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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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-27084
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 33309
FORT LAUDERDALE, FLORIDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
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 10, 2000 (based on the last reported sale price on The
Nasdaq National Market as of such date) was $19,792,872,803. As of March 10,
2000 there were 184,119,747 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ITEM 1. BUSINESS
GENERAL
Citrix Systems, Inc. ("Citrix" or the "Company") is a leading supplier of
application server software and services that enable the effective and efficient
enterprise-wide deployment and management of applications, including those
designed for Microsoft Corporation ("Microsoft") Windows(R) operating systems.
The Company's products permit organizations to deploy and manage applications
without regard to location, network connection, or type of client hardware
platform. These products utilize the Company's 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 manageable and bandwidth-efficient solution. The Company was
incorporated in April 1989, and shipped its initial products in 1991.
INDUSTRY BACKGROUND
New information technologies and the Internet 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
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 applications are faced with a diverse set of challenges,
including:
- Internet and eBusiness Initiatives. Although there has been global
adoption of the Internet by enterprises and application service providers
("ASPs"), these organizations lack the ability to rapidly integrate
32-bit Windows applications into standard Web browsers.
- 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(R)
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 limit the ability of organizations to deploy Windows,
Java(TM) 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 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 Windows Application Servers and Management Services Products permit
organizations to
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deploy and manage Windows applications without regard to location or type of
client hardware platforms. These products operate by executing the Windows
applications on a multi-user Windows NT 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:
- The Internet, accessed through widely-available browser technology;
- Emerging information appliances, such as hand-held wireless devices,
PDAs, information kiosks, Windows-based terminals and network computers;
- Low-bandwidth connections, such as dial-up, wide area networks ("WAN")
and wireless;
- Intel and non-Intel based platforms, such as 486 and Pentium computers
and laptops which are not capable of running the applications locally,
UNIX workstations, Java applications, X-Terminals and Macintosh systems.
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 technology 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, Java or UNIX 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 and licensed back to Microsoft under the terms of a development
agreement with Microsoft as described in Item 7.
PRODUCTS
The Company's products consist of the following:
Windows Application Servers. The Windows Application Servers product line
consists primarily of MetaFrame(TM) and WinFrame(R) products. MetaFrame software
is an enhancement to Microsoft Windows NT Server 4.0, Terminal Server Edition
("NT Terminal Server") and Windows 2000 server products, which Microsoft
launched in February 2000. MetaFrame is system software that incorporates
Citrix's ICA protocol and extends NT Terminal Server or Windows 2000 with
additional client and server functionality, including support for heterogeneous
computing environments, enterprise-class end-to-end management and the ability
to easily deploy applications via the Internet. The Company's MetaFrame
software, in conjunction with NT Terminal Server and/or Windows 2000, delivers a
comprehensive application server software 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. 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.
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The Company's products enable the deployment and management of Windows
business applications in large-scale Windows, non-Windows and heterogeneous
environments. MetaFrame and WinFrame software 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. These deployments often involve complex applications running on
multiple servers and supporting numerous clients. In addition, the Company
offers additional user license packs to increase the number of users who can
access Windows Application Servers software.
MetaFrame and WinFrame first shipped in June 1998 and August 1995,
respectively. Windows Application Servers constituted approximately 74% of the
Company's revenues in 1999, 69% in 1998, and 67% in 1997. Sales of MetaFrame
product line accounted for approximately 46% of the Company's revenues in 1999
and 22% in 1998. Sales of WinFrame product line accounted for approximately 4%,
29% and 49% of the Company's revenues in 1999, 1998 and 1997, respectively.
Management Services Products. Management Services Products consist of
enhancements to the Windows Application Servers product line, which incorporates
sophisticated management tools into the MetaFrame and WinFrame product lines.
The management tools include application publishing services, help desk support
features, support for desktop peripherals and other features which permit the
centralized management and support of server-based applications. The Company
markets the following Management Services Products:
- Load Balancing Services. The Company's Load Balancing system provides
true application-based load balancing and enterprise scalability.
- Resource Management Services. The Company's Resource Management system
provides the means to monitor and manage critical system resources.
- Installation Management Services. The Company's Installation Management
Services provides the means to easily package applications for
installation on MetaFrame servers across the enterprise.
- UNIX Integration Services. The Company's UNIX Integration Services
provides X11 connectivity to Citrix MetaFrame and WinFrame Servers for
UNIX-based desktops and terminals.
- Secure ICA. The Company's Secure ICA system option provides 40-, 56- and
128-bit encryption for client access to MetaFrame and WinFrame
installations.
Collectively, these products accounted for approximately 10% of the
Company's revenues in 1999, 5% in 1998 and 2% in 1997.
Computing Appliances Products. The Company licenses Windows Application
Servers clients and servers to manufacturers of computing appliances who add
value to these products, and in some cases, remarket these products under their
own brand names. Computing Appliances Products accounted for approximately 2% of
the Company's revenues in 1999, 9% in 1998 and 19% in 1997.
The Citrix Solution can be applied in numerous computing situations, such
as:
Remote Computing. 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 and branch office locations and deployment of applications over an
enterprise WAN. Without the use of MetaFrame/NT Terminal Server or WinFrame
software, 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.
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 application 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
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organization could add secure interactive access to an application directly from
a web page without developing any new programs or changing the existing
application program or database.
Terminals. Citrix has licensed its ICA technology to companies such as
IBM, Acer, Sun, QNX, Wyse Technology and Boundless Technologies to enable the
development of low-cost 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 application server products, when coupled
with these new devices, will provide an effective alternative to character-based
implementations and will capitalize on existing Windows applications, tools and
development facilities.
Hand-held PCs, PDAs and Information Appliances. Many device manufacturers,
including Motorola, Sharp, Fujitsu, Hitachi, Hewlett Packard, and Symbol
Technologies, are shipping low cost portable devices that 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, which may limit the functionality of these wireless devices. The
Company believes that 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, IBM, Sharp,
Symbol Technologies, Telxon Corporation, Psion Software PLC and others for this
purpose.
UNIX, X-Terminal, DOS and Macintosh Support for Windows. Windows 95 and 98
caused major changes in the Windows application software market at the time they
were introduced. As independent software vendors moved to develop applications
that capitalized on the new features of the Windows 95 and 98 operating systems
organizations upgraded client systems in order to run these applications.
However, many organizations employed a heterogeneous mix of computing platforms,
including DOS systems, Windows 3.x systems, UNIX workstations, Java devices,
X-Terminals and Macintosh computers, each of which is incapable of running such
applications without additional hardware or software. 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.
TARGET MARKETS
Corporate Customers. The Company's primary market for its products and
services is large and medium-sized enterprises that require the ability to
deploy, manage, and access business applications across the extended enterprise.
The Company's products and technology extend the functionality of the operating
system by providing enterprise application management for increased scalability,
deployment and simplified application support, Web-enablement of applications,
and universal application access to users.
Application Service Providers. The rising cost of licensing and the
complexity of systems administration have given rise to ASPs. ASPs function as
virtual "computing utility companies" whereby businesses or consumers can access
applications from a central location. The ability of ASPs to rapidly deliver
such applications over the Internet and other networks, wired to wireless, is
limited by bandwidth requirements, user device capabilities, and a system that
is scalable, reliable and secure. The Company's products and technologies allow
ASPs to deliver the largest number of applications to the broadest array of
computing devices with minimum bandwidth requirements. The advanced
manageability and security features of the Company's products and technologies
enable ASPs to meet the demands for scalability, reliability and security.
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 technology for distributed Windows applications.
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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, Windows NT, Windows CE and Internet
Explorer. 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 that expired
in September 1994 and was 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, Windows 2000 and 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.
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 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. Additionally, Microsoft's obligation 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 expired
in November 1999. Microsoft may now market or endorse other methods to provide
multi-user Windows access to non-Windows client devices. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
Additional Strategic Relationships. During 1999, the Company entered into
its 100th ICA license agreement. Currently, more than 200 different devices
incorporate Citrix ICA, ranging from Linux terminals to information appliances,
such as wireless phones and handheld devices. ICA licensees include IBM, Compaq,
Hewlett Packard, Motorola, Samsung, Hitachi and Sharp, among others.
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. This team has been
involved in the development of system software products utilizing Windows NT
technology and UNIX.
During 1999, 1998 and 1997, the Company incurred research and development
expenses of approximately $37.4 million, $22.9 million and $6.9 million,
respectively. The Company also recorded charges of approximately $2.3 million,
$18.4 million and $4.0 million during the years 1999, 1998 and 1997,
respectively, 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. Citrix 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 through its Citrix Solutions Network(TM) ("CSN") program.
As of December 31, 1999, the Company had sales and marketing relationships
with approximately 7,200 organizations around the world. The Company had
relationships with seven national (domestic) distributors,
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approximately 50 CSN Authorized Platinum Solutions Providers, 1,000 CSN
Authorized Gold Solutions Providers and 2,800 CSN Authorized Silver Solutions
Providers. Internationally, the Company had relationships with approximately 80
distributors and 3,260 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.
In September 1998, Citrix officially launched the Citrix Business
Alliance(TM) ("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 1999, CBA
membership included over 430 members including Apple Computer, Inc., BMC
Software, Inc., Compaq Computer Corporation, Data General (a division of EMC
Corporation), Hewlett Packard Company, IBM Corporation, JD Edwards, Lotus
Development Corporation, National Semiconductor Corporation, Novell, Inc.,
PeopleSoft, Inc., Progress Software and SAP AG.
In September 1999, Citrix launched the Citrix Developer Network ("CDN"), a
development community focused on Citrix application server software technology
to promote an open exchange of technical knowledge and information. This program
emphasizes the commitment that Citrix has to delivering tools that empower
technical relationships and integration with Citrix technology. By the end of
1999, CDN membership had grown to over 7,700 members. CDN membership consists
primarily of independent software vendors, system integrators, corporate IT
departments, resellers and consultants.
During 1999, Citrix established a strategic Global Consulting Partnering
program to develop alliances with several of the "Big 5" accounting and
consulting firms and other global and regional consulting firms. Partnering with
Citrix gives these consulting firms new opportunities to extend their reach to
existing and new Citrix customers. Citrix works closely with these consulting
companies to provide customers with tangible business improvements through
application server software and services.
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.
