, Florida as well as through satellite
offices in the United Kingdom, Germany, Australia, France, Japan and Italy.
Operations
The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations. All production and
warehousing is performed by an independent contractor on a purchase order
basis. Shipping is made primarily from the location of the independent
contractor, although limited shipments are made from the Company's facilities.
Master software diskettes, development of user manuals, packaging designs,
initial product quality control and testing are performed at the Company's
facilities. Diskette and CD-ROM duplication, printing of documentation,
packaging and assembly are performed by the independent contractor to the
Company's specifications. To date, the Company has not experienced any
material difficulties or delays in the manufacture and assembly of its
products.
The Company has identified and evaluated alternative manufacturing vendors
and believes that such alternative vendors are capable of producing the
requisite quality and volumes at competitive prices. However, if difficulties
and delays were to be encountered, and transition to an alternate manufacturer
were not completed promptly, the Company's business, results of operations and
financial condition could be materially adversely affected.
The Company generally ships products upon receipt of an order. As a result,
the Company has relatively little backlog at any given time, and does not
consider backlog to be a significant indicator of future performance.
Competition
The markets in which the Company competes are intensely competitive and
offer a variety of solutions to the deployment of enterprise-wide
applications. Remote computing products range from simple remote control
software for a single PC to remote node hardware products to branch office
routers. Competitive factors in the remote computing market include
completeness of features, product quality and functionality, marketing and
sales resources and customer service and support. While the Company believes
that it presently competes on a
7
favorable basis with respect to each of these factors, there can be no
assurance that the Company will be able to continue to compete effectively in
the face of increased competition. The Company faces competition from
organizations that seek alternative approaches to remote computing from such
companies as 3Com, Nortel, Cisco Systems, Microsoft, Novell and Symantec, all
of whom are significantly larger than the Company and have greater financial
resources.
Additionally, the Company believes that companies, including Microsoft, have
entered or will enter the market with solutions that involve a similar
approach to Citrix's multi-user application server. In particular, NCD is
marketing products as add-on products to NT Terminal Server. The products are
based on Microsoft's Remote Desktop Protocol (RDP) and claim to have functions
similar to those found in MetaFrame. See "--Strategic Relationships" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Certain Factors Which May Affect Future Results." Additionally,
the announcement of the release, and the actual release, of products
competitive to the Company's existing and future product lines, such as NT
Terminal Server, could cause existing and potential customers of the Company
to postpone or cancel plans to license certain of the Company's existing and
future product offerings, which would adversely impact its net revenues,
operating results and financial condition. Further, the Company's ability to
market ICA, MetaFrame software and other future product offerings will be
dependent on Microsoft's licensing and pricing scheme to allow client devices
implementing ICA, MetaFrame or any future product offerings to attach to NT
Terminal Server.
In addition, alternative products exist for Internet commerce that directly
or indirectly compete with the Company's products. Existing or new products
that extend web site software to provide database access or interactive
computing can materially impact the Company's ability to sell its products in
this market. Competitors in this market include Microsoft, Netscape, Sun
Microsystems and other makers of web server and browser software. As markets
for the Company's products continue to develop, additional companies,
including companies with significant market presence in the computer hardware,
software and networking industries, may enter the markets in which the Company
competes and further intensify competition. These competitors and potential
competitors may have significantly greater financial, technical, sales,
marketing, support and other resources than the Company. There can be no
assurance that the Company will be able to establish and maintain a market
position in the face of increased competition. Although the Company believes
that price has historically been a less significant competitive factor than
product performance, reliability and functionality, the Company believes that
price competition may become more significant in the future. The Company may
not be able to maintain its historic prices, and an inability to do so could
adversely affect the Company's business, results of operations and financial
condition.
Proprietary Technology
The Company's success is heavily dependent upon proprietary technology.
While the Company has filed 95 patent applications worldwide, of which five
U.S. patents and one foreign patent have been granted, and the Company takes
steps to protect its technology under the copyright laws, patent protection
and existing copyright laws afford only limited protection for the Company's
software. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, the Company also relies on trade secret protection and
confidentiality and proprietary information agreements to protect its
proprietary technology. The loss of any material trade secret, trademark,
trade name or copyright could have a material adverse effect on the Company.
There can be no assurance that the Company's efforts to protect its
proprietary technology rights will be successful. Despite the Company's
precautions, it may be possible for unauthorized third parties to copy certain
portions of the Company's products or to obtain and use information that the
Company regards as proprietary. Substantially all of the Company's sales are
derived from the licensing of Company products under "shrink wrap" license
agreements that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. Although the Company
does not believe that its products infringe on the rights of third parties,
there can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertion will not
result in costly litigation or require the Company to obtain a license to
proprietary technology rights of such parties. In addition, there can be no
assurance that such licenses will be available on reasonable terms or at all.
8
While the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that because of the
rapid pace of technological change in the industry, factors such as the
technical expertise, knowledge and innovative skill of the Company's
management and technical personnel, its strategic relationships, name
recognition, the timeliness and quality of support services provided by the
Company and its ability to rapidly develop, enhance and market software
products may be more significant in maintaining the Company's competitive
position.
Employees
As of December 31, 1998, the Company had approximately 620 employees. Twelve
of the Company's employees are represented by a statutory collective
bargaining agreement in France. The Company believes its relations with
employees are good.
ITEM 2. PROPERTIES
The Company's corporate offices are located in Fort Lauderdale, Florida. The
corporate offices consist of leased and subleased office space in four
buildings totaling approximately 141,000 square feet. In addition, the Company
leases approximately 34,000 square feet of office space in other locations in
the United States.
The Company leases and subleases a total of approximately 67,000 square feet
of office space in various other facilities in the United Kingdom, Germany,
Australia, France, Japan and Italy.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock and Dividend Policy
The Company's Common Stock is currently traded on The Nasdaq National Market
under the symbol "CTXS." Public trading of the Common Stock commenced on
December 8, 1995. Prior to that time, there was no public market for the
Company's Common Stock. The following table sets forth the high and low
closing prices for the Company's Common Stock as reported on The Nasdaq
National Market for the periods indicated, as adjusted to the nearest 1/16 to
reflect the three-for-two stock split in the form of a stock dividend paid on
February 20, 1998 to holders of record of the Company's Common Stock on
February 12, 1998. Such information reflects inter-dealer prices, without
retail mark-up, markdown or commission and may not represent actual
transactions. The following table does not reflect the two-for-one stock split
in the form of a stock dividend declared on March 1, 1999 to be paid on or
about March 25, 1999 to holders of record of the Company's Common Stock on
March 17, 1999.
High Low
--------- ---------
Year ended December 31, 1999:
First quarter (through March 9, 1999)..................... $102 3/8 $74 15/16
Year ended December 31, 1998:
Fourth quarter............................................ $97 1/16 $50 3/4
Third quarter............................................. $75 1/4 $57 5/8
Second quarter............................................ $68 5/8 $48 1/2
First quarter............................................. $54 3/16 $37 1/2
Year ended December 31, 1997:
Fourth quarter............................................ $55 7/16 $33 1/16
Third quarter............................................. $37 15/16 $27 15/16
Second quarter............................................ $29 1/4 $7 1/4
First quarter............................................. $33 13/16 $7 1/16
9
On March 9, 1999, the last reported sale price of the Common Stock on The
Nasdaq National Market was $88.97 per share. As of March 9, 1999, there were
approximately 449 holders of record of the Common Stock.
The Company currently intends to retain any earnings for use in its business
and does not anticipate paying any cash dividends on its capital stock in the
foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table does not reflect the two-for-one stock split in the form
of a stock dividend declared on March 1, 1999 to be paid on or about March 25,
1999 to holders of record of the Company's Common Stock on March 17, 1999.
Year Ended December 31,
-----------------------------------------
1998 1997 1996 1995 1994
-------- -------- ------- ------- -------
(in thousands, except per share data)
Consolidated Statement of Income
Data:
Net revenues........................ $248,636 $123,933 $44,527 $14,568 $10,085
Cost of revenues.................... 16,682 12,304 5,099 1,956 2,137
-------- -------- ------- ------- -------
Gross margin........................ 231,954 111,629 39,428 12,612 7,948
Operating expenses:
Research and development.......... 22,858 6,948 3,843 2,343 1,912
Sales, marketing and support...... 74,855 35,352 13,741 6,670 4,444
General and administrative........ 20,131 10,651 4,126 1,784 1,395
Amortization of intangible
assets........................... 10,190 -- -- -- --
In-process research and
development...................... 18,416 3,950 -- -- --
-------- -------- ------- ------- -------
Total operating expenses........ 146,450 56,901 21,710 10,797 7,751
-------- -------- ------- ------- -------
Income from operations.............. 85,504 54,728 17,718 1,815 197
Interest income, net................ 9,968 9,894 4,545 173 45
-------- -------- ------- ------- -------
Income before income taxes.......... 95,472 64,622 22,263 1,988 242
Income taxes........................ 34,370 23,264 3,562 93 --
-------- -------- ------- ------- -------
Net income.......................... $ 61,102 $ 41,358 $18,701 $ 1,895 $ 242
======== ======== ======= ======= =======
Diluted earnings per share.......... $ 1.34 $ 0.95 $ 0.46 $ 0.06 --
======== ======== ======= ======= =======
Diluted pro forma earnings per
share(1)........................... -- -- -- -- $ 0.01
======== ======== ======= ======= =======
Diluted weighted average shares
outstanding
Historical........................ 45,648 43,631 40,905 30,370 --
======== ======== ======= ======= =======
Pro forma(1)...................... -- -- -- -- 30,291
======== ======== ======= ======= =======
10
December 31,
------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
(in thousands)
Consolidated Balance Sheet Data:
Working capital................... $158,900 $222,916 $139,778 $42,688 $ 1,989
Total assets...................... 431,380 282,668 149,580 46,715 3,932
Long term portion of capital lease
obligations...................... -- -- 8 88 68
Redeemable convertible preferred
stock............................ -- -- -- -- 18,608
Common stockholders' equity
(deficit)........................ 297,454 196,848 141,851 42,962 (16,473)
- --------
(1) Pro forma earnings per share and the pro forma weighted average shares
outstanding for the year ended December 31, 1994 are calculated using the
weighted average number of common and common equivalent shares outstanding
during the respective periods after giving effect to the conversion of
redeemable convertible preferred stock into an aggregate of 23,039,082
shares of Common Stock on the issuance dates of the various series.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company develops, markets, sells and supports innovative client and
server-based computing software that enables effective and efficient
deployment of enterprise applications that are designed for Microsoft Windows
operating systems.
From its introduction in the second quarter of 1993 through the second
quarter of 1995, the Company's WinView product represented the largest source
of the Company's revenues. The Company began shipping its WinFrame product in
final form in the third quarter of 1995 and MetaFrame in the second quarter of
1998, and these products, together with their related options, have comprised
the largest source of the Company's revenue.
On May 9, 1997, the Company and Microsoft entered into a License,
Development and Marketing Agreement, as amended (the "Development Agreement"),
which provides for the licensing to Microsoft of certain of the Company's
multi-user software enhancements to Microsoft's Windows NT Server and for the
cooperation between the parties for the development of certain future multi-
user versions of Microsoft Windows NT Server, Terminal Server Edition ("NT
Terminal Server"). The Development Agreement also provides for each party to
develop its own enhancements to the jointly developed products which may
provide access to NT Terminal Server base platform from a wide variety of
computing devices. In June 1998, the Company released its MetaFrame product, a
Company-developed enhancement that implements the Independent Computing
Architecture (ICA) on NT Terminal Server, which provides NT Terminal Server
with capabilities similar to those currently offered in the WinFrame product
line. Pursuant to the terms of the Development Agreement, in May 1997, the
Company received an aggregate of $75 million as a non-refundable royalty
payment and for engineering and support services to be rendered by the
Company. Under the terms of the Development Agreement, the Company is entitled
to receive payments of an additional $100 million, in quarterly payments, a
portion of which has already been received. In addition, Microsoft and the
Company have agreed to engage in certain joint marketing efforts to promote
use of Windows NT Server-based multi-user software and the Company's ICA
protocol. Additionally, subject to the terms of the Development Agreement,
Microsoft has agreed to endorse only the Company's ICA protocol as the
preferred way to provide multi-user Windows access for devices other than
Windows client devices until at least November 1999 and the Company shall be
entitled to license its WinFrame technology based on Windows NT 3.51 until at
least September 30, 2001.
As a result of the Development Agreement, the Company will continue to
support the Microsoft Windows NT platform, but the MetaFrame products and
later releases will no longer incorporate Windows NT technology. The Company
plans to continue developing enhancements to its MetaFrame product line and
expects that this
11
product, WinFrame products and associated options and royalties derived under
the terms of the Development Agreement will constitute a majority of its
revenues for the foreseeable future.
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2 (as amended by SOP 98-4),
"Software Revenue Recognition" for 1998 and Statement of Position 91-1,
"Software Revenue Recognition" for 1996 and 1997. Product revenues are
recognized upon shipment of the software product only if no significant
Company obligations remain, the fee is fixed or determinable, and collection
of the resulting receivable is deemed probable. The initial fee of $75 million
relating to the Development Agreement is being recognized ratably over the
term of the contract, which is five years. The additional $100 million due
pursuant to the Development Agreement, as amended, is being recognized ratably
over the remaining term of the contract, effective April 1998. In the case of
non-cancelable product licensing arrangements under which certain Original
Equipment Manufacturers (OEMs) have software reproduction rights, initial
recognition of revenue also requires delivery and customer acceptance of the
product master or first copy. Subsequent recognition of revenues is based upon
reported royalties from the OEMs as well as estimates of royalties due through
the Company's reporting date. Revenue from packaged product sales to
distributors and resellers is recorded when related products are shipped. In
software arrangements that include rights to multiple software products, post-
contract customer support, and/or other services, the Company allocates the
total arrangement fee among each deliverable based on the relative fair value
of each of the deliverables determined based on vendor-specific objective
evidence. Product returns and sales allowances, including stock rotations, are
estimated and provided for at the time of sale. Non-recurring engineering fees
are recognized ratably as the work is performed. Revenues from training and
consulting are recognized when the services are performed. Service and
subscription revenues from customer maintenance fees for ongoing customer
support and product updates and upgrades are based on the price charged or
derived value of the undelivered elements and are recognized ratably over the
term of the contract, which is typically twelve months. Service revenues,
which are immaterial when compared to net revenues, are included in net
revenues on the face of the statement of income.
The Company has acquired and licensed technology related to its strategic
objectives. On October 2, 1997, the Company completed its acquisition of
certain of the assets, technology and operations of DataPac Australasia Pty
Limited for approximately $5.0 million in cash. In January 1998, the Company
licensed certain software technology from EPiCON, Inc., for approximately $8.0
million payable in cash. On February 5, 1998, the Company completed its
acquisition of certain of the assets, technology and operations of Insignia
Solutions, plc for approximately $17.5 million in cash. On June 30, 1998, the
Company acquired all of the outstanding securities of APM Limited, the parent
company of Digitivity Inc., for approximately $40.4 million in cash. In July
1998, the Company completed its acquisition of certain technologies of VDOnet
Corporation Ltd. for approximately $8.0 million in cash.
These acquisitions and licensing arrangement were accounted for under the
purchase method of accounting and in accordance with Accounting Principles
Board Opinion No. 16, "Accounting for Business Combinations." The Company
allocated the cost of the acquisitions to the assets acquired and the
liabilities assumed based on their estimated fair values using valuation
methods believed to be appropriate at the time. The acquired intangible assets
included in-process technology projects, among other assets, which were
related to research and development that had not reached technological
feasibility and for which there was no alternative future use. As a result of
the Securities and Exchange Commission Staff's letter to the American
Institute of Certified Public Accountants dated September 9, 1998 regarding
its views on in-process research and development ("IPR&D") write-offs, the
Company revised its calculations of the value of the acquired in-process
technology based on adjusted after-tax cash flows and reduced the amount of
the write-offs for purchased IPR&D to $2.7 million, $10.7 million and $2.4
million related to the Insignia, APM and VDOnet acquisitions, respectively,
and $2.6 million related to the licensing agreement with EPiCON. These
reductions have been reallocated to other intangible assets. After giving
effect to the re-evaluation, the Company recorded amortization of intangible
assets of $10.2 million and $100,000 and write-offs of IPR&D of $18.4 million
and $4.0 million for the years ended December 31, 1998 and 1997, respectively,
in accordance with applicable accounting pronouncements.