Additional sales personnel based in Fort Lauderdale, Florida; Toronto, Canada;
London, England; Munich, Germany; Schaffhausen, Switzerland; Paris, France;
Amsterdam, Netherlands; Copenhagen, Denmark; Milan, Italy; Madrid, Spain;
Sydney, Australia; Melbourne, Australia; Singapore; Tokyo, Japan; Hong Kong;
Bangalore, India; Sao Paolo, Brazil and Mexico City, Mexico support these field
personnel. These additional sales personnel 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, Ireland and
Australia. Citrix also provides technical advice 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
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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.
OPERATIONS
The Company controls all purchasing, inventory, scheduling, order
processing and accounting functions related to its operations. Production,
warehousing and fulfillment is performed by independent contractors on a
purchase order basis in the United States and in Ireland. Shipping is primarily
performed at the locations of the independent contractors, 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. The independent
contractors duplicate diskettes and CD-ROMs, print documentation, and package
and assemble product 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
was 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 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, GraphOn and SCO market products
that 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, 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 the Company's business, results of
operations, and financial condition.
In addition, alternative products exist for Internet commerce that directly
or indirectly compete with the Company's products. Existing or new products that
extend website 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, AOL, 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.
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PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon proprietary technology. The
Company has filed patent applications in the United States and foreign
countries. A number of patents have been issued domestically and in foreign
countries, while other patent applications are currently pending. The Company
also takes steps to protect its technology under copyright laws. However, 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. A significant portion of the Company's sales is 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.
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, 1999, the Company had approximately 1,080 employees.
Twenty-one 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 various
buildings totaling approximately 254,000 square feet. In addition, the Company
leases approximately 51,000 square feet of office space in other locations in
the United States.
The Company leases and subleases a total of approximately 109,000 square
feet of office space in various other facilities in Europe, Latin America and
the Asia Pacific region.
ITEM 3. LEGAL PROCEEDINGS
On or about March 15, 2000, the Company learned that GraphOn Corporation
("GraphOn") filed an action in the Santa Clara County Superior Court in
California against the Company and Insignia Solutions plc ("Insignia'), certain
of whose assets the Company acquired in February 1998. GraphOn's claims allege
that the Company and Insignia misappropriated GraphOn's trade secrets and
engaged in unfair competition. GraphOn's claims are for unspecified damages. The
Company intends to vigorously defend against this claim but is unable to predict
the ultimate outcome.
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 1999.
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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." 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,
the two-for-one stock split in the form of a stock dividend declared on March 1,
1999 and paid on March 25, 1999 to holders of record of the Company's Common
Stock on March 17, 1999 and the two-for-one stock split in the form of a stock
dividend declared on January 19, 2000 and paid on February 16, 2000 to holders
of record of the Company's Common Stock on January 31, 2000. Such information
reflects inter-dealer prices, without retail markup, markdown or commission and
may not represent actual transactions.
HIGH LOW
---- ----
YEAR ENDED DECEMBER 31, 2000:
First quarter (through March 10, 2000).................... $118 9/16 $ 52 1/2
YEAR ENDED DECEMBER 31, 1999:
Fourth quarter............................................ $ 64 5/8 $ 29 9/16
Third quarter............................................. $ 34 5/8 $ 22 3/4
Second quarter............................................ $ 28 11/16 $ 14 11/16
First quarter............................................. $ 25 5/8 $ 17
YEAR ENDED DECEMBER 31, 1998:
Fourth quarter............................................ $ 24 1/4 $ 12 11/16
Third quarter............................................. $ 18 13/16 $ 14 7/16
Second quarter............................................ $ 17 3/16 $ 12 1/8
First quarter............................................. $ 13 9/16 $ 9 3/8
On March 10, 2000, the last reported sale price of the Common Stock on The
Nasdaq National Market was $107.50 per share. As of March 10, 2000, there were
approximately 710 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.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net revenues................................. $ 403,285 $248,636 $123,933 $44,527 $14,568
Cost of revenues (excluding amortization
presented separately below)................ 14,579 16,682 12,304 5,099 1,956
---------- -------- -------- ------- -------
Gross margin................................. 388,706 231,954 111,629 39,428 12,612
Operating expenses:
Research and development................... 37,363 22,858 6,948 3,843 2,343
Sales, marketing and support............... 121,302 74,855 35,352 13,741 6,670
General and administrative................. 37,757 20,131 10,651 4,126 1,784
Amortization of intangible assets.......... 18,480 10,190 -- -- --
In-process research and development........ 2,300 18,416 3,950 -- --
---------- -------- -------- ------- -------
Total operating expenses........... 217,202 146,450 56,901 21,710 10,797
---------- -------- -------- ------- -------
Income from operations....................... 171,504 85,504 54,728 17,718 1,815
Interest and other income.................... 23,843 10,043 9,903 4,545 173
Interest expense............................. (12,622) (75) (9) -- --
---------- -------- -------- ------- -------
Income before income taxes................... 182,725 95,472 64,622 22,263 1,988
Income taxes................................. 65,781 34,370 23,264 3,562 93
---------- -------- -------- ------- -------
Net income................................... $ 116,944 $ 61,102 $ 41,358 $18,701 $ 1,895
========== ======== ======== ======= =======
Diluted earnings per share(a)................ $ 0.61 $ 0.33 $ 0.24 $ 0.11 $ 0.02
========== ======== ======== ======= =======
Diluted weighted-average shares outstanding
(a)........................................ 192,566 182,594 174,524 163,620 121,480
========== ======== ======== ======= =======
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................. $ 433,249 $158,900 $222,916 $139,778 $42,688
Total assets................................ 1,037,857 431,380 282,668 149,580 46,715
Long term debt and capital lease
obligations............................... 313,940 48 8 8 88
Stockholders' equity........................ 533,070 297,454 196,848 141,851 42,962
- ---------------
(a) Adjusted to reflect the stock splits discussed in Item 5.
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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
and management of enterprise applications that are designed for Microsoft
Windows(R) operating systems. The Company's Windows Application Servers
primarily consist of the WinFrame(R) and MetaFrame(TM) product lines, which
began shipping in the third quarter of 1995 and second quarter of 1998,
respectively, together with their related options, comprise 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 platforms 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(R)) on
NT Terminal Server. 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 for engineering and support services to be rendered by the
Company. Under the terms of the Development Agreement, as amended, the Company
received additional payments totaling $100 million on a quarterly basis. No
additional payments are due pursuant to the Development Agreement. 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. Subject to the terms of the Development Agreement, 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 continues to support
the Microsoft Windows NT platform, but the MetaFrame products and later releases
no longer directly incorporate Windows NT technology. The Company plans to
continue developing enhancements to its MetaFrame product line and expects that
this product and associated options 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 and SOP
98-9) and related interpretations, "Software Revenue Recognition" for 1999 and
1998 and SOP 91-1, "Software Revenue Recognition" for 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 five year term
of the contract, which began in May 1997. The additional $100 million received
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 ("PCS"), 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 ("VSOE"). The Company sells software and PCS separately and
VSOE is determined by the price charged when each element is sold separately.
Product returns and sales allowances, including stock
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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. In January 1998, the Company licensed certain software technology
from EPiCON, Inc., for approximately $8.0 million payable in cash. In February
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. In June 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 $7.9 million in net
cash. In July 1999, the Company completed its acquisition of certain software
technologies and assets of ViewSoft, Inc. for approximately $33.5 million in
cash and liabilities assumed.
In December 1999, the Company amended its license agreement with EPiCON to
allow the Company access to additional software technology and to extend the
exclusive license term for an additional $4.0 million, of which $1.3 million was
paid in cash at the amendment date.
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex") for approximately $47.8 million in cash, of
which $28.7 million was paid at the closing date and the balance is payable, in
equal installments, 18 and 24 months after the closing date, contingent upon
future events, as defined in the acquisition agreement.
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. Except for Innovex, 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.
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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, 1999 1998
----------------------- COMPARED COMPARED
1999 1998 1997 TO 1998 TO 1997
----- ----- ----- -------- --------
Net revenues...................................... 100.0% 100.0% 100.0% 62.2% 100.6%
Cost of revenues (excluding amortization presented
separately below)............................... 3.6 6.7 9.9 (12.6) 35.6
----- ----- -----
Gross margin...................................... 96.4 93.3 90.1 67.6 107.8
Operating expenses:
Research and development........................ 9.3 9.2 5.6 63.5 229.0
Sales, marketing and support.................... 30.1 30.1 28.5 62.0 111.7
General and administrative...................... 9.4 8.1 8.6 87.6 89.0
Amortization of intangible assets............... 4.6 4.1 -- 81.4 *
In-process research and development............. 0.5 7.4 3.2 * *
----- ----- -----
Total operating expenses................ 53.9 58.9 45.9 48.3 157.4
----- ----- -----
Income from operations............................ 42.5 34.4 44.2 100.6 56.2
Interest and other income......................... 5.9 4.0 8.0 138.9 0.7
Interest expense.................................. (3.1) -- -- * --
----- ----- -----
Income before income taxes........................ 45.3 38.4 52.2 91.4 47.7
Income taxes...................................... 16.3 13.8 18.8 91.4 47.7
----- ----- -----
Net income........................................ 29.0% 24.6% 33.4% 91.4 47.7
===== ===== =====
- ---------------
* not meaningful.
Net Revenues. Net revenues are presented below in five categories: Windows
Application Servers, Computing Appliances Products, Management Services
Products, Microsoft Royalties and Other Revenue. Windows Application Servers
revenue represents fees related to the licensing of the Company's MetaFrame and
WinFrame products, subscriptions and additional user licenses. Computing
Appliances Products revenue consists of license fees and royalties from OEMs who
are granted a license to incorporate and/or market the Company's multi-user
technologies in their own product offerings. Management Services Products
consist of system option products such as Load Balancing Services, Resource
Management Services and other options, which are applicable to both the
MetaFrame and WinFrame product lines. Microsoft royalties represent fees
recognized in connection with the Development Agreement.
The increase in net revenues in 1999 was primarily attributable to
increases in the volume of shipments of the Company's MetaFrame product line and
associated additional user licenses, which began shipping in June 1998, while
sales of the WinFrame product line and associated additional user licenses
decreased. The Company expects that revenue from MetaFrame-based products will
constitute an increasing percentage of net revenue and that revenue from
WinFrame-based products will decrease as a percentage of net revenues. To a
lesser extent, the increase in net revenues in 1999 was due to an increase in
revenue related to the Development Agreement with Microsoft and increases in the
volume of shipments of Management Services Products, primarily due to higher
sales levels of the Load Balancing Services product as end users continue to
implement larger scale MetaFrame solutions. The Company anticipates the revenue
from the Development Agreement with Microsoft will account for a decreasing
percentage of net revenues. Net revenues of Computing Appliances Products
declined in 1999 due to decreased volume of licensing to OEMs.
The increase in net revenues in 1998 was primarily attributable to an
increase in unit sales of the Company's MetaFrame product and additional user
licenses, which were first shipped in June 1998, and increases in unit sales of
Management Services Products. To a lesser extent, the increase in net revenues
in
14
15
1998 was attributable to an increase in unit sales of WinFrame and an increase
in revenue related to the Development Agreement with Microsoft.
An analysis of the Company's net revenues is detailed in the table below:
YEAR ENDED DECEMBER 31, REVENUE REVENUE
----------------------- GROWTH GROWTH
1999 1998 1997 1998 TO 1999 1997 TO 1998
----- ----- ----- ------------ ------------
Windows Application Servers................... 74.2% 69.4% 66.5% 73.5% 109.6%
Computing Appliances Products................. 2.4 8.8 19.4 (55.2) (9.6)
Management Services Products.................. 9.5 4.8 2.3 222.6 316.3
Microsoft royalties........................... 9.9 12.8 7.8 25.5 229.7
Other revenue................................. 4.0 4.2 4.0 49.3 111.2
----- ----- -----
Net revenues.................................. 100.0% 100.0% 100.0% 62.2 100.6
===== ===== =====
International and Segment Revenues. International revenues (sales outside
of the United States) accounted for approximately 37.1%, 31.6% and 20.6% of net
revenues for the years ended December 31, 1999, 1998 and 1997, respectively. See
Note 12 to the Company's Consolidated Financial Statements appearing in Item 8
of this Annual Report. The increase in international revenues as a percentage of
net revenues was primarily due to the Company's increased sales and marketing
efforts in Europe and Asia. The Company anticipates that international revenues
will account for an increasing percentage of net revenues in the future.
An analysis of geographic segment net revenue is detailed in the table
below:
YEAR ENDED DECEMBER 31, REVENUE REVENUE
----------------------- GROWTH GROWTH
1999 1998 1997 1998 TO 1999 1997 TO 1998
----- ----- ----- ------------ ------------
Americas...................................... 50.9% 48.0% 54.1% 71.9% 78.1%
EMEA.......................................... 31.8 25.8 16.1 100.0 220.4
Asia Pacific.................................. 5.0 4.3 2.2 87.6 297.6
Other......................................... 12.3 21.9 27.6 (8.8) 59.1
----- ----- -----
Consolidated net revenues..................... 100.0% 100.0% 100.0% 62.2 100.6
===== ===== =====
The increase in net revenues in 1999 was primarily attributable to
continued demand for Citrix products in the Americas and Europe, Middle East &
Africa ("EMEA") regions and larger scale MetaFrame implementations in these
regions. The EMEA revenue increase is also due to greater sales and marketing
efforts in Europe and the opening and expansion of additional sales offices in
that region. The decrease in other revenue, which primarily consists of revenue
related to the Development Agreement with Microsoft and revenue from OEMs,
decreased due to a lower volume of licensing to OEMs.
The increase in net revenues in 1998 was primarily attributable to higher
sales volumes in the Americas and EMEA regions due to the release of the
Company's MetaFrame product, which was first shipped in June 1998. EMEA revenue
also increased due to a greater sales and marketing presence in Europe via the
addition and expansion of offices in various European countries. To a lesser
extent, the increase in net revenues in 1998 was attributable to an increase in
other revenue due to an increase related to the Development Agreement with
Microsoft.
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
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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. The Company's
cost of revenues exclude the amortization of core technology.
Gross Margin. The increase in gross margin as a percent of net revenues
from 1998 to 1999 was primarily due to increases in sales of the MetaFrame
product and related user licenses. The MetaFrame product line has a relatively
high gross margin contribution as the MetaFrame product line bears no royalties.
Additionally, the increase in gross margin contribution is partly due to an
adjustment to royalties payable associated with higher than expected additional
user licenses deployed with MetaFrame products. Gross margin related to the
Development Agreement increased from 1998 to 1999 due primarily to an increase
in revenue related to the Development Agreement as well as a decrease in related
engineering and support expenses which decreased due to the maturity level of
the MetaFrame product. The overall increase in gross margin as a percentage of
net revenues for 1999 was partially offset by an increase in inventory reserves.
The Company anticipates gross margin as a percentage of net revenues will
decrease as the Company increases its consulting services offering which has a
lower gross profit margin as a percentage of net revenues.
The increase in gross margin as a percent of net 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 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 1999 and 1998 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
with the translation and localization of the MetaFrame and WinFrame products.
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. 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 described herein.
Sales, Marketing and Support Expenses. The increase in sales, marketing
and support expenses in 1999 resulted, in part, from increased sales staff and
associated salaries, commissions and expenses related to expansion of the
Company's sales force. The increase was also due to higher levels of promotional
activities and marketing programs directed at customer and business partner
acquisition and retention, increased marketing staff and associated salaries,
and additional advertising activities related to specific product lines and
corporate branding. Promotional activities include various demand generation
programs and other promotional activities such as direct mail campaigns,
programs directed at resellers and trade shows.
Increases in sales, marketing and support expenses in 1998 resulted
primarily from increases in promotional and advertising activities to expand
product-specific marketing programs, such as the MetaFrame launch in 1998. The
increase was also due to increased sales and marketing staff and associated
salaries, commissions and related expenses.
General and Administrative Expenses. Increases in general and
administrative expenses in 1999 and 1998 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 1999, for additional
expenditures related to improvements to its information systems.
Amortization of Intangible Assets. The increase in amortization of
goodwill and identifiable intangible assets in 1999 and 1998 is primarily due to
the acquisition of Insignia Solutions, plc in February 1998, APM
16
17
Ltd. in June 1998, VDOnet Corporation Ltd. in July 1998, and the EPiCON
licensing arrangement in January 1998. These acquisitions resulted in additional
goodwill and identifiable intangible assets of approximately $14.4 million,
$30.5 million, $5.6 million and $5.4 million, respectively, at their respective
date of acquisition or licensing. Additionally, for 1999, the increase was due
to the acquisition of ViewSoft, Inc. in July 1999 which resulted in additional
goodwill and identifiable intangible assets of approximately $31.1 million. As
of December 31, 1999, the Company had net goodwill and identifiable intangible
assets of $63.4 million, associated with these transactions, remaining to be
amortized over four years following the acquisitions. The Company anticipates
that amortization of goodwill and identifiable intangible assets will increase
due to the continuation of the Company's acquisition efforts.
In-Process Research and Development. In 1999, the Company completed the
acquisition of certain in-process software technologies from ViewSoft, in which
it allocated $2.3 million of the purchase price to IPR&D. During 1998, the
Company completed acquisitions and a 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.
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 in 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.
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 transactions, 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, although
there are no acquirer-specific synergies identified in the assumption model. 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, VDOnet and
ViewSoft acquisitions. Appropriate adjustments were made to operating income to
derive net cash flow, and the estimated net cash flows of the in-process
17
18
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%, 50% and 30% for
the EPiCON licensing agreement, Insignia, APM, VDOnet and ViewSoft 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 904% 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
882%, decreasing over the remaining years at rates ranging from 7% to 68%
annually, resulting in annual gross profits ranging from approximately $0.6
million to $69.2 million. Increases and decreases in gross profit are assumed to
move in tandem with increases and decreases in revenue. The gross profit
projections assumed a growth rate approximately the same as the revenue growth
rate. The assumption model's expected gross profit percentage was used
consistently throughout the respective periods.
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 -286% (due to an expected operating loss in the first year of one of the
projects), 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. General and administrative expenses are assumed to move in tandem
with increases and decreases in revenue. Selling and marketing expenses are
expected to decline over time compared to revenues due to general business
trends associated with the life cycle of the product. Operating profit
projections assumed a growth rate approximately the same as the revenue growth
rate.
The Company used discount rates ranging from 30% to 50% for valuing the
in-process research and development acquired in these transactions, which the
Company believes reflected the risk associated with the completion of the
individual research and development projects acquired and the estimated future
economic benefits to be generated subsequent to the completion of the projects.
A description of the in-process research and development and the estimates
made by the Company for each of EPiCON, Insignia, APM, VDOnet and ViewSoft 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.
EPiCON
The in-process research and development acquired in the license of EPiCON
technology consisted of one significant research and development project,
Installation Management. 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
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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, which was currently under development, was operating in a Citrix
MetaFrame or WinFrame environment at the date of licensing. However, EPiCON was
in the process of modifying their technology to operate in a WinFrame and
MetaFrame environment. The Company estimated that the project was less than 60%
complete at the date of licensing. After licensing the EPiCON technology, the
Company continued the development of the project to operate in a Windows NT 4.0
environment and the integration of the technology into a MetaFrame and WinFrame
environment. The aggregate value assigned to the in-process research and
development was $2.6 million. See a summary of the projections made in the
valuation of the in-process research and development and an updated status of
completion of each project in the tables that follow.
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 enhancements to ICA in WinFrame and MetaFrame software. At the date of
the acquisition, Insignia was shipping software that enhanced WinFrame and was
in the process of modifying this product to incorporate changes necessary for it
to interface with MetaFrame. Insignia was also developing Keoke, a video display
protocol designed to add performance and bandwidth enhancements to ICA in
WinFrame and MetaFrame software. Following the acquisition, the Company
continued the process of incorporating changes necessary to interface with
MetaFrame and to add the Keoke functionality to the Company's ICA protocol.
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. See the summary of projections made in the
valuation of the in-process research and development and an updated status of
completion for each project in the tables that follow.
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 applications, which is
similar to WinFrame software, but actually runs Java applications. At the date
of the acquisition, APM was shipping a Java application server solution that
allowed an enterprise user to access Java-applets from the Internet and execute
these applets outside the corporate firewall in a server-based computing
configuration in a fashion that was transparent to the enterprise user. APM was
in the process of modifying its software product to incorporate changes
necessary for it to interface with Java 2.0, which was a major new release that
included major rewrites to the Java desktop. Following the acquisition, the
Company planned on continuing the process of incorporating changes necessary to
interface with Java 2.0, and in addition, planned on further developing the
software product into an application server for Java 2.0 that would operate in a
MetaFrame and WinFrame server environment.