12
Results of Operations
The following table sets forth statement of operations data of the Company
expressed as a percentage of net revenues and as a percentage of change from
period-to-period for the periods indicated.
Year Ended
December 31, 1998 1997
------------------- Compared to Compared to
1998 1997 1996 1997 1996
----- ----- ----- ----------- -----------
Net revenues...................... 100.0% 100.0% 100.0% 100.6% 178.3%
Cost of revenues.................. 6.7 9.9 11.5 35.6 141.3
----- ----- -----
Gross margin...................... 93.3 90.1 88.5 107.8 183.1
----- ----- -----
Operating expenses:
Research and development........ 9.2 5.6 8.6 229.0 80.8
Sales, marketing and support.... 30.1 28.5 30.9 111.7 157.3
General and administrative...... 8.1 8.6 9.2 89.0 158.2
Amortization of intangible
assets......................... 4.1 -- -- * *
In-process research and
development.................... 7.4 3.2 -- * *
----- ----- -----
Total operating expenses...... 58.9 45.9 48.7 157.4 162.1
----- ----- -----
Income from operations............ 34.4 44.2 39.8 56.2 208.9
Interest income, net.............. 4.0 8.0 10.2 0.7 117.7
----- ----- -----
Income before income taxes........ 38.4 52.2 50.0 47.7 190.3
Income taxes...................... 13.8 18.8 8.0 47.7 553.2
----- ----- -----
Net income........................ 24.6% 33.4% 42.0% 47.7% 121.2%
===== ===== ===== ===== =====
- --------
* not meaningful.
Net Revenues. The Company's net revenues during 1998, 1997 and 1996 were
derived primarily from product license revenues. The increase in net revenues
in 1998 is primarily attributable to an increase in unit sales of the
Company's new MetaFrame product, which was first shipped in June 1998, and
increases in unit sales of system options products. System options products
include additional user licenses as well as other options, which are
applicable to both the WinFrame and MetaFrame product lines. To a lesser
extent, the increase in net revenues in 1998 was attributable to an increase
in unit sales of WinFrame and an increase in revenue related to the
Development Agreement with Microsoft.
The increase in net revenues in 1997 primarily reflects revenues generated
from the Company's WinFrame products, and to a lesser extent, increased volume
in licensing of OEM products, as well as the initial recognition of revenue
related to the Development Agreement with Microsoft. These increases in net
revenues during 1997 were partially offset by a decline in the Company's
WinView product revenues and, to a lesser extent, an increase in the Company's
provision for stock rotation of the previous version of WinFrame and product
returns.
An analysis of Company net revenue is detailed in the table below. Net
revenue is segregated into five main categories: WinFrame-based products,
MetaFrame-based products, system options products, OEM revenue, Microsoft
royalties and other revenue. The OEM revenue consists of license fees and
royalties from third party manufacturers who are granted a license to
incorporate and/or market the Company's multi-user technologies in their own
product offerings. The Company's WinFrame, MetaFrame and OEM revenues
represent product license fees based upon the Company's multi-user NT-based
technology. Microsoft royalties represent fees recognized in connection with
the Development Agreement.
13
Year Ended
December 31, Revenue Revenue
---------------- Growth Growth
1997 to 1996 to
1998 1997 1996 1998 1997
---- ---- ---- -------- --------
WinFrame-based products..................... 28% 49% 63% 14% 110%
MetaFrame-based products.................... 21 -- -- * *
System options products..................... 24 19 -- 160 *
OEM revenue................................. 9 19 26 (6) 101
Microsoft royalties......................... 13 8 -- 230 *
Other revenue............................... 5 5 11 84 26
--- --- --- --- ---
Net revenues................................ 100% 100% 100% 101% 169%
=== === === === ===
- --------
* not meaningful.
International. International revenues (sales outside of the United States)
accounted for approximately 31.6%, 20.6% and 15.8% of net revenues for the
years ended December 31, 1998, 1997 and 1996, respectively, and are expected
to account for a larger percentage of revenue in 1999. See Note 13 to the
Company's Consolidated Financial Statements appearing in Item 8 of this Annual
Report.
The Company will continue investing in international markets and expanding
its international operations by establishing additional foreign operations,
hiring personnel, expanding its international sales force and adding third
party channel partners. International revenues may fluctuate in future periods
as a result of difficulties in staffing, dependence on an independent
distribution channel, competition, variability of foreign economic and
political conditions and changing restrictions imposed by regulatory
requirements, localized product release timing and marketing such products in
foreign countries.
Cost of Revenues. Cost of revenues consisted primarily of the cost of
royalties, product media and duplication, manuals, packaging materials and
shipping expense. Cost of OEM revenues included in cost of revenues primarily
consisted of cost of royalties, except where the OEM elected to purchase
shrink-wrapped products, in which case such costs were as described in the
previous sentence. All development costs incurred in connection with the
Development Agreement are expensed as incurred as a separate component of cost
of revenues. All development costs included in the research and development of
software products and enhancements to existing products have been expensed as
incurred except for certain intangible assets related to the acquisitions and
licensing arrangement described herein.
Gross Margin. The increase in gross margin as a percent of gross revenues
from 1997 to 1998 was primarily attributable to the introduction of the
MetaFrame product line which has a relatively high gross margin contribution,
as it bears no royalty, compared to the WinFrame product line. In the third
quarter of 1997, the Company began shipping WinFrame version 1.7, which had a
higher gross margin than the previous WinFrame version, due to lower royalty
fees and fewer components. The overall increase in 1998 gross margin was
partially offset by gross margin contribution related to the Development
Agreement revenue, which has a lower gross margin as a percentage of net
revenue.
The increase in gross margin as a percent of gross revenues from 1996 to
1997 was primarily attributable to changes in product mix, representing
changes in the mix of OEM revenues versus product sold to distributors and
resellers, and different products within the WinFrame product line, which were
partially offset by the gross margin related to the Development Agreement
revenues.
Research and Development Expenses. Research and development expenses
consisted primarily of personnel-related costs. To date, all internal software
development costs have been expensed as incurred. Increases in research and
development expenses in 1998 and 1997 resulted primarily from additional
staffing, associated salaries and related expenses required to expand and
enhance the Company's product lines. Additionally, in 1998, research and
development expenses increased as a result of third-party expenses associated
14
with the translation and localization of the MetaFrame and WinFrame products,
as well as increased expenses associated with the Company's software products
and technology. In 1998 and 1997, these costs were partially offset by the
allocation of certain research and development expenses to cost of revenues
for the portion of these expenses associated with the Development Agreement
revenues.
Sales, Marketing and Support Expenses. Increases in sales, marketing and
support expenses in 1998 resulted, in part, from increases in sales, marketing
and support staff and associated salaries, commissions and related expenses.
Increases in sales, marketing and support expenses in 1998 and 1997 resulted
primarily from increases in promotional and advertising activities, which
include co-op advertising programs and other promotional activities such as
those directed at resellers, training programs, trade shows and other direct
mail and advertising activities. Additionally, sales and marketing staff and
associated salaries, commissions and related expenses, also increased. Such
increases in sales, marketing and support expenses resulted from efforts to
expand product-specific marketing programs, such as the MetaFrame launch in
1998, and increased efforts to expand the Company's product distribution
channels in 1997.
General and Administrative Expenses. Increases in general and administrative
expenses in 1998 and 1997 resulted primarily from increased staff, associated
salaries and related expenses necessary to support overall increases in the
scope of the Company's operations, and in 1997, increased legal fees due to
contract negotiations and litigation defense as well as an increase in the
provision for doubtful accounts due to an increased level of accounts
receivable attributable to each period's respective increase in sales.
Amortization of Intangible Assets. The increase in amortization of goodwill
and identifiable intangible assets in 1998 is due to the Insignia, APM and
VDOnet acquisitions and EPiCON licensing arrangement. As of December 31, 1998,
the Company had net goodwill of $4.6 million associated with these
transactions remaining to be amortized over four years following the
acquisitions. In addition, the Company had other net identifiable intangible
assets of $41.6 million associated with the 1998 acquisitions and licensing
arrangement remaining to be amortized over three to four years, as applicable.
See "--In-Process Research and Development."
In-Process Research and Development. During 1998, the Company completed the
acquisition and licensing of certain in-process software technologies in which
it allocated a portion of the purchase price to IPR&D. The Company allocated
$2.7 million, $10.7 million and $2.4 million for IPR&D related to the
Insignia, APM and VDOnet acquisitions, respectively, and $2.6 million for
IPR&D related to the licensing agreement with EPiCON, after giving effect to
the re-evaluation, as further discussed in Note 2 to the Consolidated
Financial Statements and "--Overview."
Since the respective dates of acquisition and licensing, the Company has
used the acquired in-process technology to develop new product offerings and
enhancements, which have or will become part of the Company's suite of
products when completed. Functionality included in products using the acquired
in-process technology have been introduced at various times following the
respective transaction dates of the acquired assets and licensing, and the
Company currently expects to complete the development of the remaining
projects at various dates between 1999 and 2000. Upon completion, the Company
has offered and intends to offer the related products to its customers.
The nature of the efforts required to develop and integrate the acquired in-
process technology into commercially viable products or features and
functionalities within the Citrix suite of existing products principally
relate to the completion of all planning, designing and testing activities
that are necessary to establish that the products can be produced to meet
design requirements, including functions, features and technical performance
requirements. The Company currently expects that products utilizing the
acquired in-process technology will be successfully developed, but there can
be no assurance that commercial viability of any of these products will be
achieved. Furthermore, future developments in the software industry,
particularly the server-based computing environment, changes in technology,
changes in other products and offerings or other developments may cause the
Company to alter or abandon product plans.
15
Failure to complete the development of these projects in their entirety, or
in a timely manner, could have a material, adverse impact on the Company's
financial condition and results of operations. No assurance can be given that
actual revenues and operating profit attributable to acquired in-process
research and development will not deviate from the projections used to value
such technology in connection with each of the respective acquisitions.
Ongoing operations and financial results for acquired assets and licensed
technology, and the Company as a whole, are subject to a variety of factors
which may not have been known or estimable at the date of such transaction,
and the estimates discussed below should not be considered the Company's
current projections for operating results for the acquired assets or licensed
technology or the Company as a whole.
The fair value of the in-process technology in each acquisition was based on
analyses of the markets, projected cash flows and risks associated with
achieving such projected cash flows. In developing these cash flow
projections, revenues were estimated based on relevant factors, including
aggregate revenue growth rates for the business as a whole, individual service
offering revenues, characteristics of the potential market for the service
offerings and the anticipated life of the underlying technology. Operating
expenses and resulting profit margins were estimated based on the
characteristics and cash flow generating potential of the acquired in-process
research and development, and included assumptions that certain expenses would
decline over time as operating efficiencies were obtained. The Company assumed
material net cash inflows would commence in 1999 for the EPiCON licensing
agreement and Insignia acquisition and in 2000 for the APM and VDOnet
acquisitions. Appropriate adjustments were made to operating income to derive
net cash flow, and the estimated net cash flows of the in-process technologies
in each acquisition were then discounted to present value using rates of
return that the Company believes reflect the specific risk/return
characteristics of these research and development projects. The selection of
discount rates for application in each acquisition were based on the
consideration of: (i) the weighted average cost of capital, which measures a
company's cost of debt and equity financing weighted by the percentage of debt
and percentage of equity in its target capital structure; (ii) the
corresponding weighted average return on assets which measures the after-tax
return required on the assets employed in the business weighted by each asset
group's percentage of the total asset portfolio; and (iii) venture capital
required rates of return which typically relate to equity financing for
relatively high-risk business projects. The risk adjusted discount rates were
35%, 40%, 50% and 50% for the EPiCON licensing agreement, Insignia, APM and
VDOnet acquisitions, respectively.
Revenues attributable to the acquired in-process technology were assumed to
increase depending on the product between the first two to five years of six
to seven year projection periods at annual rates ranging from 20% to 264%
before decreasing over the remaining years at rates ranging from 7% to 68% as
other products are released in the marketplace. Projected annual revenue
attributable to the products ranged from approximately $0.6 million to $74.6
million over the term of the projections. These projections were based on
aggregate revenue growth rates for the business as a whole, individual product
revenues, giving consideration to transaction volumes and prices, anticipated
growth rates for the client-server market, anticipated product development and
product introduction cycles, and the estimated life of the underlying
technology. Projected revenues from the in-process research and development
were assumed to peak during periods between 1999 and 2002, depending on the
product, and decline from 2000 to 2004 as other new products are expected to
enter the market.
Gross profit was assumed to increase in the first two to five years of the
projection period, depending on the product, at annual rates ranging from 20%
to 266%, decreasing over the remaining years at rates ranging from 7% to 68%
annually, resulting in annual gross profits ranging from approximately
$600,000 to $69.2 million. The gross profit projections assumed a growth rate
approximately the same as the revenue growth rate.
Operating profit was assumed to increase depending on the product, in the
first two to four years of the projection period at annual rates ranging
between 19% and 255%, and decrease over the remaining years at rates between
3% and 75% annually, resulting in annual operating profits of approximately
$0.3 million to $31.2 million. Operating profit projections assumed a growth
rate approximately the same as the revenue growth rate.
The Company used discount rates ranging from 35% to 50% for valuing the in-
process research and development acquired in these transactions, which the
Company believes reflected the risk associated with the
16
completion of the individual research and development projects acquired and
the estimated future economic benefits to be generated subsequent to the
projects' completion.
A description of the in-process research and development and the estimates
made by the Company for each of DataPac, EPiCON, Insignia, APM/Digitivity and
VDOnet is summarized below. All of the acquired projects are targeted for the
server-based computing market. After the acquisition or license of each
technology, the Company has continued the development of these in-process
projects.
DataPac
The in-process research and development acquired in the DataPac acquisition
consisted primarily of one significant research and development project, VGA
Connect, together with two minor projects. VGA Connect is designed as an add-
on to WinFrame software and allows MVGA cards to be used as direct connect
workstations. The Company estimated these projects were less than 25% complete
at the date of acquisition. The aggregate value assigned to the DataPac in-
process research and development was $3.95 million. At the time of the
valuation, the expected cost to complete all such projects was approximately
$220,000.
EPiCON
The in-process research and development acquired in the license of EPiCON
technology consisted of one significant research and development project,
Application Installation Services. This project enables an application to be
installed once on a server and then replicated to all other servers in a
server farm configuration, and is targeted for the server-based computing
market. At the date of licensing, EPiCON was shipping its Windows NT 3.51
version of its ALTiS application deployment product and was testing its
Windows NT 4.0 version. Neither the Windows NT 3.51 version nor the Windows NT
4.0 version of the ALTiS product was operating in a Citrix MetaFrame or
WinFrame environment at the date of licensing. After licensing the EPiCON
technology, the Company continued the development of this in-process project,
which the Company estimated was less than 60% complete at the date of
licensing. The aggregate value assigned to the in-process research and
development was $2.6 million, after giving effect of the re-evaluation
described in "--Overview." At the time of the valuation, the expected cost to
complete the project was approximately $300,000. As of December 31, 1998,
approximately $700,000 had been incurred since the date of licensing. The
Company estimates that approximately $400,000 will be required to complete the
remaining research and development project and it is expected to be completed
during the first half of 1999. The remaining efforts to complete the project
are primarily the migration of the core processing from the client environment
to the server environment and the integration of such technology into the
Company's MetaFrame and WinFrame products. The research and development risks
associated with this project primarily reside with the migration of the
Application Installation Services technology to the Company's MetaFrame and
WinFrame platforms, which are based on server-based computing technology.
Insignia
The in-process research and development acquired in the Insignia acquisition
consisted primarily of one significant research and development project,
Keoke, a video display protocol designed to add performance and bandwidth
management enhancements to ICA in WinFrame and MetaFrame software. The Company
estimated this project was less than 40% complete at the date of acquisition.
The aggregate value assigned to in-process research and development was $2.7
million. At the date of the valuation, the expected cost to complete the Keoke
and other projects related to the acquisition was approximately $1.9 million.
As of December 31, 1998, approximately $700,000 had been incurred since the
date of acquisition. The Company estimates that approximately $600,000 will be
required to complete the remaining research and development project and it is
expected to be completed by the end of 1999. The remaining efforts to complete
the project are primarily the utilization of performance enhancements and
algorithmic methodologies of the Keoke protocol to create similar improvements
in the Company's ICA protocol. The research and development risks associated
with this project primarily relate to the integration of key performance
features of Keoke into the Company's ICA protocol.
17
APM
The in-process research and development acquired in the APM acquisition
consisted primarily of one significant research and development project. The
project is a Windows NT-based application server for Java, which is similar to
WinFrame software, but actually runs Java applications. At the date of the
acquisition, APM was shipping a secure server-based enterprise solution that
helped companies deploy and manage intranet and Internet-based Java
applications. The Company estimated this project was less than 45% complete at
the date of acquisition. The aggregate value assigned to the in-process
research and development was $10.7 million. At the time of the valuation, the
expected cost to complete the project was approximately $8.0 million. As of
December 31, 1998, approximately $2.0 million had been incurred since the date
of acquisition. The Company estimates that approximately $3.6 million will be
required to complete the remaining research and development project and it is
expected to be completed in 2000. The remaining effort to complete the project
is primarily the utilization of acquired technology to develop an application
server for Java that would operate in a MetaFrame and WinFrame server
environment. The research and development risks associated with this project
relate primarily to updating the acquired technology to be compatible with Sun
Microsystems' Java 2.0 application, integrating and porting such technology
into a variety of server-based computing architectures.
VDOnet
The in-process research and development acquired in the VDOnet acquisition
consisted primarily of one significant research and development project, ICA
Video Services. This project allows video applications and applications
containing video to be viewed on an ICA client, and is targeted for the
server-based computing market. At the date of acquisition, VDOnet was shipping
a client/server video streaming product. The product operated in a
client/server environment but was not operational in a Citrix MetaFrame or
WinFrame environment. After acquiring VDOnet, the Company continued the
development of this in-process project, which the Company estimates was less
than 65% complete at the date of acquisition. The aggregate value assigned to
the in-process research and development was $2.4 million. At the time of the
valuation, the expected cost to complete the project was approximately
$200,000. As of December 31, 1998, approximately $1.1 million had been
incurred since the date of acquisition. The Company estimates that
approximately $1.8 million will be required to complete the remaining research
and development project and it is expected to be completed in 2000. The
remaining effort to complete the project is primarily the utilization of
acquired technology to develop a video server that will provide video
applications to an ICA client. The research and development risks associated
with this project relate primarily to integrating this product into the
server-based computing environment.
There can be no assurance that the Company will not incur additional charges
in subsequent periods to reflect costs associated with these transactions or
that the Company will be successful in its efforts to integrate and further
develop these technologies.
Interest Income, Net. The increase in interest income, net, in 1997 was
primarily due to interest income earned on additional cash generated from the
receipt of an initial license fee under the terms of the Development Agreement
and, to a lesser extent, interest income generated from the net proceeds of
the Company's public offering completed in June 1996.
Income Taxes. The Company's effective tax rate amounted to 36% in 1998 and
1997 and 16% in 1996. The increase in the 1997 effective annual tax rate is
primarily due to the Company's increased profitability and lack of net
operating loss carryforwards to offset taxable income in the current year.
Such net operating loss carryforwards were included in the computation of the
effective tax rate utilized in 1996.
Liquidity and Capital Resources
During 1998, cash provided by operating activities was $119.3 million. The
cash inflow from operating activities was primarily attributable to the
receipt of $55 million under the terms of the Development Agreement,
recognition of tax benefits from the exercise of non-statutory stock options
and disqualifying dispositions of incentive stock options of approximately
$24.2 million and an increase in deferred revenue of approximately
18
$30.3 million. These cash inflows were partially offset by increases in
accounts receivable and deferred tax assets of $19.7 million and $14.5
million, respectively. Cash used in investing activities of $148.2 million for
1998 related primarily to the purchase of investments of $284.8 million and
partially offset by cash inflows from the sale of investments totaling $219.9
million. Cash was also used for acquisitions and a licensing agreement
totaling $70.5 million and the expenditure of approximately $12.4 million for
the purchase of leasehold improvements and equipment to support the Company's
growth and expansion into new facilities. Cash provided by financing
activities of $15.3 million related primarily to the proceeds from the
issuance of common stock under the Company's stock option and employee stock
purchase plans.
During 1997, the Company generated positive operating cash flows primarily
from the receipt of an initial license fee of $75 million related to the
Development Agreement. The revenues from this Development Agreement are being
recognized ratably over the contract period of five years, which caused a
substantial increase in deferred revenue relating to the Development
Agreement. Additionally, during the same period, the Company increased
profitability, which was partially offset by an increase in deferred tax
assets attributable to the taxability of the initial license fee received
under the terms of the Development Agreement. The Company also recognized tax
benefits from the exercise of non-statutory stock options and disqualifying
dispositions of incentive stock options of approximately $10.7 million. The
Company also purchased and sold short-term investments for approximately
$126.5 million and $75.6 million, respectively, during 1997. Additionally, the
Company expended approximately $6.1 million in the same period for the
purchase of leasehold improvements and equipment. These capital expenditures
were primarily associated with the Company's relocation and expansion in its
new facilities.
In 1996, the Company generated positive operating cash flows primarily from
increased profitability. In June 1996, the Company completed a public offering
which generated net proceeds of approximately $73.3 million. During 1996, the
Company recognized tax benefits from the exercise of non-statutory stock
options and disqualifying dispositions of incentive stock options of
approximately $6.3 million. Additionally, deferred tax assets increased during
1996 by approximately $3.2 million.
At December 31, 1998, the Company had $281.6 million in cash and investments
and $158.9 million of working capital. The Company's cash and cash equivalents
are invested in investment grade, highly liquid securities to minimize
interest rate risk and allow for flexibility in the event of immediate cash
needs. At December 31, 1998, the Company had $32.8 million in accounts
receivable, net of allowances, and $98.7 million of deferred revenues, of
which the Company anticipates $49.9 million will be earned over the next 12
months.
The Company believes existing cash and investments together with cash flow
expected to be generated from operations, if any, will be sufficient to meet
operating and capital expenditures requirements through 1999. The Company may
also from time to time seek to raise additional funds through public or
private financings.
Year 2000 Readiness Disclosure
Until recently, many computer programs were written using two digits rather
than four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. The consequences of this issue may include systems failures and business
process interruption to the extent companies fail to upgrade, replace or
otherwise address year 2000 problems. The year 2000 problem may also result in
additional business and competitive differentiation. Aside from the well-known
calculation problems with the use of 2-digit date formats as the year changes
from 1999 to 2000, the year 2000 is a special case leap year. As a result,
significant uncertainty exists in the software industry concerning the
potential impact of the year 2000 problem.
The Company believes that it has four general areas of potential exposure
with respect to the year 2000 problem: (i) its own software products; (ii) its
internal information systems; (iii) computer hardware and other equipment
related systems; and (iv) the effects of third party compliance efforts.
19
The Company's existing principal software product lines consist of WinFrame
and MetaFrame software. The Company's WinFrame product line is an authorized
extension to Microsoft Windows NT 3.51. The Company's MetaFrame product line
adds additional functionality to NT Terminal Server. Customers can obtain
current information about the year 2000 compliance of the Company's products
from the Company's web site. Information on the Company's web site is provided
to customers for the sole purpose of assisting in planning for the transition
to the year 2000. Such information is the most currently available concerning
the behavior of the Company's products in the next century and is provided "as
is," without warranty of any kind.
While the Company believes that the current versions of its WinFrame and
MetaFrame products are capable of storing four-digit year data, allowing
applications to differentiate between dates from the 1900s and the year 2000
and beyond, the potential incompatibility with two-digit application programs
may limit the Company's sales of product in those situations. Further,
notwithstanding the operating system's ability to store four-digit year data,
it is typically the application's function to collect and properly store date
data. There can be no assurance that the Company's products will not be
integrated by the Company or its customers with, or otherwise interact with,
non-year 2000 compliant software or other products which may malfunction and
expose the Company to claims from its customers or other third parties. The
foregoing could result in the loss of or delay in market acceptance of the
Company's products and services, increased service costs to the Company or
payment by the Company of compensatory or other damages. Although the Company
believes that many Windows applications do store four-digit year dates today,
it is possible that some applications are now or have historically only
collected two-digit year data, and in such cases WinFrame cannot create four-
digit year data for applications which have collected only two digits in year
fields. Further, there can be no assurance that the Company's software
products that are designed to be year 2000 compliant contain all necessary
technology to make them year 2000 compliant. If any of the Company's licensees
experience year 2000 problems, such licensees could assert claims for damages
against the Company.
With respect to internal information systems, the Company has commenced, but
has not yet completed, a testing and compliance program to identify any year
2000 problems. An audit has been conducted to identify all business critical
applications and responses sought from vendors as to whether the application
is compliant or not and what plans they have in place to ensure compliance
before December 31, 1999.
The third type of potential year 2000 exposure relates to the Company's
computer hardware and other equipment related systems including such equipment
as the Company's workstations, phone systems, security systems and elevator
systems. The Company is in the final stages of identifying and evaluating such
systems' year 2000 exposure. At this point, the Company has not discovered any
significant potential year 2000 exposure regarding its computer hardware and
other equipment related systems. The Company expects to complete this portion
of its compliance plan by the end of the second quarter of 1999. The Company
does not expect costs incurred to have a material adverse effect on its
financial condition.
The fourth aspect of the Company's year 2000 analysis involves evaluating
the year 2000 efforts of third parties, including critical suppliers and other
partners with whom the Company has strategic relationships. The Company is in
the process of contacting such critical suppliers and other parties through
written and/or telephone inquiries. The Company is conducting such inquiries
with existing personnel and does not expect the costs of such inquiries to be
material. If the Company determines, after conducting the aforementioned
survey, that the year 2000 exposure of any critical suppliers or other
strategic relationships could result in material disruptions to their
respective businesses, the Company may develop appropriate contingency plans.
Further, if certain critical third party providers, such as those supplying
outsourced manufacturing, electricity, water, or telecommunications services,
experience difficulties resulting in a material interruption of services to
the Company, such interruption would likely result in a material adverse
effect on the Company's business, results of operations and financial
condition.
To date, the Company has not incurred any material expenditure in connection
with identifying or evaluating year 2000 compliance issues. The Company
estimates it will not incur any material levels of expenditure on this issue
during 1999 to support its compliance initiatives. Most of these expenses have
been,
20
and in the future are expected to be, related to the opportunity costs of
employees evaluating the Company's financial and accounting software, the
current versions of the Company's products, and year 2000 compliance matters
generally. The Company believes that it is unlikely to experience a material
adverse impact on its financial condition or results of operations due to year
2000 compliance issues. However, since the assessment process is ongoing, year
2000 complications are not fully known, and potential liability issues are not
clear, the full potential impact of the year 2000 on the Company is not known
at this time.
As the Company has recently replaced its fundamental financial and
accounting software, no significant problems are anticipated which would
result in either the delay or the inability to process accounting and
financial data. If the audit of the other software applications used by
Company leads to the discovery of further year 2000 compliance issues, the
Company intends to evaluate the need for one or more contingency plans
relating to such issues.
The Company's expectations as to the extent and timeliness of modifications
required in order to achieve year 2000 compliance is a forward-looking
statement subject to risks and uncertainties. Actual results may vary
materially as a result of a number of factors, including, among others, those
described in this paragraph. There can be no assurance however, that the
Company will be able to successfully modify on a timely basis such products,
services and systems to comply with year 2000 requirements, which failure
could have a material adverse effect on the Company's operating results.
Further, while the Company believes that its year 2000 compliance efforts will
be completed on a timely basis, and in advance of the year 2000 date
transition, there can be no assurance that unexpected delays or problems,
including the failure to ensure year 2000 compliance by systems or products
supplied to the Company by a third party, will not have an adverse effect on
the Company, its financial performance, or the competitiveness or customer
acceptance of its products. Further, the Company's current understanding of
expected costs is subject to change as the project progresses and does not
include potential costs related to actual customer claims, or the cost of
internal software and hardware replaced in the normal course of business
unless such installation has been accelerated to provide solutions to year
2000 compliance issues.
European Monetary Union
On January 1, 1999 eleven of the existing members of the European Union
("EU") joined the European Monetary Union. This will lead, among many other
things, to fundamental changes in the way participating EU states implement
their monetary policies and manage local currency exchange rates. Ultimately,
there will be a single currency within certain countries of the EU, known as
the Euro and one organization, the European Central Bank, responsible for
setting European monetary policy. While some believe that the change will
bring a higher level of competition within Europe and a greater sense of
economic stability within that region, there is no certainty that the
Company's activity in this region will necessarily realize any benefits as a
result of such changes. The Company has reviewed the impact the Euro will have
on its business and whether this will give rise to a need for significant
changes in its commercial operations or treasury management functions. While
it is uncertain whether there will be any immediate direct benefits from the
planned conversion, the Company believes it is properly prepared to
accommodate any changes deemed necessary after January 1, 1999 without any
significant changes to its current commercial operations, treasury management
and management information systems.
Certain Factors Which May Affect Future Results
The Company does not provide financial performance forecasts. Citrix's
operating results and financial condition have varied in the past and may in
the future vary significantly depending on a number of factors. Except for the
historical information in this report, the matters contained in this report
include forward-looking statements that involve risks and uncertainties. The
following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time. Such factors,
among others, may have a material adverse effect upon the Company's business,
results of operations and financial condition.
21
Reliance Upon Strategic Relationship with Microsoft
Microsoft is the leading provider of desktop operating systems. Citrix
depends upon the license of key technology from Microsoft, including certain
source and object code licenses and technical support. Citrix also depends
upon its strategic alliance agreement with Microsoft pursuant to which the
Company and Microsoft have agreed to cooperate to develop advanced operating
systems and promote Windows application program interfaces. The Company's
relationship with Microsoft is subject to the following risks and
uncertainties:
. Competition with Microsoft. NT Terminal Server is, and future product
offerings by Microsoft may be, competitive with Citrix's current WinFrame
and MetaFrame products, and any future product offerings by Citrix.
. Termination of Microsoft's Endorsement of the ICA Protocol. Microsoft has
agreed to endorse only the Company's ICA protocol as the preferred method
to provide multi-user Windows access for devices other than Windows
clients until at least November 1999. Subsequent to November 1999, or
before November 1999 if certain events occur as provided in the
Development Agreement, it is possible that Microsoft will market or
endorse other methods to provide non-Windows client devices multi-user
Windows access.
. Dependence on Microsoft for Commercialization. Citrix's ability to
successfully commercialize its MetaFrame product depends on Microsoft's
ability to market NT Terminal Server products. Citrix does not have
control over Microsoft's distributors and resellers and, to the Company's
knowledge, Microsoft's distributors and resellers are not obligated to
purchase products from Microsoft.
. Product Release Delays. There may be delays in the release and shipment
of future versions of NT Terminal Server.
Dependence Upon Broad-Based Acceptance of ICA Protocol
Citrix believes that its success in the markets in which it competes will
depend upon its ability to make ICA protocol a widely accepted standard for
supporting Windows applications. If another standard emerges or if the Company
otherwise fails to achieve wide acceptance of the ICA protocol as a standard
for supporting Windows applications, the Company's business, operating results
and financial condition could be materially adversely affected. Microsoft
includes as a component of NT Terminal Server its Remote Desktop Protocol
(RDP) which has certain of the capabilities of the Company's ICA protocol, and
may offer customers a competitive solution. The Company believes that its
success is dependent on its ability to enhance and differentiate its ICA
protocol, and foster broad acceptance of the ICA protocol based on its
performance, scalability, reliability and enhanced features. In addition, the
Company's ability to win broad market acceptance of its ICA protocol will
depend upon the degree of success achieved by its strategic partners in
marketing their respective platforms, product pricing and customers'
assessment of its technical, managerial service and support expertise. If
another standard emerges or if the Company fails to achieve wide acceptance of
the ICA protocol as a standard for supporting Windows applications, the
Company's business, operating results and financial condition could be
materially adversely affected.
Dependence Upon Strategic Relationships
In addition to its relationship with Microsoft, the Company has strategic
relationships with IBM, Compaq, Wyse and others. The Company depends upon its
strategic partners to successfully incorporate the Company's technology into
their products and to market and sell such products. If the Company is unable
to maintain its current strategic relationships or develop additional
strategic relationships, or if any of its key strategic partners are
unsuccessful at incorporating its technology into their products or marketing
or selling such products, the Company's business, operating results and
financial condition could be materially adversely affected.