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. The remaining efforts to complete the project are
primarily the incorporation of changes necessary to interface with Java 2.0 and
the utilization of acquired technology to develop an application server for Java
that would operate in a MetaFrame and a 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. See the summary of projections made in the
valuation of the in-process research and development and an updated status of
completion for each project in the tables that follow.
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
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applications containing video to be viewed on an ICA client, and is targeted for
the server-based computing market. At the date of the acquisition, VDOnet was
shipping a client server video streaming product that was not operational in a
Windows NT or in a WinFrame or a MetaFrame environment. VDOnet was in the
process of modifying its software to be operational in a Windows NT environment.
In addition, VDOnet was developing enhancements that would provide for a live
camera feed and multicast, which is intended to direct a video stream to
multiple client devices simultaneously. Following the acquisition, the Company
continued the process of modifying the VDOnet software to be operational in a
Windows NT environment and is continuing the development of enhancements that
would provide for live camera feed and multicast. In addition, the Company plans
on further developing the software to be operational in a WinFrame and a
MetaFrame environment.
The Company estimates this project 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. The remaining efforts to complete the project are
primarily the modification of the VDOnet software to be operational in a Windows
NT environment and the continuation of enhancements that provide for live camera
feed and multicast functionality and the utilization of acquired technology to
develop a video server that is operational in a MetaFrame and a WinFrame server
environment. The research and development risks associated with this project
relate primarily to integrating this product into the server-based computing
environment. See the summary of projections made in the valuation of the
in-process research and development and an updated status of completion for each
project in the tables that follow.
ViewSoft
The in-process research and development acquired in the ViewSoft
acquisition consisted primarily of one significant research and development
project, ViewSoft Internet 4.0. This project enables multi-tier, Web-based
application development and deployment. At the date of the valuation, ViewSoft
was in development with this product. The product was intended to operate in the
multi-tier web application market and was not intended to operate in a MetaFrame
or a WinFrame environment.
The Company estimated this project was approximately 85% complete at the
date of acquisition. The aggregate value assigned to in-process research and
development was $2.3 million. The remaining efforts to complete the project
relate primarily to stress testing and, to a lesser extent, bug fixes and
documentation. The research and development risks associated with this project
relate primarily to potential design flaws revealed during testing. See the
summary of projections made in the valuation of the in-process research and
development and an updated status of completion for each project in the tables
that follow.
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Projections made in the valuations of in-process research and development
are summarized for each acquisition in the table that follows:
EPiCON Insignia APM VDOnet ViewSoft
------------ ------------ ------------ ------------ --------------
PROJECTION PERIOD................ 1998 - 2000 1998 - 2004 1999 - 2004 1999 - 2004 2000 - 2004
REVENUE:
Range of annual increases...... 20% 114% - 264% 113% - 211% 172% 179% - 904%
Range of annual decreases...... 40% 7% - 68% 14% - 64% 21% - 48% 14% - 26%
Year of projected peak......... 1999 2000 2002 2000 2001
GROSS PROFIT:
Range of annual increases...... 20% 114% - 266% 113% - 211% 172% 173% - 882%
Range of annual decreases...... 40% 7% - 68% 14% - 64% 21% - 48% 14% - 26%
OPERATING PROFIT:
Range of annual increases...... 19% 112% - 255% 137% - 200% 181% 153% - (286%)*
Range of annual decreases...... 34% 8% - 75% 3% - 64% 21% - 52% 14% - 26%
GROSS MARGIN:
Range of gross margin
percentages.................. 98% 97% - 98% 93% 98% 88% - 92%
SELLING & MARKETING EXPENSES:
Range of annual increases...... 20% 117% - 287% 58% - 197% 172% **
Range of annual decreases...... 53% 6% - 68% 29% - 64% 21% - 48% **
GENERAL & ADMINISTRATIVE
EXPENSES**:
Range of annual increases...... 20% 118% - 290% 113% - 180% 171% 192% - 857%
Range of annual decreases...... 40% 5% - 68% 14% - 64% 21% - 48% 14% - 26%
DISCOUNT RATE.................... 35% 40% 50% 50% 30%
- ---------------
* The negative increase in operating profit for the ViewSoft acquisition is due
to an expected operating loss in the first year.
** Selling & marketing expenses appear as part of general & administrative
expenses as such amounts were combined for purposes of valuation for the
ViewSoft acquisition.
The actual and estimated costs to complete and completion dates of the
in-process and core technology acquired or licensed for each acquisition are as
follows:
EPiCON Insignia APM VDOnet ViewSoft
-------------- --------------- --------------- -------------- --------------
(IN THOUSANDS)
Date Acquired/Licensed....... January 1998 February 1998 June 1998 July 1998 July 1999
Cost Incurred to Date........ $ 1,118 $ 1,221 $ 4,024 $ 3,758 $ 1,238
Estimated Cost to Complete... -- -- 950 1,050 2,550
-------------- --------------- --------------- -------------- --------------
Total Estimated Project
Cost....................... $ 1,118 $ 1,221 $ 4,974 $ 4,808 $ 3,788
============== =============== =============== ============== ==============
Estimated Cost to Complete at
Date of Valuation.......... $ 300 $ 1,900 $ 4,000 $ 200 $ 660
============== =============== =============== ============== ==============
Estimated Completion Date at
Date of Valuation.......... First Quarter First Quarter First Quarter Second Quarter Fourth Quarter
of 1998 of 1998 of 1999 of 1999 of 1999
Current Estimated Completion
Date....................... Completed in Completed in Third Quarter Third Quarter Third Quarter
First Quarter Second Quarter of 2000 of 2000 of 2000
of 1999 of 1999
The estimated completion date of the in-process and core technology related
to the APM acquisition has been extended as certain personnel working on this
project have been allocated to other projects. The completion date of the
in-process and core technology acquired from VDOnet has been delayed from the
originally anticipated completion date due to changes in the development of
these technologies resulting from end user feedback. The estimated completion
date of the ViewSoft project has been delayed from the originally anticipated
completion date due to increases in project scope and a longer testing period.
The Company is currently unable to determine the impact of such delays on its
business, future results of
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operations and financial condition. There can be no assurance that the Company
will not incur additional charges in subsequent periods to reflect costs
associated with completing these projects or that the Company will be successful
in its efforts to integrate and further develop these technologies.
Interest and Other Income. The increase in interest and other income in
1999 was primarily due to interest earned on the invested net proceeds from the
issuance of the zero coupon convertible subordinated debentures in March 1999.
The Company may acquire or make investments in companies it believes are related
to its strategic objectives. Such investments will reduce the Company's cash
and/or investment balances and therefore may reduce interest income.
Interest Expense. Interest expense in 1999 was primarily due to interest
related to the zero coupon convertible subordinated debentures issued in March
1999.
Income Taxes. The Company's effective tax rate amounted to 36% in 1999,
1998 and 1997. In July 1999, the Company changed its organizational structure
whereby it moved certain operational and administrative processes to overseas
subsidiaries. The Company provides current income taxes on foreign earnings as
if those earnings will be repatriated. The Company is in the process of
evaluating what amount, if any, of the foreign earnings that will be permanently
reinvested. Based on the results of the Company's evaluation process, the level
of permanent reinvestment of foreign earnings may change and may significantly
impact results of operations in the period of change.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, cash provided by operating activities was $184.0 million
related primarily to net income of $116.9 million, tax benefits from the
exercise of non-statutory stock options and disqualifying dispositions of
incentive stock options of $50.8 million, depreciation and amortization expenses
of $27.6 million and an increase in accounts payable and other accrued expenses
of $27.5 million due to increased marketing expenses, accrued taxes and royalty
fees and an increase in product returns of $18.0 million primarily due to
product swaps caused by the release of MetaFrame 1.8 and the overall increase in
the Company's revenues. These cash inflows were partially offset by increases in
accounts receivable of $41.1 million due primarily to higher revenue levels and
an increase of prepaid expenses of $32.8 million due primarily to a receivable
from estimated tax payments in excess of the tax liability. Cash used in
investing activities of $457.5 million for 1999 related primarily to the net
purchases of investments of $396.2 million, the acquisition of ViewSoft of $35.0
million and the expenditure of $26.3 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 $362.1 million related
primarily to the net proceeds from the issuance of convertible subordinated
debentures and $70.4 million from the issuance of common stock under the
Company's stock option and employee stock purchase plans.
During 1998, cash provided by operating activities was $119.3 million
related primarily to net income of $61.1 million, tax benefits from the exercise
of non-statutory stock options and disqualifying dispositions of incentive stock
options of approximately $24.2 million, the write off of in-process research and
development of approximately $18.4 million related to the acquisition of
Insignia, APM and VDOnet and the licensing of EPiCON, depreciation and
amortization of $15.2 million and an increase in deferred revenue of
approximately $23.3 million related to the Development Agreement. These cash
inflows were partially offset by increases in accounts receivable and deferred
tax assets of $28.9 million and $14.5 million, respectively. Cash used in
investing activities of $147.2 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 $11.4 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 $75.0 million related to the
Development Agreement. The revenues from this Development
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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
spent 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.
At December 31, 1999, the Company had $763.8 million in cash and
investments and $433.2 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, 1999, the Company had $55.3 million in accounts
receivable, net of allowances, and $121.7 million of deferred revenues, of which
the Company anticipates $67.8 million will be earned over the next 12 months.
On April 15, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to $200 million of the Company's common
stock. Purchases will be made from time to time in the open market and paid out
of general corporate funds. As of December 31, 1999, none of the Company's
outstanding common stock had been repurchased under this program.
In February 2000, the Company completed its acquisition of all of the
operating assets of Innovex Group, Inc. for approximately $47.8 million, of
which $28.7 million was paid in cash at the closing date and the balance is
payable, in equal installments, 18 and 24 months after the closing date. The
Company's ultimate purchase price is contingent upon future events.
The Company believes existing cash and investments together with cash flow
expected from operations will be sufficient to meet operating and capital
expenditures requirements through 2000. The Company may from time to time seek
to raise additional funds through public or private financings. The Company may
also acquire or make investments in companies it believes are related to its
strategic objectives. Such investments will reduce the Company's available
working capital.
YEAR 2000 READINESS DISCLOSURE
Last year, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its identification
and testing of systems. As a result of those efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. 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 2000 to support its compliance initiatives.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its computer
systems and those of its suppliers and vendors to ensure that any latent Year
2000 matters that may arise are addressed promptly.
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.
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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.