Competition
The markets in which Citrix competes are intensely competitive. Most of its
competitors and potential competitors, including Microsoft, have significantly
greater financial, technical, sales and marketing and other resources than the
Company. The announcement of the release and the actual release of products
competitive with the Company's existing and future product lines, such as NT
Terminal Server and related enhancements,
22
could cause existing and potential customers of the Company to postpone or
cancel plans to license the Company's product lines. This would adversely
impact the Company's business, operating results and financial condition.
Further, the Company's ability to market ICA, MetaFrame and other future
product offerings may be affected by Microsoft's licensing and pricing scheme
for client devices implementing the Company's product offerings which attach
to NT Terminal Server.
In addition, alternative products exist for Internet commerce that directly
or indirectly compete with the Company's products. Existing or new products
that extend web site software to provide database access or interactive
computing can materially impact the Company's ability to sell its products in
this market. As markets for the Company's products continue to develop,
additional companies, including companies with significant market presence in
the computer hardware, software and networking industries, may enter the
markets in which the Company competes and further intensify competition.
Finally, although the Company believes that price has historically been a less
significant competitive factor than product performance, reliability and
functionality, the Company believes that price competition may become more
significant in the future. The Company may not be able to maintain its
historic prices, and any inability to do so could adversely affect its
business, results of operations and financial condition.
As a result of these and other factors, the Company may not be able to
compete effectively with current or future competitors, which would have a
material adverse effect on its business, operating results and financial
condition.
Dependence on Proprietary Technology
Citrix relies primarily on a combination of copyright, trademark and trade
secret laws, as well as confidentiality procedures and contractual provisions,
to protect its proprietary rights. The Company's efforts to protect its
proprietary technology rights may not be successful. The loss of any material
trade secret, trademark, tradename, or copyright could have a material adverse
affect on the Company. Despite the Company's precautions, it may be possible
for unauthorized third parties to copy certain portions of the Company's
products or to obtain and use information regarded as proprietary.
Substantially all of the Company's sales are derived from the licensing of its
products under "shrink wrap" license agreements that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, the Company's ability to protect its proprietary
rights may be affected by the following:
. Differences in International Law. The laws of some foreign countries do
not protect the Company's intellectual property to the same extent as do
the laws of the United States and Canada.
. Third Party Infringement Claims. Third parties may assert infringement
claims against the Company in the future. This may result in costly
litigation or require the Company to obtain a license to intellectual
property rights of such third parties. Such licenses may not be available
on reasonable terms or at all.
As a result of these and other factors, the Company may not be able to
compete effectively with current or future competitors, which would have a
material adverse effect on the Company's business, operating results and
financial condition.
Product Concentration
The Company anticipates that its MetaFrame and WinFrame product lines and
related enhancements will constitute the majority of its revenue for the
foreseeable future. The MetaFrame product, when combined with NT Terminal
Server, provides capabilities similar to those currently offered in the
WinFrame technology line. Therefore, the Company's ability to generate revenue
from its MetaFrame product will depend upon market acceptance of NT Terminal
Server products. The Company expects that revenue from MetaFrame-based
products will constitute an increasing percentage of total revenue in the near
future and that revenue from WinFrame-based products will decrease over time
as a percentage of total revenue. Declines in demand for products based on
WinFrame technology may occur as a result of new competitive product releases,
price competition, lack of
23
success of its strategic partners, technological change or other factors. In
addition, the introduction of products based on the MetaFrame technology may
create competition with its WinFrame product line and may delay or replace
orders of either product line.
Year 2000
Until recently, many computer programs were written using two digits rather
than four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. The consequences of this issue may include systems failures and business
process interruption to the extent companies fail to upgrade, replace or
otherwise address year 2000 problems. The year 2000 problem may also result in
additional business and competitive differentiation. Aside from the well-known
calculation problems with the use of 2-digit date formats as the year changes
from 1999 to 2000, the year 2000 is a special case leap year and in many
organizations using older technology, dates were used for special programmatic
functions. As a result, significant uncertainty exists in the software
industry concerning the potential impact of the year 2000 problem. The Company
believes it has four general areas of potential exposure with respect to the
year 2000 problem:
. its own software products;
. its internal information systems;
. computer hardware and other equipment related systems; and
. the effects of compliance efforts by third parties, including our
partners, suppliers and vendors.
While the Company believes that the current versions of its WinFrame and
MetaFrame products are currently capable of storing four-digit year data,
allowing applications to differentiate between dates from the 1900s and the
year 2000 and beyond, the potential incompatibility with two-digit application
programs may limit the Company's sales of product in those situations. There
can be no assurance that the Company's products will not be integrated by the
Company or its customers with, or otherwise interact with, non-year 2000
compliant software or other products which may malfunction and expose the
Company to claims from its customers or other third parties.
The Company has not yet completed its assessment of Year 2000 compliance
issues with respect to all of these areas. Since the year 2000 complications
are not fully known, potential year 2000 problems could materially adversely
affect the Company's business, results of operations and financial condition.
Dependence on Key Personnel
The Company's success will depend, in large part, upon the services of a
number of key employees. The Company does not have long-term employment
agreements with any of its key personnel. Any officer or employee can
terminate his relationship at any time.
The effective management of the Company's anticipated growth will depend, in
a large part, upon the Company's ability to (i) retain its highly skilled
technical, managerial and marketing personnel; and (ii) to attract and
maintain replacements for and additions to such personnel in the future.
Competition for such personnel is intense and may affect the Company's ability
to successfully attract, assimilate or retain sufficiently qualified
personnel.
New Products and Technological Change
The markets for the Company's products are relatively new and are
characterized by:
. rapid technological change;
. evolving industry standards;
. changes in end-user requirements; and
. frequent new product introductions and enhancements, including
enhancements to certain key technology licensed from Microsoft.
24
These market characteristics will require the Company to continually enhance
its current products and develop and introduce new products to keep pace with
technological developments and respond to evolving end-user requirements.
Additionally, the Company and others may announce new product enhancements or
technologies that could replace or shorten the life cycle of the Company's
existing product offerings.
The Company believes it will incur additional costs and royalties associated
with the development, licensing or acquisition of new technologies or
enhancements to existing products. This will increase the Company's cost of
revenues and operating expenses. The Company cannot currently quantify such
increase with respect to transactions that have not occurred. The Company may
use a substantial portion of its cash and investments to fund these additional
costs, resulting in a decrease in interest income, unless such decrease is
offset by cash flows from future operations.
The Company may need to hire additional personnel to develop new products,
product enhancements and technologies and to fulfill the Company's
responsibilities under the terms of the Development Agreement. If the Company
is unable to add additional staff and resources, future enhancement and
additional features to its existing or future products may be delayed, which
may have a material adverse effect on the Company's business, results of
operations and financial condition.
Potential for Undetected Errors
Despite significant testing by the Company and by current and potential
customers, new products may contain errors after commencement of commercial
shipments. Additionally, the Company's products depend upon certain third
party products which may contain defects and could reduce the performance of
the Company's products or render them useless. Since the Company's products
are often used in mission-critical applications, errors in the Company's
products or the products of third parties upon which the Company's products
rely could give rise to warranty or other claims by the Company's customers.
Reliance Upon Indirect Distribution Channels and Major Distributors
The Company relies significantly on independent distributors and resellers
for the marketing and distribution of its products. The Company does not
control its distributors and resellers. Additionally, the Company's
distributors and resellers are not obligated to purchase products from the
Company and may also represent other lines of products.
Need to Expand Channels of Distribution
The Company intends to leverage its relationships with hardware and software
vendors and systems integrators to encourage them to recommend or distribute
the Company's products. In addition, an integral part of the Company's
strategy is to expand its direct sales force and add third-party distributors
both domestically and internationally. The Company is currently investing, and
intends to continue to invest, significant resources to develop these
channels, which could reduce the Company's profits.
Maintainence of Growth Rate
The Company's revenue growth rate in 1999 may not approach the levels
attained in 1998, 1997 and 1996. The Company's growth during those three years
is largely attributable to the introduction of MetaFrame in mid-1998 and
WinFrame in late 1995. To the extent revenue growth continues, the Company
believes that its cost of revenues and certain operating expenses will also
increase. Due to the fixed nature of a significant portion of such expenses,
together with the possibility of slower revenue growth, its income from
operations and cash flows from operating and investing activities may decrease
as a percentage of revenues in 1999.
New Accounting Pronouncements
In March 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." The Company plans to adopt SOP 98-1 in 1999, which
will require the capitalization of certain costs incurred after the date of
adoption in
25
connection with developing or obtaining software for internal use. The Company
currently expenses such costs as incurred. Management has not yet determined
what the effect of SOP 98-1 will be on the Company's consolidated financial
position, results of operations or cash flows.
In-Process Research and Development Valuation
The Company recently re-evaluated the amounts previously charged to in-
process research and development in connection with certain acquisitions and
licensing arrangements. The amount and rate of amortization of such amounts
are subject to a number of risks and uncertainties, including, without
limitation, the effects of any changes in accounting standards or guidance
adopted by the staff of the Commission or the accounting profession. Any
changes in accounting standards or guidance adopted by the staff of the
Commission, may materially adversely affect future results of operations
through increased amortization expense.
Revenue Recognition Process
The Company continually re-evaluates its programs, including specific
license terms and conditions, to market its current and future products and
services. The Company may implement new programs, including offering specified
and unspecified enhancements to its current and future product lines. The
Company may recognize revenues associated with such enhancements after the
initial shipment or licensing of the software product or over the product's
life cycle. The timing of the implementation of such programs, the timing of
the release of such enhancements and other factors will impact the timing of
the Company's recognition of revenues and related expenses associated with its
products, related enhancements and services. As a result of these factors, the
Company currently cannot quantify the impact of the re-evaluation of its
programs on its business, results of operations and financial condition.
Product Returns and Price Reductions
The Company provides certain of its distributors with product return rights
for stock balancing or limited product evaluation. The Company also provides
certain of its distributors with price protection rights. To cover these
product returns and price protections, the Company has established reserves
based on its evaluation of historical trends and current circumstances. The
Company believes that it has adequate reserves to cover product returns and
price protections. However, these reserves may not be sufficient in the
future.
International Operations
The Company's continued growth and profitability will require further
expansion of its international operations. To successfully expand
international sales, the Company must establish additional foreign operations,
hire additional personnel and recruit additional international resellers. Such
international operations are subject to certain risks, such as:
. difficulties in staffing and managing foreign operations;
. dependence on independent relicensors;
. fluctuations in foreign currency exchange rates;
. compliance with foreign regulatory and market requirements;
. variability of foreign economic and political conditions;
. changing restrictions imposed by regulatory requirements, tariffs or
other trade barriers or by United States export laws;
. costs of localizing products and marketing such products in foreign
countries;
. longer accounts receivable payment cycles;
. potentially adverse tax consequences, including restrictions on
repatriation of earnings;
. difficulties in protecting intellectual property; and
. burdens of complying with a wide variety of foreign laws.
26
Volatility of Stock Price
The market price for the Company's Common Stock has been volatile and has
fluctuated significantly to date. The trading price of the Common Stock is
likely to continue to be highly volatile and subject to wide fluctuations in
response to factors such as actual or anticipated variations in operating and
financial results, anticipated revenue or earnings growth, analyst reports or
recommendations and other events or factors, many of which are beyond the
Company's control. In addition, the stock market in general, and The Nasdaq
National Market and the market for software companies and technology companies
in particular, have experienced extreme price and volume fluctuations. These
broad market and industry factors may materially and adversely affect the
market price of the Common Stock, regardless of the Company's actual operating
performance. In the past, following periods of volatility in the market price
of a company's securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on our business,
financial condition and results of operations.
Fluctuations in Economic and Market Conditions
The demand for the Company's products depends in part upon the general
demand for computer hardware and software, which fluctuates based on numerous
factors, including capital spending levels and general economic conditions.
Management of Growth and Higher Operating Expenses
The Company has recently experienced rapid growth in the scope of its
operations, the number of its employees and the geographic area of its
operations. In addition, the Company has completed certain international
acquisitions since October 1997. Such growth and assimilation of acquired
operations and personnel of such acquired companies has placed and may
continue to place a significant strain on the Company's managerial,
operational and financial resources. To manage its growth effectively, the
Company must continue to implement and improve additional management and
financial systems and controls. The Company believes that it has made adequate
allowances for the costs and risks associated with these expansions. However,
its systems, procedures or controls may not be adequate to support its current
or future operations. In addition, the Company may not be able to effectively
manage this expansion and still achieve the rapid execution necessary to fully
exploit the market opportunity for its products and services in a timely and
cost-effective manner. The Company's future operating results will also depend
on its ability to manage its expanding product line, expand our sales and
marketing organizations and expand its support organization commensurate with
the increasing base of its installed product.
The Company plans to increase its professional staff during 1999 as it
implements sales, marketing and support and product developments efforts, as
well as associated administrative systems, to support planned growth. As a
result of this planned growth in the size of its staff, the Company believes
that it will require additional facilities during 1999. Although the Company
believes that the cost of such additional facilities will not significantly
impact its financial position or results of operations, the Company
anticipates that operating expenses will increase during 1999 as a result of
its planned growth in staff. Such an increase in operating expenses may reduce
its income from operations and cash flows from operating activities in 1999.
Anti-Takeover Effect of Charter, By-Laws, Delaware Law and Contractual
Provisions; Availability of Preferred Stock for Issuance
Provisions of the Company's Amended and Restated Certificate of
Incorporation and By-laws, as amended, as well as Delaware law could
discourage a proxy contest or make more difficult the acquisition of a
substantial block of the Company's Common Stock. The Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law which
restricts certain business combinations with interested stockholders. The
Company's agreements with Microsoft contain prohibitions on assignment which
could have the effect of deterring an acquisition by a third party, or
limiting the price that investors might be willing to pay in the future
27
for shares of the Company's Common Stock. In addition, the Company's Board of
Directors is authorized to issue, without stockholder approval, up to
5,000,000 shares of preferred stock with voting, conversion and other rights
and preferences that may be superior to the common stock and that could
adversely affect the voting power or other rights of the holders of common
stock. The issuance of preferred stock or of rights to purchase preferred
stock could be used to discourage an unsolicited acquisition proposal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk includes "forward-
looking statements" that involve risks and uncertainties. Actual results could
differ materially from those projected in the forward-looking statements. The
Company does not use derivative financial instruments for speculative or
trading purposes.
The Company maintains a non-trading investment portfolio of investment
grade, highly liquid, debt securities which limits the amount of credit
exposure to any one issue, issuer, or type of instrument. The securities in
the Company's investment portfolio are not leveraged and are generally
classified as available for sale and therefore are subject to interest rate
risk. The Company does not currently hedge interest rate exposure. The
modeling technique used measures the change in fair values arising from an
immediate hypothetical shift in market interest rates and assumes ending fair
values include principal plus accrued interest, dividends and reinvestment
income. If market interest rates were to increase by 100 basis points from
December 31, 1998 levels, the fair value of the portfolio would decline by
approximately $1.1 million.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Company's Financial Statements, together with the report of independent
certified public accountants, appear at pages F-1 through F-23, respectively,
of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most
recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1998.
28
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Summary
The following table sets forth summary information concerning the
compensation paid or earned for services rendered to the Company in all
capacities during the fiscal years ended December 31, 1998, 1997 and 1996 to
(i) the Company's Chief Executive Officer and (ii) each of the other four most
highly compensated executive officers of the Corporation who received total
annual salary and bonus in excess of $100,000 in fiscal 1998.
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation Awards(3)
---------------------------------------- Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary($) Bonus($)(1) Compensation($)(2) Options (#) Compensation($)
------------------ ---- --------- ----------- ------------------ ------------ ---------------
Mark B. Templeton (4).. 1998 205,000 137,128 -- 150,000 --
President, Chief 1997 160,000 90,000 -- 56,250 --
Executive
Officer and Director 1996 140,000 69,000 -- 75,000 --
Edward E. Iacobucci.... 1998 200,000 101,000 -- 75,000 66,259(5)
Chairman of the Board, 1997 175,000 85,000 -- 112,500 --
Vice President-- 1996 150,000 75,000 -- 150,000 --
Strategy & Technology
and Chief Technical
Officer
Michael F. Passaro..... 1998 175,000 66,950 120,000 -- --
Vice President-- 1997 150,000 75,000 100,000 37,500 --
Worldwide
Sales 1996 130,000 12,000 150,000 37,500 --
Bruce C. Chittenden.... 1998 170,000 94,770 -- 40,000 --
Vice President-- 1997 150,000 75,000 -- 56,250 --
Engineering 1996 130,000 64,500 -- 75,000 --
Roger W. Roberts (6)... 1998 230,000 154,590 -- -- --
Former Chief Executive 1997 200,000 125,000 -- 112,500 --
Officer and Director 1996 165,000 105,000 -- 150,000 --
- --------
(1) Bonuses are reported in the year earned, even if actually paid in a
subsequent year.
(2) Consists of amounts accrued pursuant to commissions.
(3) The Company did not grant any restricted stock awards or stock
appreciation rights or make any long term incentive plan payouts during
the fiscal years ended December 31, 1998, December 31, 1997 and December
31, 1996.
(4) Mr. Templeton was appointed Chief Executive Officer of the Company in
January 1999 and President of the Company in January 1998.
(5) Consists of non-reimbursed business expenses.
(6) Mr. Roberts served as President of the Company until January 1998 and as
Chief Executive Officer of the Company until December 31, 1998.
29
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
year ended December 31, 1998 pursuant to the Company's 1995 Stock Plan to each
of the executive officers named in the Summary Compensation Table (the "Named
Executive Officers"). The Company did not grant any stock options pursuant to
the Company's 1989 Stock Option Plan or any stock appreciation rights to the
Named Executive Officers during the fiscal year ended December 31, 1998.
Individual Grants
------------------------------------------ Potential Realizable
% of Total Value at Assumed
Number of Options Annual Rates of
Securities Granted to Stock Price Appreciation
Underlying Employees Exercise for Option Term(2)
Options in Fiscal Price(1) Expiration ------------------------
Name Granted(#) Year ($/Share) Date 5%($) 10%($)
---- ---------- ---------- --------- ---------- ----------- ------------
Mark B. Templeton....... 150,000 3.55 58.00 4/24/08 5,471,383 13,865,559
Edward E. Iacobucci..... 75,000 1.77 58.00 4/24/08 2,735,692 6,932,780
Michael F. Passaro...... -- -- -- -- -- --
Bruce C. Chittenden..... 40,000 0.95 61.38 8/3/08 1,543,936 3,912,638
Roger W. Roberts........ -- -- -- -- -- --
- --------
(1) The exercise price per share of each option was determined by the
Compensation Committee to be equal to the fair market value per share of
Common Stock on the date of grant.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation of the
Company's Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and Common Stock
holdings are dependent on the timing of such exercises and the future
performance of the Company's Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that
the amounts reflected will be received by the individuals.
Aggregate Option Exercises and Year-End Values
The following table sets forth, for each of the Named Executive Officers,
information with respect to the exercise of stock options during the year
ended December 31, 1998 and the year-end value of unexercised options.
Value of Unexercised
Shares Numbers of Unexercised In-the-Money Options at
Acquired on Value Options at December 31, 1998 December 31, 1998
Name Exercise(#) Realized($)(1) Vested/Unvested Vested/Unvested($)(2)
---- ----------- -------------- ---------------------------- -----------------------
Mark B. Templeton....... 58,000 3,744,878 52,860/243,521 3,927,896/13,042,083
Edward E. Iacobucci..... -- -- 204,217/207,034 16,384,264/12,053,500
Michael F. Passaro...... 90,002 5,552,458 83,436/-- 7,118,675/--
Bruce C. Chittenden..... 85,834 3,807,954 12,565/106,019 849,363/5,989,549
Roger W. Roberts........ 152,502 8,834,315 385,466/132,034 33,933,521/9,123,812
- --------
(1) Amounts disclosed in this column were calculated based on the difference
between the fair market value of the Company's Common Stock on the date of
exercise and the exercise price of the options in accordance with
regulations promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and do not reflect amounts actually received
by the named officers.
(2) Value is based on the difference between the option exercise price and the
fair market value at December 31, 1998, the fiscal year-end ($97.063 per
share), multiplied by the number of shares underlying the option.
30
Stock Plans
The Company currently has three employee stock ownership plans: the 1989
Stock Option Plan, the 1995 Stock Plan and the 1995 Employee Stock Purchase
Plan. The 1989 Stock Option Plan, the 1995 Stock Plan and the 1995 Employee
Stock Purchase Plan are all administered by the Compensation Committee of the
Board of Directors. The 1989 Stock Option Plan provides for the grant of
incentive stock options and non-statutory stock options to employees,
directors and consultants of the Company to purchase up to 6,314,136 shares of
Common Stock. The terms of such options, including the persons to whom options
will be granted, the type of option to be granted (incentive or non-
statutory), the number of shares to be covered by each option and the terms
and conditions upon which an option may be granted, are generally determined
by the Compensation Committee. As of March 9, 1999, options to purchase an
aggregate of 445,488 shares of Common Stock were issued and outstanding under
the 1989 Stock Option Plan, all of which were then exercisable. The Company
does not intend to grant any additional options under the 1989 Stock Option
Plan.
Under the terms of the Company's 1995 Stock Plan, the Company is authorized
to make stock awards, provide eligible individuals with the opportunity to
purchase stock, grant incentive stock options and grant non-statutory stock
options (collectively, the "Stock Rights") to employees, consultants,
directors and officers of the Company. The 1995 Stock Plan provides for the
issuance of up to 9,000,000 shares plus, effective on January 1, 1996, on
January 1 of each year, a number of shares of Common Stock equal to five
percent (5%) of the total number of shares of Common Stock issued and
outstanding as of December 31 of the preceding year. Notwithstanding the
foregoing, no more than 15,000,000 shares of Common Stock may be issued
pursuant to the exercise of incentive stock options granted under the 1995
Stock Plan. The terms of such Stock Rights, including number of shares subject
to each Stock Right, when the Stock Right become exercisable, the exercise or
purchase price of the Stock Right, the duration of the Stock Right and the
time, manner and form of payment upon exercise of a Stock Right, are generally
determined by the Compensation Committee. As of the March 9, 1999, options to
purchase an aggregate of 7,421,375 shares of Common Stock were issued and
outstanding under the 1995 Stock Plan, of which options for approximately
1,135,807 shares were then exercisable.
The 1995 Employee Stock Purchase Plan provides for the issuance of a maximum
of 2,250,000 shares of Common Stock pursuant to the exercise of
nontransferable options granted to participating employees. Under the 1995
Employee Stock Purchase Plan, eligible employees of the Company may
participate in semi-annual plan offerings in which payroll deductions may be
used to purchase shares of Common Stock. The purchase price of such shares is
the lower of 85% of the fair market value of the Common Stock on the day the
offering commences or 85% of the fair market value of the Common Stock on the
day the offering terminates. As of March 9, 1999, 50,142 shares of Common
Stock had been purchased under the 1995 Employee Stock Purchase Plan.
Compensation Committee Interlocks and Insider Participation
The members of the Committee are Messrs. Compton and Dow. No member of the
Committee was at any time during the past year an officer or employee of the
Company or any of its subsidiaries, was formerly an officer of the Company or
any of its subsidiaries, or had any relationship with the Company requiring
disclosure herein.
During the last year, no executive officer of the Company served as (i) a
member of the compensation committee (or other committee of the Board of
Directors performing equivalent functions or, in the absence of any such
committee, the entire Board of Directors) of another entity, one of whose
executive officers served on the Compensation Committee of the Company; (ii) a
director of another entity, one of whose executive officers served on the
Compensation Committee of the Company; or (iii) a member of the compensation
committee (or other committee of the Board of Directors performing equivalent
functions or, in the absence of any such committee, the entire Board of
Directors) of another entity, one of whose executive officers served as a
director of the Company.
31
Compensation of Directors
Employee Directors do not receive cash compensation for their service as
members of the Board of Directors. Non-employee Directors receive a fee of
$1,500 for each meeting of the Board of Directors that they attend, $200 for
each meeting of the Board of Directors that they participate in via telephone
and $500 for each committee meeting that they attend. Non-employee Directors
are reimbursed for their reasonable out-of-pocket expenses incurred in
attending such meetings.
Non-employee directors are also eligible for participation in the 1995 Non-
Employee Director Stock Option Plan. The 1995 Non-Employee Director Stock
Option Plan provides for the grant of options to purchase a maximum of 900,000
shares of Common Stock to non-employee directors of the Company. The 1995 Non-
Employee Director Stock Option Plan authorizes the grant to each director who
is not an employee of the Company and who is first elected as a director after
the date of the Company's initial public offering, an option to purchase
45,000 shares of Common Stock. Each non-employee director will also receive,
on each three-year anniversary of such director's first election to the Board
of Directors, an option to purchase 45,000 shares of Common Stock, provided
that such director has continuously served on the Board of Directors during
such three-year period. The exercise price per share for all options granted
under the 1995 Non-Employee Director Stock Option Plan will be equal to 100%
of the fair market value per share of the Common Stock as of the date of
grant. As of March 9, 1999, 270,000 options had been granted under the 1995
Non-Employee Director Stock Option Plan, of which options for approximately
93,845 shares were then exercisable.
Employment Agreement
The Company and Roger W. Roberts, a member of the Board of Directors and the
former President and Chief Executive Officer of the Company, have entered into
an employment agreement effective as of January 1, 1999 pursuant to which Mr.
Roberts is employed as Employee Advisor. Under the terms of the employment
agreement, Mr. Roberts receives a base salary of $120,000 and an annual
performance bonus of up to $80,000, payable at the discretion of the Chief
Executive Officer of the Company. Mr. Roberts is entitled to participate in
the benefit plans that may be provided from time to time to the Company's
employees. In the event that Mr. Roberts is terminated without cause, he will
receive an amount equivalent to the base salary and bonus he would have
received during the 90 days post-termination of his employment, plus Mr.
Roberts shall receive the normal post-termination benefits in accordance with
the Company's retirement, insurance and other benefit plans or arrangements;
provided, however, that the Company shall continue to provide Mr. Roberts with
coverage under its health benefit plans until the 91st day following the date
that notice of termination is given. If Mr. Roberts is terminated with cause,
he will not be entitled to receive any payments or benefits after the
termination, except for such amounts as are required to be paid under
applicable law and the normal post-termination benefits under the Company's
benefit plans. The employment agreement terminates on December 31, 1999,
except that it may be extended for one or more terms by the Chief Executive
Officer of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 9, 1997, the Company and Microsoft entered into a Development
Agreement, which provides for the licensing to Microsoft of certain of the
Company's multi-user software enhancements to Microsoft's Windows NT Server
and for the cooperation between the parties for the development of certain
future multi-user versions of NT Terminal Server. The Development Agreement
also provides for each party to develop its own enhancements to the jointly
developed products which may provide access to the NT Terminal Server base
platform from a wide variety of computing devices. In June 1998, the Company
released its MetaFrame product,
32
which implements ICA on the NT Terminal Server platform, and which provides NT
Terminal Server with capabilities similar to those currently offered in the
WinFrame product line. Pursuant to the terms of the Development Agreement, in
May 1997, the Company received an aggregate of $75 million as a non-refundable
royalty payment and for engineering and support services to be rendered by the
Company. Under the terms of the Development Agreement, the Company is entitled
to receive payments of an additional $100 million, in quarterly payments, a
portion of which has already been received. In addition, Microsoft and the
Company have agreed to engage in certain joint marketing efforts to promote
use of Windows NT Server-based multi-user software and the Company's ICA
protocol. Additionally, subject to the terms of the Development Agreement,
Microsoft has agreed to endorse only the Company's ICA protocol as the
preferred way to provide multi-user Windows access for devices other than
Windows client devices until at least November 1999, and the Company shall be
entitled to license its WinFrame technology based on Windows NT 3.51 until at
least September 30, 2001.
The Company is a party to other license and distribution agreements with
Microsoft, pursuant to which the Company has recognized $8.5 million of
royalty expense in cost of revenues during 1998. In connection with these
agreements, the Company had accrued royalties and other accounts payable of
$2.9 million at December 31, 1998.
The Company has adopted a policy that all transactions between the Company
and its officers, directors, principal shareholders and their affiliates shall
be on terms no less favorable to the Company than could be obtained by the
Company from unrelated third parties, and shall be approved by a majority of
the outside independent and disinterested directors.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Consolidated Financial Statements.
For a list of the consolidated financial information included herein, see
Index on Page F-1.
2. Financial Statement Schedules.
The following consolidated financial statement schedule is included in Item
8:
Valuation and Qualifying Accounts
3. List of Exhibits.
Exhibit No. Description
----------- -----------
2.1(5) Agreement and Undertaking by and among the Non-Executive Directors
of APM Limited, the Executive Directors of APM Limited, and Citrix
Systems, Inc.
2.2(5) Recommended Offers by Citrix Systems, Inc. for APM Limited
3.1(1) Amended and Restated Certificate of Incorporation of the Company
3.2(1) Amended and Restated By-laws of the Company
3.3(7) Certificate of Amendment of Amended and Restated Certificate of
Incorporation
4.1(1) Specimen certificate representing the Common Stock
10.1(1)* 1989 Stock Option Plan
10.2(1)* 1995 Stock Plan
10.3(1)* 1995 Non-Employee Director Stock Option Plan
10.4(1)* 1995 Employee Stock Purchase Plan, as amended
10.5(1) Microsoft Corporation Source Code Agreement between the Company
and Microsoft Corporation ("Microsoft") dated November 15, 1989
10.6(1) Amendment No. 1 to the Source Code Agreement between the Company
and Microsoft dated October 1, 1992
10.7(1) License Agreement for Microsoft OS/2 Version Releases 1.x, 2.x
between the Company and Microsoft dated August 15, 1990
10.8(1) Amendment No. 1 to the License Agreement between the Company and
Microsoft dated August 15, 1990, Contract No. 5198-0228 dated May
6, 1991
10.9(1) Amendment No. 2 to License Agreement between the Company and
Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x, dated
October 1, 1992
10.10(1) Amendment No. 3 to the License Agreement between the Company and
Microsoft dated August 15, 1990, Contract No. 5198-0228 dated
January 1, 1994
10.11(1) Amendment No. 4 to the License Agreement between the Company and
Microsoft dated August 15, 1990, dated January 31, 1995
10.12(1) Strategic Alliance Agreement between the Company and Microsoft
dated December 12, 1991
10.13(1) Form of Indemnification Agreement
10.14(2) Lease Agreement between Halmos Trading and Investment Company and
the Company dated June 6, 1996
34
Exhibit No. Description
----------- -----------
10.15(3) License, Development and Marketing Agreement dated July 9, 1996
between the Company and Microsoft Corporation
10.16(4) License, Development and Marketing Agreement dated May 9, 1997
between the Company and Microsoft Corporation
10.17(6) Amendment No. 1 to License, Development and Marketing Agreement
dated May 9, 1997 between the Company and Microsoft Corporation
10.18** Employment Agreement dated as of January 1, 1999 by and between
the Company and Roger W. Roberts.
21.1** List of Subsidiaries
23.1** Consent of Ernst & Young LLP
24.1** Power of Attorney (Included in signature page)
27** Financial Data Schedule
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(2) Incorporated herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(3) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(4) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
(5) Incorporated herein by reference to the exhibits of the Company's Current
Report on Form 8-K dated as of June 30, 1998.
(6) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(7) Incorporated herein by reference to Exhibits 3 and 4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed Herewith.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 1998.
(c) Exhibits.
The Company hereby files as part of this Form 10-K the exhibits listed in
Item 14(a)(3) above. Exhibits which are incorporated herein by reference can
be inspected and copied at the public reference facilities maintained by the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C., and at the
Commission's regional offices at CitiCorp Center, 500 West Madison Street,
Suite 1400, Chicago, IL 60661-2511 and Seven World Trade Center, Suite 1300,
New York, NY 10048. Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 29549, at prescribed rates.
(d) Financial Statement Schedule.
The Company hereby files as part of this Form 10-K the consolidated
financial statement schedule listed in Item 14(a)(2) above, which is attached
hereto.
35
SIGNATURES
Pursuant to 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, in Fort
Lauderdale, Florida on the 10th day of March, 1999.
CITRIX SYSTEMS, INC.
/s/ Mark B. Templeton
By: _________________________________
Mark B. Templeton
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Citrix Systems, Inc., hereby
severally constitute and appoint Roger W. Roberts and Edward E. Iacobucci, and
each of them singly, our true and lawful attorneys, with full power to them
and each of them singly, to sign for us in our names in the capacities
indicated below, all amendments to this report, and generally to do all things
in our names and on our behalf in such capacities to enable Citrix Systems,
Inc. to comply with the provisions of the Securities Exchange Act of 1934, as
amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below on the 10th day of March,
1999.