- Expiration of Microsoft's Endorsement of the ICA Protocol. Microsoft's
obligation to endorse only the Company's ICA protocol as the preferred
method to provide multi-user Windows access for devices other than
Windows clients expired in November 1999. Microsoft may now market or
endorse other methods to provide multi-user Windows access to non-Windows
client devices.
- 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, Hewlett Packard 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
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with the Company's existing and future product lines, such as NT Terminal Server
and related enhancements, 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 website 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.
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
effect 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. A significant portion of
the Company's sales are derived from the licensing of its products under a
"shrink wrap" license agreement that is 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.
Product Concentration
The Company anticipates that its MetaFrame product line and related
enhancements will constitute the majority of its revenue for the foreseeable
future. 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 continue to decrease over time as a percentage of
total revenue. Declines in demand for products based on MetaFrame technology may
occur as a result of new competitive product releases, price competition, lack
of success of its strategic partners, technological change or other factors.
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 or her relationship at any time.
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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.
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.
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
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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.
Need to Attract Large Enterprise Customers
The Company intends to attract and service large enterprise customers by
expanding its direct sales force and offering consulting services. The Company's
inability to attract large enterprise customers could have a material adverse
effect on its business, operating results and financial condition. Additionally,
large enterprise customers usually request special pricing and generally have
longer sales cycles which could negatively impact our revenues. Further, as the
Company attempts to attract large enterprise customers, we may need to increase
corporate branding activities which will increase our operating expenses, but
may not proportionally increase our operating revenues.
Maintenance of Growth Rate
The Company's revenue growth rate in 2000 may not approach the levels
attained in 1999, 1998 and 1997. 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 2000.
In-Process Research and Development Valuation
The Company has in the past re-evaluated the amounts 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
Securities and Exchange Commission or the accounting profession. Any changes in
accounting standards or guidance adopted by the staff of the Securities and
Exchange 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 Company modified its licensing fees with certain customers to a per
usage basis. The Company may implement a different licensing model, in certain
circumstances, which would result in the recognition of licensing fees over a
longer period which may result in decreasing revenue. 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. These reserves may
not be sufficient to cover product returns and price protections in the future,
in which case the Company's operating results may be adversely affected.
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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 distributors and resellers;
- 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.
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 the Company's 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.
Fluctuations in the demand for the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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 domestic and
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
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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 its 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 2000 as it
implements sales, marketing and support and product development 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 2000. 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 2000 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 2000.
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,
1999 and 1998 levels, the fair value of the portfolio would decline by
approximately $4.5 million and $1.1 million, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Company's Financial Statements and related financial statement
schedule, together with the report of independent certified public accountants,
appear at pages F-1 through F-27, 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.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the director nominees to be elected at the
Meeting, the directors and the executive officers of the Company, their ages,
and the positions currently held by each such person with the Company.
NAME AGE POSITION
---- --- --------
Mark B. Templeton.......................... 47 President, Chief Executive Officer and
Director
Edward E. Iacobucci........................ 46 Chairman of the Board, Senior Vice
President, Strategy & Technology, and Chief
Technical Officer
John P. Cunningham......................... 62 Chief Financial Officer, Treasurer, Senior
Vice President, Finance and Administration,
and Assistant Secretary
Bruce C. Chittenden........................ 51 Senior Vice President, Software Product
David A.G. Jones........................... 45 Senior Vice President, Worldwide Sales
Douglas A. Wheeler......................... 37 Senior Vice President, Marketing
John C. Burris............................. 45 Vice President, Worldwide Customer Services
Leslie A. Pendergrast...................... 38 Vice President, Human Resources
David D. Urbani............................ 54 Vice President, Controller
Kevin R. Compton(1)(2)..................... 41 Director
Stephen M. Dow(1).......................... 44 Director
Robert N. Goldman(2)....................... 50 Director
Michael W. Brown........................... 53 Director
John W. White.............................. 61 Director
Tyrone F. Pike............................. 45 Director
Roger W. Roberts........................... 55 Director
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mark B. Templeton has served as President of the Company since January 1998
and as its Chief Executive Officer since January 1999. He was elected to the
Board of Directors in May 1998. Prior to January 1998, he served as Vice
President, Marketing since joining the Company in June 1995. From April 1994 to
June 1995, Mr. Templeton served as Group Director, Corporate Marketing for UB
Networks, Inc. (formerly Ungermann-Bass, Inc.), a computer network hardware
manufacturer. From November 1993 to April 1994, he served as Executive Vice
President for Softblox, Inc., a software company. From July 1991 to November
1993, Mr. Templeton served as Vice President, Marketing for Keyfile Corporation,
a group collaboration software company. Mr. Templeton also serves on the Board
of Directors of Active Word Systems, Inc.
Edward E. Iacobucci, co-founder of the Company, has served as a director
since the Company's inception in 1989 and as Chairman of the Board since
September 1991. From the Company's inception until April 1999, Mr. Iacobucci
served as Chief Technical Officer and Vice President, Strategy & Technology. Mr.
Iacobucci is the author of the well-known OS/2 Programmer's Guide. In April
1999, Mr. Iacobucci was promoted to Senior Vice President, Strategy &
Technology. Prior to forming the Company in 1989, Mr. Iacobucci was employed for
eleven years by IBM, where he was most recently responsible for the design and
architecture of IBM PC operating systems and led the joint IBM/Microsoft design
team that conceived the original OS/2 product. Earlier at IBM, Mr. Iacobucci had
overall responsibility for the design and architecture of the IBM network
management product, NetView. Mr. Iacobucci also serves on the Board of Directors
of Caldera Systems, Inc.
John P. Cunningham joined the Company as its Chief Financial Officer,
Senior Vice President, Finance and Administration, Treasurer and Assistant
Secretary in November 1999. Prior to joining the Company,
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Mr. Cunningham served as Executive Vice-President and Chief Financial Officer of
Getronics NV (formerly Wang Global), a computer services firm, from 1998 to
1999. Prior to that, he served as Chief Financial Officer at Whirlpool
Corporation, a diversified manufacturer, from 1996 to 1998 and Maytag
Corporation, a diversified manufacturer, from 1994 to 1996. Mr. Cunningham has
also served as Corporate Controller and held other general management at
International Business Machines Corporation.
Bruce C. Chittenden joined the Company in 1993 as Vice President,
Engineering. In April 1999, Mr. Chittenden was promoted to Senior Vice
President, Software Products. Prior to joining the Company, he served as Vice
President, Engineering and Manufacturing of Uniquest, Inc., a network software
manufacturer, from March to November 1993. From July 1991 to March 1993, Mr.
Chittenden served as Executive Vice President of Computone Corporation, a
computer peripherals manufacturer, and from April 1984 to July 1991 he served as
Vice President, Engineering of The Santa Cruz Operation, Inc., a systems
software manufacturer.
David A.G. Jones joined the Company in October 1998 as Vice President,
International. In April 1999, Mr. Jones was promoted to Senior Vice President,
Worldwide Sales. Prior to joining the Company, he served as President of The
Vision Factory, Inc., a developer of e-commerce software tools, from 1997 to
1998. From 1996 to 1997, he served as Vice President -- International of
mFactory Inc., a developer of multimedia development software. From 1993 to
1996, Mr. Jones served as Senior Director for Apple Computer, Inc., a computer
company.
Douglas A. Wheeler joined the Company in October 1999 as Senior Vice
President, Marketing. Prior to joining the Company, he served as Vice President,
Corporate Marketing for Compaq Computer Corporation, a computer manufacturer
from 1997 to 1999. From 1996 to 1997, he served as Vice President, Corporate
Marketing for Tandem Computers, a computer manufacturer. From 1993 to 1995, he
served as Vice President, Corporate Marketing for UB Networks, a computer
network hardware manufacturer.
John C. Burris joined the Company in July 1999 as Vice President, Worldwide
Customer Services. Prior to joining the Company, Mr. Burris was employed by
Lucent Technologies, from 1996 to 1999 as Vice President and General Manager of
the Gulf States region. Prior to 1996, Mr. Burris was employed in various
customer service capacities for AT&T Corporation including a term as managing
director for AT&T's Asia/Pacific region.
Leslie A. Pendergrast joined the Company in July 1996 as Director, Human
Resources. In April 1999, Ms. Pendergrast was promoted to Vice President, Human
Resources. Prior to joining the Company, Ms. Pendergrast served as Manager,
Human Resources for Certified Vacations, a travel services company, from 1995 to
1996.
David D. Urbani joined the Company in March 2000 as Vice President,
Controller. Prior to joining the Company, Mr. Urbani served as Vice President,
Treasurer for Maytag Corporation, a diversified manufacturer, from 1995 to 2000.
Kevin R. Compton has served as a director of the Company since March 1991.
Since 1990, Mr. Compton has served as a general partner of Kleiner Perkins
Caufield & Byers, a venture capital investment firm. From May 1985 to December
1990, Mr. Compton was the vice president and general manager of the network
systems team at Businessland, Inc., a computer retailer, and at AmeriSource
Corporation prior to its acquisition by Businessland. Mr. Compton serves on the
Board of Directors of OneWorld Systems, Digital Generations Systems, Corsair
Communications and VeriSign and is also a director of several privately-held
companies.
Stephen M. Dow has served as a director of the Company since 1989. Since
1983, Mr. Dow has served as a general partner of Sevin Rosen Funds, a venture
capital investment firm. Mr. Dow serves on the Board of Directors of ArQule,
Inc. and Corsair Communications and is also a director of several privately-held
companies.
Robert N. Goldman has served as a director of the Company since June 1995.
In November 1995, Mr. Goldman was named President and Chief Executive Officer of
eXcelon Corporation, formerly know as Object Design, Inc., a developer of object
data management software. From 1986 to August 1995,
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Mr. Goldman served as Chairman of the Board of Trinzic, Inc. and its predecessor
software companies that were engaged in the development and marketing of
client/server middleware software products. Trinzic was formed by the merger of
AICorp and AION Corporation in 1992. Mr. Goldman served as AICorp President and
Chief Executive Officer from 1986 to 1992. From 1983 to 1986, Mr. Goldman served
as President and Chief Operating Officer of Cullinet Software, Inc., a software
developer. Mr. Goldman serves on the Board of Directors of SystemSoft
Corporation, Parametric Technology Corporation and several privately-held
companies.
Michael W. Brown has served as a director of the Company since July 1997.
Mr. Brown served in various positions at Microsoft Corporation from 1989 through
January 1998, including as Chief Financial Officer until July 1997. Mr. Brown is
a member of the Board of Governors of the National Association of Security
Dealers and Chairman of the Board of Directors of The Nasdaq National Market.