Signature Title(s)
--------- --------
/s/ Edward E. Iacobucci Chairman of the Board of Director
______________________________________
Edward E. Iacobucci
/s/ Mark B. Templeton President, Chief Executive Officer and
______________________________________ Director (Principal Executive
Mark B. Templeton Officer)
/s/ James J. Felcyn, Jr. Vice President of Finance and
______________________________________ Administration and Chief Financial
James J. Felcyn, Jr. Officer (Principal Financial Officer)
/s/ Marc-Andre Boisseau Corporate Controller (Principal
______________________________________ Accounting Officer)
Marc-Andre Boisseau
/s/ Kevin R. Compton Director
______________________________________
Kevin R. Compton
/s/ Stephen M. Dow Director
______________________________________
Stephen M. Dow
/s/ Robert N. Goldman Director
______________________________________
Robert N. Goldman
36
Signature Title(s)
--------- --------
/s/ Michael W. Brown Director
______________________________________
Michael W. Brown
/s/ Tyrone F. Pike Director
______________________________________
Tyrone F. Pike
/s/ Roger W. Roberts Director
______________________________________
Roger W. Roberts
/s/ John W. White Director
______________________________________
John W. White
37
CITRIX SYSTEMS, INC.
List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Citrix Systems, Inc. are
included in Item 8:
Report of Independent Certified Public Accountants........................ F-2
Consolidated Balance Sheets--December 31, 1998 and 1997................... F-3
Consolidated Statements of Income--Years ended December 31, 1998, 1997 and
1996..................................................................... F-4
Consolidated Statements of Stockholders' Equity--Years ended December 31,
1998, 1997 and 1996...................................................... F-5
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997
and 1996................................................................. F-6
Notes to Consolidated Financial Statements--December 31, 1998............. F-7
The following consolidated financial statement schedule of Citrix Systems,
Inc. is included in Item 14(d):
Schedule II Valuation and Qualifying Accounts....................... F-23
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Citrix Systems, Inc.
We have audited the accompanying consolidated balance sheets of Citrix
Systems, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 Citrix
Systems, Inc. at December 31, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
West Palm Beach, Florida
February 19, 1999, except for
Note 17 as to which the date is March 1, 1999
F-2
CITRIX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
December 31
------------------
1998 1997
-------- --------
(in thousands,
except par value)
Assets
Current assets:
Cash and cash equivalents................................ $127,546 $140,081
Short-term investments................................... 56,934 89,111
Accounts receivable, net of allowances of $6,234 and
$6,298 at December 31, 1998 and 1997, respectively...... 32,798 12,631
Inventories.............................................. 4,071 2,273
Prepaid expenses......................................... 6,745 3,498
Other current assets..................................... 3,037 --
Current portion of deferred tax assets................... 12,885 10,767
-------- --------
Total current assets................................... 244,016 258,361
Long-term investments...................................... 97,108 --
Property and equipment:
Equipment under capital leases........................... 555 366
Computer equipment and software.......................... 11,667 4,106
Property, equipment and furniture........................ 2,900 1,364
Leasehold improvements................................... 6,112 2,906
-------- --------
21,234 8,742
Less accumulated depreciation and amortization........... (7,051) (2,064)
-------- --------
14,183 6,678
Long-term portion of deferred tax assets................... 29,274 16,764
Intangible assets:
Core technology.......................................... 40,934 --
Other intangibles........................................ 15,939 989
-------- --------
56,873 989
Less accumulated amortization............................ (10,074) (124)
-------- --------
46,799 865
-------- --------
$431,380 $282,668
======== ========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other accrued expenses.............. $ 29,735 $ 14,018
Accrued royalties and other accounts payable to
stockholder............................................. 2,891 3,044
Deferred revenue......................................... 10,107 3,147
Current portion of deferred revenues on contract with
stockholder............................................. 39,830 15,000
Income taxes payable..................................... 2,553 236
-------- --------
Total current liabilities.............................. 85,116 35,445
Deferred revenues on contract with stockholder............. 48,810 50,375
Commitments
Stockholders' equity:
Preferred stock at $.01 par value: 5,000 shares
authorized, none issued and outstanding................. -- --
Common stock at $.001 par value: 150,000 and 60,000
shares authorized; 42,962 and 41,473 issued and
outstanding at 1998 and 1997, respectively.............. 43 41
Additional paid-in capital............................... 188,250 148,748
Retained earnings........................................ 109,161 48,059
-------- --------
Total stockholders' equity............................. 297,454 196,848
-------- --------
$431,380 $282,668
======== ========
See accompanying notes.
F-3
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31
-------------------------
1998 1997 1996
-------- -------- -------
(in thousands, except per
share information)
Revenues:
Net revenues--unrelated parties.................... $216,901 $114,308 $44,527
Net revenues--stockholder.......................... 31,735 9,625 --
-------- -------- -------
Net revenues..................................... 248,636 123,933 44,527
-------- -------- -------
Cost of revenues:
Cost of revenues--unrelated parties................ 13,422 11,265 5,099
Cost of revenues--stockholder...................... 3,260 1,039 --
-------- -------- -------
Total cost of revenues........................... 16,682 12,304 5,099
-------- -------- -------
Gross margin......................................... 231,954 111,629 39,428
Operating expenses:
Research and development........................... 22,858 6,948 3,843
Sales, marketing and support....................... 74,855 35,352 13,741
General and administrative......................... 20,131 10,651 4,126
Amortization of intangible assets.................. 10,190 -- --
In-process research and development................ 18,416 3,950 --
-------- -------- -------
Total operating expenses......................... 146,450 56,901 21,710
-------- -------- -------
Income from operations............................... 85,504 54,728 17,718
Interest income, net................................. 9,968 9,894 4,545
-------- -------- -------
Income before income taxes........................... 95,472 64,622 22,263
Income taxes......................................... 34,370 23,264 3,562
-------- -------- -------
Net income........................................... $ 61,102 $ 41,358 $18,701
======== ======== =======
Earnings per common share:
Basic earnings per share........................... $ 1.45 $ 1.01 $ 0.50
======== ======== =======
Weighted average shares outstanding................ 42,118 40,861 37,771
======== ======== =======
Earnings per common share--assuming dilution:
Diluted earnings per share......................... $ 1.34 $ 0.95 $ 0.46
======== ======== =======
Weighted average shares outstanding................ 45,648 43,631 40,905
======== ======== =======
See accompanying notes.
F-4
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
-------------- Paid-In Retained Earnings
Shares Amount Capital (Accumulated Deficit)
------ ------ ---------- ---------------------
(in thousands)
Balance at December 31, 1995... 35,476 $35 $ 54,927 $(12,000)
Exercise of stock options...... 819 1 332
Exercise of warrants........... 145
Common stock issued under
employee stock purchase plan.. 32 225
Issuance of common stock
through public offering (net
of offering costs of $4,148).. 3,548 4 73,298
Tax benefit from employer stock
plans......................... 6,328
Net income..................... 18,701
------ --- -------- --------
Balance at December 31, 1996... 40,020 40 135,110 6,701
Exercise of stock options...... 1,444 1 2,721
Repurchase and cancellation of
common stock previously
issued........................ (1) (1)
Common stock issued under
employee stock purchase plan.. 10 242
Tax benefit from employer stock
plans......................... 10,676
Net income..................... 41,358
------ --- -------- --------
Balance at December 31, 1997... 41,473 41 148,748 48,059
Exercise of stock options...... 1,481 2 14,955
Cash in lieu of fractional
shares........................ (3)
Common stock issued under
employee stock purchase plan.. 8 376
Tax benefit from employer stock
plans......................... 24,174
Net income..................... 61,102
------ --- -------- --------
Balance at December 31, 1998... 42,962 $43 $188,250 $109,161
====== === ======== ========
See accompanying notes.
F-5
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
------------------------------
1998 1997 1996
--------- --------- --------
(in thousands)
Operating activities
Net income..................................... $ 61,102 $ 41,358 $ 18,701
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 15,173 1,712 376
Tax benefit related to the exercise of non-
statutory stock options and disqualified
dispositions of incentive stock options..... 24,174 10,675 6,328
In-process research and development.......... 18,416 3,950 --
(Recovery of) provision for doubtful
accounts.................................... (106) 1,399 624
Provision for product returns................ 42 2,671 1,319
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable........................ (19,660) (12,111) (5,140)
Inventories................................ (1,799) (1,550) (502)
Other current assets....................... (5,443) (2,733) (447)
Deferred tax assets........................ (14,536) (24,362) (3,169)
Accounts payable and other accrued
expenses.................................. 9,492 8,472 2,355
Accrued royalties and other accounts
payable to stockholder.................... (153) 1,520 1,003
Deferred revenue........................... 6,960 1,073 853
Deferred revenue on contract with
stockholder............................... 23,265 65,375 --
Income taxes payable....................... 2,391 236 (93)
--------- --------- --------
Net cash provided by operating activities...... 119,318 97,685 22,208
Investing activities
Purchases of investments....................... (284,793) (126,536) (38,206)
Proceeds from sale of investments.............. 219,861 75,632 --
Cash paid for acquisitions..................... (63,549) (2,611) --
Cash paid for licensing agreement.............. (7,000) -- --
Purchases of property and equipment............ (11,420) (6,104) (2,155)
Purchase of trademark.......................... (250) -- --
Proceeds from note receivable from officer..... -- -- 100
--------- --------- --------
Net cash used in investing activities.......... (147,151) (59,619) (40,261)
Financing activities
Net proceeds from issuance of common stock..... 15,329 2,964 73,860
Repurchase of common stock previously issued... -- (1) --
Payments on capital lease obligations.......... (31) (82) (143)
--------- --------- --------
Net cash provided by financing activities...... 15,298 2,881 73,717
--------- --------- --------
(Decrease)/increase in cash and cash
equivalents................................... (12,535) 40,946 55,664
Cash and cash equivalents at beginning of
year.......................................... 140,081 99,135 43,471
--------- --------- --------
Cash and cash equivalents at end of year....... $ 127,546 $ 140,081 $ 99,135
========= ========= ========
Supplemental cash flow information
The Company paid income taxes of approximately $20,481 in 1998 and $37,976
in 1997. Additionally, the Company paid interest of approximately $98, $9 and
$19 during the years ended December 31, 1998, 1997 and 1996, respectively.
See accompanying notes.
F-6
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Organization
Citrix Systems, Inc. ("Citrix" or the "Company"), a Delaware corporation
founded on April 17, 1989, is a leading supplier of application server
products and technologies that enable the effective and efficient enterprise-
wide deployment and management of applications designed for Microsoft
Windows(R) operating systems. The Company's MetaFrame(TM) and WinFrame(R)
product lines, developed under license and strategic alliance agreements with
Microsoft Corporation ("Microsoft"), permit organizations to deploy Windows
applications without regard to location, network connection, or type of client
hardware platforms. The Company markets its products through multiple indirect
channels such as distributors, value-added resellers and original equipment
manufacturers, primarily in the United States and Europe. The Company has
formed wholly-owned subsidiaries, primarily in Europe and the Asia-Pacific
region, for the purpose of expanding its international presence.
2. Restatement of Interim Financial Statements
In a September 9, 1998 letter to the American Institute of Certified Public
Accountants ("AICPA"), the staff of the Securities and Exchange Commission
("SEC") expressed its views on the recording of in-process research and
development ("IPR&D"). As a result, the Company has re-evaluated the amount of
purchased IPR&D recorded in connection with its acquisition of Insignia
Solutions, plc. ("Insignia"), APM Ltd., parent company of Digitivity Inc.
("APM"), VDOnet Corporation Ltd. ("VDOnet") and its licensing agreement with
EPiCON, Inc. ("EPiCON") based on its understanding and interpretation of the
aforementioned letter. The re-evaluations resulted in a decrease in the amount
of purchase price that was allocated to IPR&D and an increase in the amount
allocated to purchased technology and goodwill. Specifically, the Company
reduced the amount of previously reported write-offs for purchased IPR&D to
$18.4 million and increased amortization of intangible assets to $10.2 million
and increased net intangible assets to $46.8 million for the year ended
December 31, 1998.
The following table summarizes the adjustments made to the values ascribed to
IPR&D:
Write-Offs
-------------------------
As Previously
Acquisition Reported As Restated
----------- ------------- -----------
(In thousands)
Insignia......................................... $15,950 $ 2,700
EPiCON........................................... 7,850 2,584
APM.............................................. 33,800 10,700
VDONet........................................... 7,200 2,432
------- -------
$64,800 $18,416
======= =======
3. Significant Accounting Policies
Consolidation Policy
The consolidated financial statements of the Company include the accounts of
its wholly-owned subsidiaries. All significant transactions between the
Company and its subsidiaries have been eliminated in consolidation.
Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, cash and cash
equivalents include marketable securities which are primarily municipal notes,
bonds and paper; government securities; corporate notes, bonds
F-7
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and paper; money market funds; and commercial paper, consisting of various
instruments with contractual maturities of three months or less. The Company
minimizes its credit risk associated with cash and cash equivalents by
investing in high quality credit instruments.
Investments
Short-term investments at December 31, 1998 primarily consist of municipal
notes, bonds and paper; government securities; commercial paper and corporate
notes, bonds and paper. Long-term investments at December 31, 1998 primarily
consist of government securities. The Company minimizes its credit risk
associated with short and long-term investments by using investment grade,
highly liquid securities. The Company follows the provisions of Statement of
Financial Accounting Standards Board No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115). SFAS No. 115
requires investments to be classified based on management's intent in three
categories: held-to-maturity securities, available-for-sale securities and
trading securities. Held-to-maturity securities are recorded at amortized
cost. Available-for-sale securities are recorded at market value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Trading securities are recorded at market value with unrealized gains
and losses reported in earnings. The Company classifies its short and long-
term investments as available-for-sale securities. The Company's short-term
investments have a contractual maturity of 12 months or less and have an
average contractual maturity of less than ten months. The Company's long-term
investments have a contractual maturity of one to three years and have an
average contractual maturity of approximately two years and three months.
Accounts Receivable
Substantially all of the Company's accounts receivable are due from
distributors and value-added resellers of microcomputer software. Collateral
is not required. Credit losses are provided for in the consolidated financial
statements and have been within management's expectations. No significant
customer or group of customers within a certain geographical region represent
a significant concentration of credit risks.
Inventories
Inventories, consisting primarily of finished goods, are stated at the lower
of cost (determined by the first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which is
approximately three years for computer equipment, software, office equipment
and furniture, and the lesser of the lease term or five years for leasehold
improvements. Assets under capital lease are amortized over the shorter of the
asset life or the remaining lease term which is approximately 30 months.
Amortization of assets under capital lease is included in depreciation
expense. Accumulated amortization of equipment under capital leases
approximated $2,020,000 and $360,000 at December 31, 1998 and 1997,
respectively.
Intangible Assets
Goodwill and other intangible assets are being amortized using the straight-
line method over periods ranging from one to four years. The Company
periodically reviews goodwill and other intangible assets to determine if any
impairment exists based upon projected, undiscounted net cash flows of the
related business unit. As of December 31, 1998, in the opinion of management,
there has been no such impairment.
F-8
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") 91-1, "Software Revenue Recognition"
for 1996 and 1997 and SOP 97-2 (as amended by SOP 98-4) "Software Revenue
Recognition" for 1998. Product revenues are recognized upon shipment of the
software product only if no significant Company obligations remain, the fee is
fixed or determinable, and collection of the resulting receivable is deemed
probable. In the case of non-cancelable product licensing arrangements under
which certain Original Equipment Manufacturers (OEMs) have software
reproduction rights, initial recognition of revenue also requires delivery and
customer acceptance of the product master or first copy. Subsequent
recognition of revenues is based upon reported royalties from the OEMs as well
as estimates of royalties due through the Company's reporting date. Revenue
from packaged product sales to distributors and resellers is recorded when
related products are shipped. In software arrangements that include rights to
multiple software products, post-contract customer support, and/or other
services, the Company allocates the total arrangement fee among each
deliverable based on the relative fair value of each of the deliverables
determined based on vendor-specific objective evidence. Product returns and
sales allowances, including stock rotations, are estimated and provided for at
the time of sale. Non-recurring engineering fees are recognized ratably as the
work is performed. Revenues from training and consulting are recognized when
the services are performed. Service and subscription revenues from customer
maintenance fees for ongoing customer support and product updates and upgrades
are based on the price charged or derived value of the undelivered elements
and are recognized ratably over the term of the contract, which is typically
twelve months. Service revenues, which are immaterial when compared to net
revenues, are included in net revenues on the face of the statement of income.