Mr. Brown also serves on the Board of Directors of Wang Laboratories Inc. and
Adminstaff, Inc.
John W. White has served as a director of the Company since 1998. From
March 1994 to August 1998, Mr. White served as Vice President and Chief
Information Officer at Compaq Computer Corporation, a computer company and
supplier of computer systems. Prior to joining Compaq, Mr. White spent more than
28 years at Texas Instruments, a diversified electronics company, most recently
as President of the Information Technology Group. Prior to his tenure at Texas
Instruments, Mr. White worked at Electronic Data Systems Corporation, a
technology based professional services firm. Mr. White serves on the Board of
Directors of Metasolv and Fast Software.
Tyrone F. Pike has served as a director of the Company since 1993. Mr. Pike
is CEO, President and Chairman of VPNX.com, Inc., formerly known as SwitchSoft
Systems, Inc., a network management software company, which he founded in August
1996. From January 1994 to August 1996, Mr. Pike served in various positions at
UB Networks, Inc., a computer network hardware manufacturer, including Senior
Vice President and Chief Technical Officer from April 1995 to August 1996,
Senior Vice President and General Manager Network Products Division from August
1994 to April 1995, and Senior Vice President and General Manager Network
Services Division from January to August 1994. Prior to joining UB Networks, Mr.
Pike served as a partner of Pike Associates, a consulting firm, from September
1992 to January 1994. From March to September 1992, Mr. Pike served as President
and CEO of Global Village Communications, Inc., a Macintosh software and
hardware supplier. From May 1991 to June 1992, he served as Manager, Strategic
Planning & Business Development of Intel Corporation, a manufacturer of computer
chips. From April 1983 to May 1991, Mr. Pike served as Founder, Chairman and
President of LANSystems, Inc., a local area network company and a network
management software provider, of which he served as a director until February
1994. Mr. Pike serves on the Board of Directors for Kaspia Systems, Inc. and
Puma Technology.
Roger W. Roberts has served as a director since joining the Company in June
1990. He also served as Chief Executive Officer of the Company from June 1990
until December 1998 and served as President of the Company from June 1990 until
January 1998. Prior to joining the Company, Mr. Roberts was employed for over
twenty years by Texas Instruments, a diversified electronics company, where he
held technical, marketing and general management positions. Most recently at
Texas Instruments, Mr. Roberts was Director of Marketing for the Peripheral
Products Division, responsible for the MicroLaser printers and TravelMate
notebooks.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors have been duly elected and
qualified.
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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 Corporation in all
capacities during the fiscal years ended December 31, 1999, 1998 and 1997 to (i)
the Company's Chief Executive Officer during 1999 and (ii) each of the other
four most highly compensated executive officers of the Company who received
total annual salary and bonus in excess of $100,000 in fiscal 1999.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS(3)
-------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($)(2) OPTIONS(#) COMPENSATION($)
--------------------------- ---- --------- ----------- ------------------ -------------- ---------------
Mark B. Templeton................... 1999 307,500 176,396 4,859 1,200,000 --
President, Chief Executive 1998 205,000 137,128 -- 600,000 --
Officer and Director 1997 160,000 90,000 -- 225,000 --
Edward E. Iacobucci................. 1999 232,500 83,298 6,868 200,000 --
Chairman of the Board, 1998 200,000 101,000 -- 300,000 66,259(4)
Senior Vice President, Strategy 1997 175,000 85,000 -- 450,000 --
& Technology and Chief Technical
Officer
David A.G. Jones.................... 1999 190,000 112,697 -- 220,000 1,512(5)
Senior Vice President, 1998 42,500 20,000 -- 300,000 129,663(5)
Worldwide Sales 1997 -- -- -- -- --
Bruce C. Chittenden................. 1999 190,000 78,398 1,401 180,000 --
Senior Vice President, 1998 170,000 94,770 -- 160,000 --
Software Products 1997 150,000 75,000 -- 225,000 --
James J. Felcyn, Jr.(6)............. 1999 185,000 68,598 9,332 80,000 --
Former Chief Financial 1998 170,000 76,128 -- 160,000 --
Officer, Treasurer, Vice 1997 150,000 55,000 -- 225,000 --
President, Finance, Administration
and Assistant Secretary
Marc-Andre Boisseau(7).............. 1999 127,500 26,350 -- 120,000 --
Former Vice President, 1998 106,792 -- -- 56,400 --
Controller and Principal 1997 76,000 -- -- 116,850 --
Accounting Officer
- ---------------
(1) Bonuses are reported in the year earned, even if actually paid in a
subsequent year.
(2) Consists of amounts paid in lieu of such officer's inability to defer
certain matching 401(k) contributions due to the terms of the Company's
401(k) Plan.
(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, 1999, December 31, 1998 and December 31, 1997. On
February 20, 1998, the Company effected a 3-for-2 stock split in the form of
a 50% stock dividend to the stockholders of record of the Company's Common
Stock on February 12, 1998. On March 25, 1999, the Company effected a
2-for-1 stock split in the form of a 100% stock dividend to the stockholders
of record of the Company's Common Stock on March 17, 1999. On February 16,
2000, the Company effected a 2-for-1 stock split in the form of a 100% stock
dividend to the stockholders of record of the Company's Common Stock on
January 31, 2000. All share numbers in this table and elsewhere in this
proxy statement reflect such stock splits.
(4) Consists on non-reimbursed business expenses.
(5) Consists of relocation expenses.
(6) Mr. Felcyn resigned from his officerships in the Company effective November
30, 1999 and currently serves as a consultant/advisor to the Company.
(7) Mr. Boisseau resigned from the Company effective January 3, 2000.
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Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
year ended December 31, 1999 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, 1999.
INDIVIDUAL GRANTS
-----------------------------------
NUMBER % OF TOTAL POTENTIAL REALIZABLE VALUE AT
OF OPTIONS ASSUMED ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM(2)
OPTIONS IN FISCAL PRICE(1) EXPIRATION ------------------------------
NAME GRANTED(#) YEAR ($/SHARE) DATE 5%($) 10%($)
---- ---------- ---------- --------- ---------- ------------ -------------
Mark B. Templeton........................ 400,000 1.91 19.66 2/28/09 4,944,684 12,530,800
400,000 1.91 22.60 2/28/09 3,765,304 11,351,420
400,000 1.91 25.55 2/28/09 2,585,924 10,172,040
Edward E. Iacobucci...................... 200,000 0.95 24.38 5/31/09 3,065,861 7,769,494
David A.G. Jones......................... 120,000 0.57 24.38 5/31/09 1,839,517 4,661,696
100,000 0.48 25.44 8/1/09 1,599,751 4,054,082
Bruce C. Chittenden...................... 80,000 0.38 24.38 5/31/09 1,226,345 3,107,797
100,000 0.48 25.44 8/1/09 1,559,751 4,054,082
James J. Felcyn, Jr...................... 80,000 0.38 24.38 5/31/09 1,226,345 3,107,797
Marc-Andre Boisseau...................... 60,000 0.29 24.38 5/31/09 919,759 2,330,848
60,000 0.29 25.44 8/1/09 959,850 2,432,449
- ---------------
(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. The fair market value per share of Common
Stock as of March 10, 2000 was $107.50.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation of the
Company's Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and Common Stock
holdings are dependent on the timing of such exercises and the future
performance of the Company's Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.
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AGGREGATE OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth, for each of the Named Executive Officers,
information with respect to the exercise of stock options during the year ended
December 31, 1999 and the year-end value of unexercised options.
VALUE OF UNEXERCISED
SHARES NUMBERS OF UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE($)(2)
---- ----------- --------------- ---------------------------- -------------------------------
Mark B. Templeton............ 304,846 6,975,128 397,858/1,682,820 19,847,837/70,334,407
Edward E. Iacobucci.......... 525,928 9,261,423 678,442/640,632 36,104,334/30,069,650
David A.G. Jones............. 87,494 1,530,498 2/432,504 90/17,580,739
Bruce C. Chittenden.......... 206,304 3,475,926 28,544/419,488 1,505,238/18,709,692
James J. Felcyn, Jr.......... 222,914 4,964,690 10,940/309,488 598,836/14,732,118
Marc-Andre Boisseau.......... 73,018 1,653,631 2,437/197,547 137,535/8,364,958
- ---------------
(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, 1999, the fiscal year-end ($62.50 per
share), multiplied by the number of shares underlying the option.
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 has expired and no further
options may be granted pursuant to such plan. As of March 10, 2000, options to
purchase an aggregate of 824,332 shares of Common Stock were issued and
outstanding under the 1989 Stock Option Plan, all of which were then
exercisable.
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 to employees, consultants, directors and officers of the Company. The
1995 Stock Plan originally provided for the issuance of up to 36,000,000 shares
(adjusted for stock splits), plus, effective on January 1, 1997, 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 60,000,000
shares (adjusted for stock splits) 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 becomes 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 March 10, 2000, options to purchase an aggregate
of 40,735,457 shares of Common Stock were issued and outstanding under the 1995
Stock Plan, of which options for approximately 4,676,735 shares were then
exercisable. The Company proposes to amend and restate the 1995 Stock Plan at
the upcoming Annual Meeting of Stockholders to be held on May 18, 2000.
The 1995 Employee Stock Purchase Plan provides for the issuance of a
maximum of 9,000,000 shares of Common Stock (adjusted for stock splits) 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
35
36
the day the offering terminates. As of March 10, 2000, 227,572 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.
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 3,600,000
shares (adjusted for stock splits) 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 180,000 shares of Common Stock (adjusted for stock
splits). 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 180,000 shares of Common Stock (adjusted for stock splits),
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 10, 2000, 1,106,475 options had been granted under the 1995
Non-Employee Director Stock Option Plan, of which options for approximately
520,051 shares were then exercisable.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the Record Date: (i) by each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock; (ii) by each director or nominee of the
Company; (iii) by each present or former executive officer of the Company named
in the Summary Compensation Table and (iv) by all directors, executive officers
and nominees of the Company as a group. On February 16, 2000, the Company
effected a 2-for-1 stock split in the form of a 100% stock dividend to
stockholders of record of the Company's Common Stock on January 31, 2000. All
share numbers in this table and elsewhere in this proxy statement reflect such
stock split.