The Company provides most of its distributors with product return rights for
stock balancing and price protection rights. Stock balancing rights permit
distributors to return products to the Company for credit within specified
limits and subject to ordering an equal amount of the Company's products.
Price protection rights require that the Company grant retroactive price
adjustments for inventories of the Company's products held by distributors if
the Company lowers its prices for such products. Allowances for product
returns amounted to approximately $4,641,000 and $4,599,000 at December 31,
1998 and 1997, respectively. The Company has not and has no plan to reduce its
prices for inventory currently held by distributors or resellers; accordingly,
there are no reserves for price protection at December 31, 1998 and 1997.
During 1997, the Company entered into a License, Development and Marketing
Agreement, as amended (the "Development Agreement") with a stockholder.
Pursuant to the terms of the Development Agreement, the Company received an
aggregate of $75 million as a non-refundable royalty payment and for
engineering and support services to be rendered by the Company. This initial
fee is being recognized ratably over the term of the five year contract. Under
the terms of the Development Agreement, the Company is entitled to receive an
additional $100 million, in quarterly payments, a portion of which has already
been received. The additional $100 million is being recognized ratably over
the remaining term of the contract, effective April 1998.
Revenue from software maintenance, service, and support arrangements and
training programs and materials totaling $10,531,799, $4,289,705 and
$1,474,106 for the years ended December 31, 1998, 1997 and 1996, respectively,
is recognized when the services are provided. Such items are included in net
revenues. The costs of providing training and services are included in sales,
marketing and support expenses.
Foreign Currency Translation
The functional currency of each of the Company's wholly-owned foreign
subsidiaries is U.S. dollars. Assets and liabilities of the subsidiaries are
translated into U.S. dollars at year-end exchange rates, and revenues and
expenses are translated at average rates prevailing during the year.
Translation adjustments and foreign currency transaction gains and losses are
included in results of operations.
F-9
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cost of Revenues
All development costs incurred in connection with the Development Agreement
are expensed as incurred as a separate component of cost of revenues.
Royalty Expense
The Company is a party to licensing agreements with various entities which
require no minimum payment commitment and give the Company the right to use
certain software object code in the development of its products in exchange
for the payment of certain amounts based upon the sales of the related
products. The licensing agreements have terms ranging from one to five years,
and include renewal options. Royalty expense related to these agreements is
included in cost of revenues.
Advertising Expense
The Company expenses advertising costs as incurred. The Company recognized
advertising expenses of approximately $9,453,000, $4,551,000 and $1,733,000
during the years ended December 31, 1998, 1997 and 1996, respectively. These
amounts are included in sales, marketing and support expenses. The Company did
not incur any direct response advertising cost, as defined by SOP 93-7,
"Reporting on Advertising Costs," during 1998, 1997 or 1996.
Income Taxes
Deferred income tax assets and liabilities are determined based upon
differences between the financial statement and income tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Software Development Costs
SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" requires software development costs to be
capitalized upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management
with respect to certain external factors such as anticipated future revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalizable software development costs have not been significant and have
been expensed as incurred.
Risks and Uncertainties
The Company's operating results and financial condition have varied and may
in the future vary significantly depending on a number of factors. The
following factors may have a material adverse effect upon the Company's
business, results of operations and financial conditions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. While the Company believes that such
estimates are fair when considered in conjunction with the consolidated
financial position and results of operations taken as a whole, the actual
amount of such estimates when known will vary from these estimates.
F-10
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reliance Upon Strategic Relationship
A stockholder is the leading provider of desktop operating systems. The
Company is dependent upon the license of certain key technology from this
stockholder including certain source and object code licenses, technical
support and other materials. The Company is also dependent on its strategic
alliance agreement with this stockholder which provides for cooperation in the
development of technologies for advanced operating systems, and the promotion
of advanced application program interfaces. Additionally, this stockholder has
significantly greater financial, technical, sales and marketing and other
resources than the Company.
Product Concentration
The Company anticipates that one of its product technologies and future
derivative products and product lines based upon this technology, if any, will
constitute a majority of its revenue for the foreseeable future. The Company
may experience declines in demand for products based on this technology,
whether as a result of new competitive product releases, price competition,
lack of success of its strategic partners, technological change or other
factors.
New Product Enhancements and Technical Changes
The market for the Company's products is relatively new and is characterized
by rapid technological change, evolving industry standards, changes in end-
user requirements and frequent new product introductions and enhancements,
including enhancements to certain key technology licensed from a stockholder.
The Company believes it will incur additional costs and royalties associated
with the development, licensing, or acquisition of new technologies or
enhancements to existing products which will increase the Company's costs of
good sold and operating expenses.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value method of accounting for issuance of stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to SFAS No. 123,
companies are encouraged, but are not required, to adopt the fair value method
of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
(APB Opinion 25) but would be required to disclose in a note to the
consolidated financial statements pro forma net income and per share amounts
as if the Company had applied the new method of accounting.
The Company applies APB Opinion 25 and related interpretations in accounting
for its plans and has complied with the disclosure requirements of SFAS No.
123.
Earnings Per Share
Dilutive common stock equivalents consist of warrants and stock options
(calculated using the treasury stock method in 1998, 1997 and 1996). All
common share and per share data, except par value per share, have been
retroactively adjusted to reflect the two-for-one stock split of the Company's
Common Stock effective June 4, 1996 and the three-for-two stock split of the
Company's Common Stock effective February 20, 1998, which are further
discussed in Note 15. As discussed in Note 17, the effect of the March 1999
two-for-one stock split is not reflected in these financial statements.
F-11
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain reclassifications of the prior years' financial statements have been
made to conform to the current year's presentation.
4. Acquisitions and Licensed Technology
On February 5, 1998, the Company completed its acquisition of certain in-
process software technologies and assets of Insignia Solutions, plc for
approximately $17.5 million in cash. A portion of the purchase price was
allocated to in-process research and development, which had not reached
technological feasibility and had no alternative future use. The allocation
resulted in a pre-tax charge of approximately $2.7 million to the Company's
operations in the first quarter of 1998, after giving effect to the re-
evaluation described in Note 2 above. Further, on June 30, 1998, the Company
completed its acquisition of APM Ltd. for approximately $40.4 million in cash.
A portion of the purchase price was allocated to in-process research and
development which had not reached technological feasibility and had no
alternative future use. The allocation resulted in a pre-tax charge of
approximately $10.7 million to the Company's operations in the second quarter
of 1998, after giving effect to the re-evaluation described in Note 2 above.
In July 1998, the Company completed its acquisition of VDOnet Corporation Ltd.
for approximately $8 million in cash. This transaction was accounted for using
the purchase method of accounting with the purchase price being principally
allocated to purchase technologies and intangible assets. Approximately $2.4
million of the total purchase price represented the value of in-process
research and development that had not reached technological feasibility and
had no alternative future use and, as such, was recorded as a non-recurring
charge for in-process research and development in the third quarter of 1998,
after giving effect to the re-evaluation described in Note 2 above.
In January 1998, the Company licensed certain in-process software technology
from EPiCON, Inc. for approximately $8.0 million payable in cash. A portion of
the licensing fee was allocated to in-process research and development which
had no alternative future use. The allocation resulted in a pre-tax charge of
approximately $2.6 million to the Company's operations in the first quarter of
1998, after giving effect to the re-evaluation described in Note 2 above.
Each of the acquisitions was accounted for under the purchase method of
accounting, applying the provisions of APB Opinion No. 16 ("APB 16"). The
financial statements reflect the operations of the acquired businesses for the
periods after their respective dates of acquisition.
As of the date of each of the acquisitions, the Company concluded that the
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project, resale of the software,
and internal use. The value of the purchased IPR&D was expensed at the time of
each of the acquisitions.
F-12
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase consideration was allocated to the acquired assets and
liabilities based on fair values as follows:
Insignia EPiCON APM VDOnet
-------- ------ ------- ------
(in thousands)
Net assets acquired (net liabilities
assumed).............................. $ 400 $ -- $ (800) $ (100)
Purchased intangibles.................. 12,550 5,416 26,900 5,568
Purchased in-process research and
development........................... 2,700 2,584 10,700 2,432
Goodwill............................... 1,850 -- 3,600 --
------- ------ ------- ------
Total purchase consideration......... $17,500 $8,000 $40,400 $7,900
======= ====== ======= ======
The amounts allocated to purchased intangibles and goodwill are being
amortized on a straight-line basis over three to four years from the date of
each acquisition.
5. Cash and Investments
The summary of cash and cash equivalents and investments consist of the
following:
December 31
-----------------
1998 1997
-------- --------
(In thousands)
Cash and cash equivalents:
Cash.................................................. $ 29,794 $ 16,800
Commercial paper...................................... 7,264 57,827
Money market funds.................................... 14,488 3,063
Government securities................................. 52,712 43,520
Corporate securities.................................. 23,288 18,871
-------- --------
Cash and cash equivalents........................... $127,546 $140,081
======== ========
Short-term investments:
Commercial paper...................................... $ -- $ 25,661
Corporate securities.................................. 2,004 7,098
Government securities................................. 54,930 56,352
-------- --------
Short-term investments.............................. $ 56,934 $ 89,111
======== ========
Long-term investments:
Government securities................................. $ 97,108 $ --
======== ========
The carrying value of each marketable security including cash and cash
equivalents and investments approximate their fair value. The fair values of
cash and cash equivalents and investments are based primarily on quoted market
prices for such financial instruments.
F-13
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Accounts Payable and Other Accrued Expenses
Accounts payable and other accrued expenses consist of the following:
December 31
---------------
1998 1997
------- -------
(In thousands)
Accounts payable.......................................... $ 1,609 $ 984
Accrued compensation and employee benefits................ 4,546 2,425
Acquisition-related liabilities........................... 1,000 1,563
Accrued cooperative advertising and marketing programs.... 9,085 6,120
Accrued taxes............................................. 7,145 1,069
Other..................................................... 6,350 1,857
------- -------
$29,735 $14,018
======= =======
7. Stockholders' Equity
Stock Compensation Plans
As of December 31, 1998, the Company has four stock-based compensation
plans, which are described below. As mentioned in Note 2, the Company applies
APB Opinion 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
plans and its stock purchase plan. Had compensation cost for the Company's
four stock-based compensation plans been determined based on the fair value at
the grant dates for grants under those plans consistent with the method of
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
1998 1997 1996
------- ------- -------
(In thousands, except
per share information)
Net income............................ As reported $61,102 $41,358 $18,701
======= ======= =======
Pro forma $39,286 $33,016 $16,644
======= ======= =======
Basic earnings per share.............. As reported $ 1.45 $ 1.01 $ 0.50
======= ======= =======
Pro forma $ 0.93 $ 0.81 $ 0.44
======= ======= =======
Diluted earnings per share............ As reported $ 1.34 $ 0.95 $ 0.46
======= ======= =======
Pro forma $ 0.86 $ 0.76 $ 0.41
======= ======= =======
The fair value of each option is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions used:
1998 Grants 1997 Grants 1996 Grants
----------- ----------- -----------
Dividend yield........................ none none none
Expected volatility factor............ 0.6 0.7 0.8
Approximate risk free interest rate... 5.5% 5.5% 5.5%
Expected lives........................ 4.89 years 4.80 years 5 years
Substantially all of the options granted during 1995 were granted prior to
the Company's initial public offering and the value of such options are deemed
to approximate their fair value, as defined pursuant to SFAS No. 123. Because
the determination of the fair value of all options is based on the assumptions
described in the preceding paragraph, and because additional option grants are
expected to be made each year, the above pro forma disclosures are not
representative of pro forma effects on reported net income or loss for future
years.
F-14
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fixed Stock Option Plans
The Company's 1995 Stock Plan (the 1995 Plan) was adopted by the Board on
September 28, 1995 and approved by the Company's stockholders in October 1995.
Under the terms of the 1995 Plan, the Company is authorized to grant incentive
stock options (ISOs) and nonqualified stock options (NSOs), make stock awards
and provide the opportunity to purchase stock to employees, directors and
officers and consultants of the Company. The 1995 Plan provides for the
issuance of a maximum of 9,000,000 shares of Common Stock, plus, effective
January 1, 1996 and each year thereafter, a number of shares of Common Stock
equal to 5% of the total number of shares of Common Stock issued and
outstanding as of December 31 of the preceding year. Under the 1995 Plan, a
maximum of 15,000,000 ISOs may be granted and ISOs must be granted at exercise
prices no less than market value at the date of grant, except for ISOs granted
to employees who own more than 10% of the Company's combined voting power, for
which the exercise prices will be no less than 110% of the market value at the
date of grant. NSOs, stock awards or stock purchases may be granted or
authorized, as applicable, at prices no less than the minimum legal
consideration required. ISOs and NSOs expire ten years from the date of grant.
All options are exercisable upon vesting. The options vest at a rate of 25.00%
of the shares underlying the option one year from the date of grant and at a
rate of 2.08% monthly thereafter. The 1995 Non-Employee Director Stock Option
Plan (the Director Option Plan) was adopted by the Board of Directors on
September 28, 1995 and approved by the Company's stockholders in October 1995.
The Director Option Plan provides for the grant of options to purchase a
maximum of 900,000 shares of Common Stock of the Company to nonemployee
directors of the Company.
In April 1997, certain options previously granted during 1996 under the 1995
Option Plan were amended by reducing the exercise prices under the options to
$9.96 (which was the last sale price of the Company's Common Stock on the
Nasdaq on the date of the repricing). The options before amendment provided
the right to acquire up to 1,462,650 shares of Common Stock at exercise prices
ranging from $10.67 to $28.67 per share. In addition, employees electing to
reprice their options agreed to a change in vesting which provided for a six
month delay in the vesting schedule of each grant which was repriced. The
Compensation Committee offered the option reprice because the Committee felt
that due to changed circumstances, including the reduction in the trading
price of the Company's Common Stock, the options were no longer providing the
incentive they were designed to provide.
Under the Director Option Plan, each director who is not also an employee of
the Company and who is first elected as a director after the date of the
Company's initial public offering will receive, upon the date of his or her
initial election, an option to purchase 45,000 shares of Common Stock. Options
granted under the Director Option Plan will vest as to 33.33% one year from
the date of grant and will vest as to an additional 2.78% monthly thereafter.
In addition, on each three-year anniversary of such director's first election
to the Board of Directors, such director will receive an additional option to
purchase 45,000 shares of Common Stock, vesting in accordance with the
aforementioned schedule, provided that such director continues to serve on the
Board of Directors at the time of grant. All options granted under the
Director Option Plan will have an exercise price equal to the fair market
value of the Common Stock on the date of grant and a term of ten years from
the date of grant. Options are exercisable to the extent vested only while the
optionee is serving as a director of the Company or within 90 days after the
optionee ceases to serve as a director of the Company.
On July 11, 1989, the Company adopted its 1989 Stock Option Plan (the 1989
Plan). The 1989 Plan, as amended, permitted the Company to grant ISOs and NSOs
to purchase up to 6,314,136 shares of the Company's Common Stock. Under the
1989 Plan, options may be granted at exercise prices no less than market value
at the date of grant as determined by the Board of Directors and, therefore,
no compensation expense is recognized. All options are fully exercisable from
the date of grant and are subject to a repurchase option in favor of the
Company which lapses as to 25.00% of the shares underlying the option one year
from the date of grant and as
F-15
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to 2.08% monthly thereafter. If the purchaser of stock pursuant to the 1989
Plan is terminated from employment with the Company, the Company has the right
and option to purchase from the employee, at the price paid for the shares by
the employee, the number of unvested shares at the date of termination. The
Company does not intend to grant options under the 1989 Plan and subsequent to
November 1999 no further options may be granted under this Plan.