SHARES BENEFICIALLY PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER OWNED(1) BENEFICIALLY OWNED(1)
- ------------------------ ------------------- ----------------------
Morgan Stanley Dean Witter & Co. (2)...................... 10,091,952 5.5%
1585 Broadway
New York, NY 10036
FMR Corp.(3).............................................. 14,253,346 7.7%
83 Devonshire Street
Boston, MA 02109
AMVESCAP PLC(4)........................................... 13,683,702 7.4%
11 Devonshire Square
United Kingdom ECZM 4YR
Roger W. Roberts (5)...................................... 1,667,495 *
Edward E. Iacobucci (6)................................... 1,556,909 *
Mark B. Templeton (7)..................................... 854,167 *
Michael W. Brown (8)...................................... 165,000 *
Kevin R. Compton (9)...................................... 271,422 *
Stephen M. Dow (10)....................................... 180,516 *
Robert N. Goldman (11).................................... 55,000 *
Tyrone F. Pike (12)....................................... 207,748 *
Bruce C. Chittenden (13).................................. 46,143 *
David A.G. Jones (14)..................................... 12,501 *
John W. White (15)........................................ 10,875 *
James J. Felcyn, Jr.(16).................................. 47,808 *
Marc-Andre Boisseau....................................... 0 *
All executive officers, directors and nominees as a group
(17).................................................... 5,087,786 2.8%
- ---------------
* Represents less than 1% of the outstanding Common Stock
(1) Applicable percentage of ownership as of March 10, 2000 is based upon
184,119,747 shares of Common Stock outstanding. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission (the "Commission"), and includes voting and investment power
with respect to shares. Unless otherwise indicated below, to the knowledge
of the Company, all persons listed below have sole voting and investment
power with respect to their shares of Common Stock, except to the extent
authority is shared by spouses under applicable law. Pursuant to the rules
of the Commission, the number of shares of Common Stock deemed outstanding
includes shares issuable pursuant to options held by the respective person
or group which may be exercised within 60 days of March 10, 2000
("presently exercisable stock options").
(2) With respect to information relating to Morgan Stanley Dean Witter & Co.,
the Company has relied on information supplied by such entity in its
Schedule 13G filing with the Commission on February 1, 2000. Morgan Stanley
Dean Witter & Co. shares voting power with certain account holders with
respect
37
38
to 10,000,578 shares and shares investment power with certain account
holders with respect to 10,091,952 shares.
(3) With respect to information relating to FMR Corp., the Company has relied
on information supplied by such entity in its Schedule 13G filing with the
Commission on February 11, 2000.
(4) With respect to information relating to AMVESCAP PLC, the Company has
relied on information supplied by such entity in its Schedule 13G filing
with the Commission on February 4, 2000. AMVESCAP PLC shares voting power
and investment power with certain affiliated entities with respect to
13,683,702 shares.
(5) Includes 1,271,875 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(6) Includes 290,949 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(7) Includes 754,893 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(8) Consists of 165,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(9) Includes 180,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(10) Includes 90,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(11) Consists of 55,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(12) Includes 91,816 shares of Common Stock issuable pursuant to presently
exercisable stock options. Also includes 2,400 shares of Common Stock held
in trust for the benefit of Mr. Pike's children.
(13) Consists of 46,143 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(14) Consists of 12,501 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(15) Includes 10,075 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(16) Consists of 47,808 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(17) Includes presently exercisable stock options to purchase an aggregate of
3,024,762 shares of Common Stock. See footnotes (5), (6), (7), (8), (9),
(10), (11), (12), (13), (14), (15) and (16).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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
38
39
3. LIST OF EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1(1) -- 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(1) -- Recommended Offers by Citrix Systems, Inc. for APM Limited
2.3 -- Asset Purchase Agreement dated February 15, 2000 by and
among the Company, Innovex Group, Inc. and certain
stockholders of Innovex
3.1(2) -- Amended and Restated Certificate of Incorporation of the
Company
3.2(2) -- Amended and Restated By-laws of the Company
3.3(3) -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation
4.1(2) -- Specimen certificate representing the Common Stock
4.2(4) -- Indenture by and between the Company and State Street Bank
and Trust Company as Trustee dated as of March 22, 1999,
including the form of Debenture.
4.3(4) -- Form of Debenture (included in Exhibit 4.1).
4.3(4) -- Registration Rights Agreement by and between the Company and
Credit Suisse First Boston Corporation dated as of March 22,
1999.
10.1(2)* -- 1989 Stock Option Plan
10.2(2)* -- 1995 Stock Plan
10.3(2)* -- 1995 Non-Employee Director Stock Option Plan
10.4(2)* -- 1995 Employee Stock Purchase Plan
10.5(2) -- Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.6(2) -- Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.7(2) -- License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15, 1990
10.8(2) -- 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(2) -- 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(2) -- 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(2) -- Amendment No. 4 to the License Agreement between the Company
and Microsoft dated August 15, 1990, dated January 31, 1995
10.12(2) -- Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.13(2) -- Form of Indemnification Agreement
10.14(5) -- Lease Agreement between Halmos Trading and Investment
Company and the Company dated June 6, 1996
10.15(6) -- License, Development and Marketing Agreement dated July 9,
1996 between the Company and Microsoft Corporation
10.16(7) -- License, Development and Marketing Agreement dated May 9,
1997 between the Company and Microsoft Corporation
10.17(8) -- Amendment No. 1 to License, Development and Marketing
Agreement dated May 9, 1997 between the Company and
Microsoft Corporation
39
40
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.18(9) -- 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 of the Company's Current
Report on Form 8-K dated as of June 30, 1998.
(2) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(3) Incorporated herein by reference to Exhibits 3 and 4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(4) Incorporated herein by reference to exhibits of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(5) Incorporated herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(6) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(7) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
(8) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(9) Incorporated herein by reference to Exhibit 10.18 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 1999.
(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.
40
41
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 23rd day of March, 2000.
CITRIX SYSTEMS, INC.
By: /s/ MARK B. TEMPLETON
------------------------------------
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 23rd day of March, 2000.
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 Officer)
Mark B. Templeton
/s/ JOHN P. CUNNINGHAM Chief Financial Officer and Senior Vice
- ----------------------------------------------------- President of Finance and Administration
John P. Cunningham (Principal Financial Officer)
/s/ DAVID URBANI Vice President, Corporate Controller
- ----------------------------------------------------- (Principal Accounting Officer)
David Urbani
/s/ KEVIN R. COMPTON Director
- -----------------------------------------------------
Kevin R. Compton
/s/ STEPHEN M. DOW Director
- -----------------------------------------------------
Stephen M. Dow
/s/ ROBERT N. GOLDMAN Director
- -----------------------------------------------------
Robert N. Goldman
41
42
SIGNATURE TITLE(S)
--------- --------
/s/ MICHAEL W. BROWN Director
- -----------------------------------------------------
Michael W. Brown
/s/ TYRONE F. PIKE Director
- -----------------------------------------------------
Tyrone F. Pike
/s/ JOHN W. WHITE Director
- -----------------------------------------------------
John W. White
/s/ ROGER W. ROBERTS Director
- -----------------------------------------------------
Roger W. Roberts
42
43
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, 1999 and 1998... F-3
Consolidated Statements of Income -- Years ended December
31, 1999, 1998 and 1997................................... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1999, 1998 and 1997.................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements -- December 31,
1999...................................................... F-8
The following consolidated financial statement schedule
of Citrix Systems, Inc. is included in Item 14(a):
Schedule II Valuation and Qualifying Accounts..... F-27
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
44
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, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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
January 14, 2000, except for the seventh paragraph
of Note 7, as to which the date is January 19, 2000
F-2
45
CITRIX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------------
1999 1998
-------------- ------------
(IN THOUSANDS, EXCEPT PAR VALUE)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 216,116 $127,546
Short-term investments.................................... 221,978 56,934
Accounts receivable, net of allowances of $8,242 and
$6,234 at 1999 and 1998, respectively.................. 55,327 32,798
Inventories............................................... 7,731 4,071
Prepaid expenses.......................................... 35,364 6,745
Other current assets...................................... 7,184 3,037
Current portion of deferred tax assets.................... 26,544 12,885
---------- --------
Total current assets.............................. 570,244 244,016
Long-term investments....................................... 325,755 97,108
Property and equipment, net................................. 31,530 14,183
Intangible assets, net...................................... 63,396 46,799
Long-term portion of deferred tax assets.................... 30,197 29,183
Other assets, net........................................... 16,735 91
---------- --------
$1,037,857 $431,380
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses............... $ 59,561 $ 29,735
Accrued royalties and other accounts payable to
stockholder............................................ 427 2,891
Deferred revenues......................................... 27,907 10,107
Current portion of deferred revenues on contract with
stockholder............................................ 39,898 39,830
Income taxes payable...................................... 9,202 2,553
---------- --------
Total current liabilities......................... 136,995 85,116
Deferred revenues on contract with stockholder.............. 53,912 48,810
Convertible subordinated debentures......................... 313,880 --
Commitments
Stockholders' equity:
Preferred stock at $.01 par value: 5,000 shares
authorized, none issued and outstanding................ -- --
Common stock at $.001 par value: 400,000 shares
authorized; 181,093 and 171,846 issued and outstanding
at 1999 and 1998, respectively......................... 181 172
Additional paid-in capital................................ 309,321 188,121
Retained earnings......................................... 226,105 109,161
Accumulated other comprehensive loss...................... (2,537) --
---------- --------
Total stockholders' equity........................ 533,070 297,454
---------- --------
$1,037,857 $431,380
========== ========
See accompanying notes.
F-3
46
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Revenues:
Net revenues............................................. $363,455 $216,901 $114,308
Net revenues -- related party............................ 39,830 31,735 9,625
-------- -------- --------
Net revenues.......................................... 403,285 248,636 123,933
-------- -------- --------
Cost of revenues:
Cost of revenues (excluding amortization presented
separately below)..................................... 13,745 13,422 11,265
Cost of revenues -- related party........................ 834 3,260 1,039
-------- -------- --------
Total cost of revenues........................... 14,579 16,682 12,304
-------- -------- --------
Gross margin............................................... 388,706 231,954 111,629
Operating expenses:
Research and development................................. 37,363 22,858 6,948
Sales, marketing and support............................. 121,302 74,855 35,352
General and administrative............................... 37,757 20,131 10,651
Amortization of intangible assets........................ 18,480 10,190 --
In-process research and development...................... 2,300 18,416 3,950
-------- -------- --------
Total operating expenses......................... 217,202 146,450 56,901
-------- -------- --------
Income from operations..................................... 171,504 85,504 54,728
Interest and other income.................................. 23,843 10,043 9,903
Interest expense........................................... (12,622) (75) (9)
-------- -------- --------
Income before income taxes................................. 182,725 95,472 64,622
Income taxes............................................... 65,781 34,370 23,264
-------- -------- --------
Net income................................................. $116,944 $ 61,102 $ 41,358
======== ======== ========
Earnings per common share:
Basic earnings per share................................. $ 0.66 $ 0.36 $ 0.25
======== ======== ========
Weighted average shares outstanding...................... 176,260 168,473 163,444
======== ======== ========
Earnings per common share -- assuming dilution:
Diluted earnings per share............................... $ 0.61 $ 0.33 $ 0.24
======== ======== ========
Weighted average shares outstanding...................... 192,566 182,594 174,524
======== ======== ========
See accompanying notes.