A summary of the status and activity of the Company's three fixed stock
option plans is as follows:
Year Ended December 31
-------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- --------- --------
Outstanding at beginning
of year................ 5,569,818 $16.82 4,845,057 $11.29 3,447,726 $ 0.61
Granted............... 4,303,400 56.07 2,276,738 28.13 2,266,729 23.37
Exercised............. (1,480,940) 10.10 (1,434,701) 1.93 (819,155) 0.41
Forfeited............. (322,447) 41.12 (117,276) 14.08 (50,243) 0.96
---------- ---------- ---------
Outstanding at end of
year................... 8,069,831 37.98 5,569,818 16.82 4,845,057 11.29
========== ========== =========
Options exercisable at
end of year............ 1,535,399 14.24 1,434,045 3.86 2,544,582 0.62
========== ========== =========
Weighted-average fair
value of options
granted during the
year................... $28.82 $17.70 $15.75
Information about fixed stock options outstanding as of December 31, 1998 is
as follows:
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted
Options Average Weighted Options Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise Prices December 31, 1998 Contractual Life Exercise Price December 31, 1998 Exercise Price
--------------- ----------------- ---------------- -------------- ----------------- --------------
$0.07 to $23.75 2,031,273 7.20 $ 7.87 942,249 $ 4.75
$23.83 to $31.92 1,377,460 8.24 $28.51 501,870 $27.56
$32.63 to $50.13 1,929,125 9.10 $39.97 91,280 $38.90
$50.75 to $80.94 2,731,973 9.55 $63.73 -- --
--------- ---------
8,069,831 8.63 $37.98 1,535,399 $14.24
========= =========
Stock Purchase Plan
The 1995 Employee Stock Purchase Plan (the 1995 Purchase Plan) was adopted
by the Board of Directors on September 28, 1995 and approved by the Company's
stockholders in October 1995. The 1995 Purchase Plan took effect upon
completion of the Company's initial public offering. The 1995 Purchase Plan
provides for the issuance of a maximum of 2,250,000 shares of Common Stock
pursuant to the exercise of nontransferable options granted to participating
employees. All U.S.-based employees of the Company, whose customary employment
is 20 hours or more per week and more than 5 months in any calendar year and
who have completed at least one year of employment are eligible to participate
in the 1995 Purchase Plan. Employees who would immediately after the grant own
5% or more of the Company's Common Stock and directors who are not employees
of the Company may not participate in the 1995 Purchase Plan. To participate
in the 1995 Purchase Plan, an employee must authorize the Company to deduct an
amount (not less than 1% nor more than 5% of a participant's total cash
compensation) from his or her pay during six-month periods (each a Plan
Period).
F-16
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The maximum number of shares of Common Stock an employee may purchase in any
Plan Period is 1,500 shares subject to certain other limitations. The exercise
price for the option for each Plan Period is 85% of the lesser of the market
price of the Common Stock on the first or last business day of the Plan
Period. If an employee is not a participant on the last day of the Plan
Period, such employee is not entitled to exercise his or her option, and the
amount of his or her accumulated payroll deductions will be refunded. An
employee's rights under the 1995 Purchase Plan terminate upon his or her
voluntary withdrawal from the 1995 Purchase Plan at anytime or upon
termination of employment. Under the 1995 Purchase Plan, the Company issued
7,615, 10,239 and 32,288 shares in 1998, 1997 and 1996, respectively.
Common Stock
The Company has reserved for future issuance 13,569,184 shares of Common
Stock for the exercise of stock options outstanding or available for grant.
On May 17, 1996, the stockholders approved an increase in authorized Common
Stock from 30,000,000 shares, $0.001 par value per share to 60,000,000 shares,
$0.001 par value per share.
In June 1996, the Company issued 3,547,332 shares in connection with the
second public offering of its common stock.
On May 14, 1998, the stockholders approved an increase of authorized Common
Stock from 60,000,000 shares, $0.001 par value per share to 150,000,000
shares, $0.001 par value per share.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
$0.01 par value per share. The Company has no present plans to issue such
shares.
8. Commitments
The Company leases certain office space, equipment and software under
various noncancelable operating leases. Certain of these leases contain stated
escalation clauses while others contain renewal options.
Rental expense for the years ended December 31, 1998, 1997 and 1996 totaled
approximately $2,787,000, $715,000 and $620,000 respectively. Lease
commitments under these noncancelable operating leases for the years ended
December 31 are as follows:
(In thousands)
1999........................................................ $ 4,594
2000........................................................ 4,631
2001........................................................ 4,183
2002........................................................ 2,715
2003........................................................ 1,432
Thereafter.................................................. 103
-------
Total future minimum lease payments....................... $17,658
=======
F-17
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
The United States and foreign components of income from continuing
operations before income taxes are as follows:
1998 1997 1996
------- ------- -------
(In thousands)
United States...................................... $93,219 $64,094 $21,728
Foreign............................................ 2,253 528 535
------- ------- -------
Total............................................ $95,472 $64,622 $22,263
======= ======= =======
The components of the provision for (benefit from) income taxes are as
follows:
1998 1997 1996
-------- -------- -------
(In thousands)
Current:
Federal..................................... $ 39,026 $ 39,613 $ 5,868
Foreign..................................... 1,907 565 --
State....................................... 7,339 7,448 863
-------- -------- -------
Total current............................. 48,272 47,626 6,731
Deferred...................................... (13,902) (24,362) (3,169)
-------- -------- -------
Total income tax expense.................. $ 34,370 $ 23,264 $ 3,562
======== ======== =======
The significant components of the Company's deferred income taxes are
approximately as follows:
December 31
---------------
1998 1997
------- -------
(In thousands)
Deferred tax assets:
In-process research and development..................... $ 7,727 $ 1,334
Deferred revenue........................................ 28,882 22,087
Accounts receivable allowances.......................... 2,415 2,364
Depreciation and amortization........................... 298 71
Other................................................... 2,837 1,675
------- -------
$42,159 $27,531
======= =======
During 1998 and 1997 respectively, the Company generated and utilized
approximately $2,542,000 and $1,492,000 of research and development tax
credits. During 1997, the Company also utilized all available research and
development and alternative minimum tax credit carryforwards of approximately
$535,000 and $72,000, respectively. At December 31, 1998, the Company had no
tax credit carryovers available for future use.
There was no change in the valuation allowance for deferred tax assets for
the year ended December 31, 1998 and 1997. The Company's net change in its
valuation allowance for the years ended December 31, 1996 was a decrease of
$5,072,000.
F-18
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of the Company's income tax rate to the statutory federal
rate is as follows:
Year Ended December 31
------------------------
1998 1997 1996
------- ------- ------
(In thousands)
Federal and statutory rate....................... $33,415 $22,618 $7,792
State income taxes............................... 3,476 2,942 891
Foreign sales corporation benefits............... (1,226) (957) (95)
Other permanent differences...................... 109 180 98
Tax credits...................................... (2,542) (1,492) --
Change in valuation allowance.................... -- -- (5,072)
Other............................................ 1,138 (27) (52)
------- ------- ------
$34,370 $23,264 $3,562
======= ======= ======
10. Benefit Plan
The Company maintains a 401(k) benefit plan (the "Plan") allowing eligible
employees to contribute up to 15% of their annual compensation, limited to an
annual maximum amount as set periodically by the Internal Revenue Service. The
Company, at its discretion, may contribute up to $0.50 on each dollar of
employee contribution, limited to a maximum of 6% of the employee's annual
contribution. In 1998, the Company matching contribution was $327,483. No
matching contributions to the Plan were made prior to 1998. The Company
contribution vests over a four year period at 25% per year.
11. Significant Customers
The Company had net revenue attributed to individual customers in excess of
10% of total net sales as follows:
Year ended
December 31
--------------
1998 1997 1996
---- ---- ----
Customer A.................................................. 8% 17% 22%
Customer B.................................................. 6% 9% 12%
Customer C.................................................. 11% 6% 3%
Shareholder................................................. 13% 8% --
12. Related Party Transactions
An entity which held a greater than 5% interest in the Company at December
31, 1998 and 1997 is a party to one of the licensing agreements discussed in
Note 2. The Company recognized $8.5 million, $7.8 million and $3.5 million of
royalty expense in cost of revenues in the years ended December 31, 1998, 1997
and 1996, respectively, and has accrued royalties and other accounts payable
of $2.9 million and $3.0 million at December 31, 1998 and 1997, respectively,
in connection with this agreement.
The Company and this entity also entered into a License, Development and
Marketing Agreement (the "Development Agreement") which provides for the
licensing to the entity of certain of the Company's technology. Pursuant to
the terms of the Development Agreement, the Company received an aggregate of
$75 million as a non-refundable initial fee. Under the terms of the
Development Agreement, the Company is entitled to receive payments of an
additional $100 million, in quarterly payments, a portion of which has already
been recieved. The Company has recognized revenue of approximately $31.7
million in 1998 and $9.6 million in 1997 in connection with the Development
Agreement.
F-19
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Information Relating to Export Revenue
Export revenue representing shipments of finished goods and services
provided to international customers, by geographical areas are as follows:
Year ended December 31
----------------------
1998 1997 1996
------- ------- ------
(In thousands)
Europe.............................................. $64,130 $19,214 $4,977
Pacific Rim......................................... 10,762 4,022 1,342
Other............................................... 2,760 2,320 734
------- ------- ------
$77,652 $25,556 $7,053
======= ======= ======
14. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Year ended December 31
-----------------------
1998 1997 1996
------- ------- -------
(In thousands, except
per share information)
Numerator:
Net income........................................... $61,102 $41,358 $18,701
======= ======= =======
Denominator:
Denominator for basic earnings per share--weighted
average shares...................................... 42,118 40,861 37,771
Effect of dilutive securities:
Employee stock options............................... 3,530 2,770 2,989
Warrants............................................. -- -- 145
------- ------- -------
Dilutive potential common shares..................... 3,530 2,770 3,134
Denominator for diluted earnings per share--adjusted
weighted-average shares............................. 45,648 43,631 40,905
======= ======= =======
Basic earnings per share............................... $ 1.45 $ 1.01 $ 0.50
======= ======= =======
Diluted earnings per share............................. $ 1.34 $ 0.95 $ 0.46
======= ======= =======
15. Stock Splits
On May 17, 1996, the Board of Directors declared a two-for-one stock split
in the form of a stock dividend to be paid on or about June 4, 1996 to
stockholders of record of the Company's Common Stock on May 28, 1996.
On January 25, 1998, the Board of Directors declared a three-for-two stock
split in the form of a stock dividend paid on February 20, 1998 to
stockholders of record of the Company's Common Stock on February 12, 1998.
The number of options issuable and previously granted and their respective
exercise prices under the Company's stock option plans have been
proportionately adjusted to reflect these stock splits.
The accompanying consolidated financial statements have been retroactively
restated to reflect these stock splits.
F-20
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Recent Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". The Company plans to adopt the SOP in
1999. The SOP will require the capitalization of certain costs incurred after
the date of adoption in connection with developing or obtaining software for
internal use. The Company currently expenses such costs as incurred.
Management has not yet determined what the effect of SOP 98-1 will be on the
Company's consolidated financial position, results of operations or cash
flows.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activity" ("SFAS
133"), which is required to be adopted in years beginning after June 15, 1999.
The Statement permits early adoption as of the beginning of any fiscal
quarter. The Company has yet to determine its date of adoption. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges of underlying transactions must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities
or firm commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately recognized
in earnings. The Company will comply with the requirements of SFAS 133 when it
becomes effective; this is not expected to have a material effect on the
Company's consolidated financial position, results of operations or cash
flows.
In December 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions". The SOP addresses
software revenue recognition as it applies to certain multiple-element
arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2", to extend the deferral of application of certain
passages of SOP 97-2 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. The Company will comply
with the requirements of this SOP as they become effective; this is not
expected to have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
17. Subsequent Events
On March 1, 1999, the Company announced a two-for-one stock split in the
form of a stock dividend to be paid on or about March 25, 1999, to
stockholders of record as of March 17, 1999. Earnings per share amounts
appearing in this Form 10-K have not been retroactively adjusted to reflect
this two-for-one stock split.
F-21
Supplemental Financial Information
Quarterly Financial Information (Unaudited)
(In thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
1998 (a)
Net Revenues......................... $49,302 $56,204 $67,621 $75,509 $248,636
Gross margin......................... 44,453 51,523 63,712 72,266 231,954
Income from operations............... 16,524 12,482 23,979 32,519 85,504
Net Income........................... 12,277 9,620 16,898 22,307 61,102
Basic earnings per common share (b).. 0.29 0.23 0.40 0.52 1.45
Diluted earnings per common share
(b)................................. 0.27 0.21 0.37 0.48 1.34
1997
Net Revenues......................... $21,521 $24,517 $34,941 $42,941 $123,920
Gross margin......................... 19,327 22,226 31,500 38,576 111,629
Income from operations............... 10,133 10,698 17,292 16,605 54,728
Net Income........................... 7,493 8,299 13,073 12,493 41,358
Basic earnings per common share (b).. 0.19 0.20 0.32 0.30 1.01
Diluted earnings per common share
(b)................................. 0.18 0.19 0.30 0.28 0.95
- --------
(a) The above 1998 quarterly information have been adjusted to reflect the
restatement as further discussed in Note 2.
(b) Basic and diluted earnings per share amounts do not reflect stock split
declared on March 1, 1999.
F-22
CITRIX SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Charged to Charged to
Beginning Costs and Other Balance at
of Period Expenses Accounts Deductions End of Period
---------- ---------- ---------- ---------- -------------
1998
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $1,698,748 $ 619,955 -- $ 726,047 $1,592,656
Allowance for
returns.............. 4,599,238 -- $ 42,229(1) -- 4,641,467
---------- ---------- ---------- ---------- ----------
$6,297,986 $ 619,955 $ 42,229 $ 726,047 $6,234,123
========== ========== ========== ========== ==========
1997
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 624,204 $1,398,608 -- $ 324,064(2) $1,698,748
Allowance for
returns.............. 1,927,835 -- $2,671,403(1) -- 4,599,238
---------- ---------- ---------- ---------- ----------
$2,552,039 $1,398,608 $2,671,403 $ 324,064 $6,297,986
========== ========== ========== ========== ==========
1996
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 399,459 $ 624,427 -- $ 399,682(2) $ 624,204
Allowance for
returns.............. 608,966 -- 1,318,869(1) -- 1,927,835
Valuation allowance
for deferred tax
assets............... 5,072,000 -- -- 5,072,000(3) --
---------- ---------- ---------- ---------- ----------
$6,080,425 $ 624,427 $1,318,869 $5,471,682 $2,552,039
========== ========== ========== ========== ==========
- --------
(1) Netted against net revenues.
(2) Uncollectible accounts written off, net of recoveries.
(3) Recognition of deferred tax asset.
F-23
EXHIBIT INDEX
Exhibit No. Description
----------- ----------- ---
2.1(5) Agreement and Undertaking by and among the Non-Executive
Directors of APM Limited, the Executive Directors of APM
Limited, and Citrix Systems, Inc.
2.2(5) Recommended Offers by Citrix Systems, Inc. for APM Limited
3.1(1) Amended and Restated Certificate of Incorporation of the
Company
3.2(1) Amended and Restated By-laws of the Company
3.3(7) Certificate of Amendment of Amended and Restated Certificate
of Incorporation
4.1(1) Specimen certificate representing the Common Stock
10.1(1)* 1989 Stock Option Plan
10.2(1)* 1995 Stock Plan
10.3(1)* 1995 Non-Employee Director Stock Option Plan
10.4(1)* 1995 Employee Stock Purchase Plan, as amended
10.5(1) Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.6(1) Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.7(1) License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15, 1990
10.8(1) Amendment No. 1 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated May 6, 1991
10.9(1) Amendment No. 2 to License Agreement between the Company and
Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x,
dated October 1, 1992
10.10(1) Amendment No. 3 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated January 1, 1994
10.11(1) Amendment No. 4 to the License Agreement between the Company
and Microsoft dated August 15, 1990, dated January 31, 1995
10.12(1) Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.13(1) Form of Indemnification Agreement
10.14(2) Lease Agreement between Halmos Trading and Investment
Company and the Company dated June 6, 1996
10.15(3) License, Development and Marketing Agreement dated July 9,
1996 between the Company and Microsoft Corporation
10.16(4) License, Development and Marketing Agreement dated May 9,
1997 between the Company and Microsoft Corporation
10.17(6) Amendment No. 1 to License, Development and Marketing
Agreement dated May 9, 1997 between the Company and
Microsoft Corporation
10.18** Employment Agreement dated as of January 1, 1999 by and
between the Company and Roger W. Roberts.
21.1** List of Subsidiaries
23.1** Consent of Ernst & Young LLP
24.1** Power of Attorney (Included in signature page)
27.1** Financial Data Schedule
I-1
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(2) Incorporated herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(3) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
report on Form 10-Q for the quarter ended September 30, 1996.
(4) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
(5) Incorporated herein by reference to the exhibits of the Company's Current
Report on Form 8-K dated as of June 30, 1998.
(6) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(7) Incorporated herein by reference to Exhibits 3 and 4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith.
I-2