F-4
47
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL LOSS EARNINGS EQUITY
------- ------ ---------- ------------- -------- -------------
(IN THOUSANDS)
Balance at December 31, 1996..... 160,082 $160 $134,990 $ -- $ 6,701 $141,851
Exercise of stock options........ 5,776 6 2,716 -- -- 2,722
Repurchase and cancellation of
common stock previously
issued......................... (6) -- (1) -- -- (1)
Common stock issued under
employee stock purchase plan... 40 -- 242 -- -- 242
Tax benefit from employer stock
plans.......................... -- -- 10,676 -- -- 10,676
Net income....................... -- -- -- -- 41,358 41,358
------- ---- -------- ------- -------- --------
Balance at December 31, 1997..... 165,892 166 148,623 -- 48,059 196,848
Exercise of stock options........ 5,924 6 14,951 -- -- 14,957
Cash in lieu of fractional
shares......................... -- -- (3) -- -- (3)
Common stock issued under
employee stock purchase plan... 30 -- 376 -- -- 376
Tax benefit from employer stock
plans.......................... -- -- 24,174 -- -- 24,174
Net income....................... -- -- -- -- 61,102 61,102
------- ---- -------- ------- -------- --------
Balance at December 31, 1998..... 171,846 172 188,121 -- 109,161 297,454
Exercise of stock options........ 9,220 9 69,753 -- -- 69,762
Common stock issued under
employee stock purchase plan... 27 -- 604 -- -- 604
Tax benefit from employer stock
plans.......................... -- -- 50,843 -- -- 50,843
Net income....................... -- -- -- -- 116,944 116,944
Unrealized loss on
available-for-sale securities,
net of related taxes........... -- -- -- (2,537) -- (2,537)
------- ---- -------- ------- -------- --------
Balance at December 31, 1999..... 181,093 $181 $309,321 $(2,537) $226,105 $533,070
======= ==== ======== ======= ======== ========
See accompanying notes.
F-5
48
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $116,944 $ 61,102 $ 41,358
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 27,563 15,173 1,712
Tax benefit related to the exercise of non-statutory
stock options and disqualified dispositions of
incentive stock options.............................. 50,843 24,174 10,675
In-process research and development.................... 2,300 18,416 3,950
Provision for doubtful accounts........................ 584 620 1,399
Provision for product returns.......................... 17,996 8,580 5,809
Provision for inventory obsolescence................... 1,982 417 --
Accretion of original issue discount and amortization
of financing cost.................................... 12,592 -- --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable.................................. (41,110) (28,924) (15,249)
Inventories.......................................... (5,641) (2,216) (1,550)
Prepaid expenses..................................... (32,762) (5,352) (2,733)
Other assets......................................... (7,277) (91) --
Deferred tax assets.................................. (14,674) (14,536) (24,362)
Accounts payable and other accrued expenses.......... 27,526 9,492 8,472
Accrued royalties and other accounts payable to
stockholder....................................... (2,464) (153) 1,520
Deferred revenues.................................... 17,800 6,960 1,073
Deferred revenues on contract with stockholder....... 5,170 23,265 65,375
Income taxes payable................................. 6,649 2,391 236
-------- --------- ---------
Net cash provided by operating activities................... 184,021 119,318 97,685
INVESTING ACTIVITIES
Purchases of investments.................................... (547,510) (284,793) (126,536)
Proceeds from sale of investments........................... 151,284 219,861 75,632
Cash paid for acquisitions, net of cash acquired............ (35,006) (63,549) (2,611)
Cash paid for licensing agreement........................... -- (7,000) --
Purchases of property and equipment......................... (26,313) (11,420) (6,104)
Purchase of trademark....................................... -- (250) --
-------- --------- ---------
Net cash used in investing activities....................... (457,545) (147,151) (59,619)
F-6
49
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- --------- ---------
(IN THOUSANDS)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock.................. 70,366 15,329 2,964
Net proceeds from issuance of convertible subordinated
debentures................................................ 291,920 -- --
Other....................................................... (192) (31) (84)
-------- --------- ---------
Net cash provided by financing activities................... 362,094 15,298 2,880
-------- --------- ---------
Change in cash and cash equivalents......................... 88,570 (12,535) 40,946
Cash and cash equivalents at beginning of year.............. 127,546 140,081 99,135
-------- --------- ---------
Cash and cash equivalents at end of year.................... $216,116 $ 127,546 $ 140,081
======== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of approximately $40,894, $20,481 and $37,976
in 1999, 1998 and 1997, respectively. Additionally, the Company paid interest of
approximately $7, $98 and $9 during the years ended December 31, 1999, 1998 and
1997, respectively.
See accompanying notes.
F-7
50
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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, Europe and Asia-Pacific.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements of the Company include the accounts
of its wholly-owned subsidiaries, primarily in Europe and Asia-Pacific. All
significant transactions and balances 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 commercial
paper, money market funds, government securities, and corporate securities 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,
investment grade instruments and periodically evaluating the credit quality of
its primary financial institutions.
INVESTMENTS
Short-term investments at December 31, 1999 primarily consist of government
securities, corporate securities, and commercial paper. Long-term investments at
December 31, 1999 primarily consist of government securities and corporate
securities. The Company minimizes its credit risk associated with investments by
investing in high quality investment grade securities. Investments are
classified as available-for-sale and are stated at fair value with unrealized
gains and losses, net of taxes, reported in other comprehensive income. The
Company's short-term investments have a contractual maturity of 12 months or
less and have an average contractual maturity of less than eight months. The
Company's long-term investments have a contractual maturity of one to three
years and have an average contractual maturity of approximately one year and ten
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 and expected product returns 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 raw materials, are stated at the lower
of cost (determined by the first-in, first-out method) or market.
F-8
51
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 on average is approximately 30
months. Amortization of assets under capital leases is included in depreciation
expense. Accumulated amortization of equipment under capital leases approximated
$504,700 and $425,700 at December 31, 1999 and 1998, respectively.
Property and equipment consist of the following:
DECEMBER 31
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
Equipment under capital leases............................ $ 630 $ 555
Computer equipment and software........................... 29,163 11,667
Property, equipment and furniture......................... 5,679 2,900
Leasehold improvements.................................... 11,981 6,112
-------- -------
47,453 21,234
Less accumulated depreciation and amortization............ (15,923) (7,051)
-------- -------
$ 31,530 $14,183
======== =======
INTANGIBLE ASSETS
Intangible assets are being amortized using the straight-line method over
periods ranging from three to four years. The Company periodically reviews core
technology, goodwill and other intangible assets to determine if any impairment
exists based upon projected, undiscounted net cash flows of the related
technology. As of December 31, 1999, in the opinion of management, there has
been no such impairment.
Intangible assets consist of the following:
DECEMBER 31
------------------
1999 1998
------- -------
(IN THOUSANDS)
Core technology............................................. $46,730 $40,934
Goodwill and other intangibles.............................. 45,454 15,939
------- -------
92,184 56,873
Less accumulated amortization............................... (28,788) (10,074)
------- -------
$63,396 $46,799
======= =======
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 1997 and SOP 97-2 (as amended by SOP 98-4) "Software Revenue Recognition"
for 1998 and 1999. 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
F-9
52
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("PCS"), 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 ("VSOE"). The Company sells software and PCS
separately and VSOE is determined by the price charged when each element is sold
separately. 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 $6,697,000 and $4,641,000 at December 31, 1999 and 1998,
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, 1999 and 1998.
During 1997, the Company entered into a License, Development and Marketing
Agreement, as amended (the "Development Agreement") with a stockholder.
According to the Development Agreement, all intellectual property rights which
each party owned at the effective date of the agreement (May 1997) remained as
the sole and exclusive property of such party. As to the technology and
enhancements developed under this agreement, the Company retains ownership of
any Citrix plug-in software, any component or implementation of ICA developed by
Citrix, and other Citrix value added software not encompassed by the scope of
the agreement. Pursuant to the terms of the Development Agreement, the Company
received an aggregate of $75 million as a non-refundable royalty payment for
engineering and support services to be rendered by the Company. This initial fee
is being recognized ratably over the five year term of the contract, which began
in May 1997. Under the terms of the Development Agreement, as amended, the
Company received additional payments totaling $100 million on a quarterly basis.
No additional payments are due pursuant to the Development Agreement. There was
no risk of financial loss as the related products had already been released and
achieved acceptance in the marketplace. Contractually, the Company is not
obligated to repay any of the proceeds received, as the royalty fees are
non-refundable.
Revenue from software maintenance, service, and support arrangements and
training programs and materials, which totaled $15,750,000, $10,531,799 and
$4,289,705 for the years ended December 31, 1999, 1998 and 1997, 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 the U.S. dollar however, some of the subsidiaries' books and
records are maintained in local currency. Assets and liabilities of the
subsidiaries are remeasured into U.S. dollars at year-end exchange rates, and
revenues and expenses are remeasured at average rates prevailing during the
year. Translation adjustments and foreign currency
F-10
53
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction gains (losses) of approximately $(745,000), $19,000, and $49,000 for
the years ended December 31, 1999, 1998 and 1997, respectively are included in
interest and other income.
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. Cost of
revenues exclude amortization of core technology.
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 has
cooperative advertising agreements with certain distributors and resellers
whereby the Company will reimburse distributors and resellers for qualified
advertising of Citrix products. Reimbursement is made once the distributor or
reseller provides substantiation of qualified expenditures. The Company
estimates the impact of this program and records it at the time of product sale.
The Company recognized advertising expenses of approximately $12,569,000,
$9,453,000 and $4,551,000 during the years ended December 31, 1999, 1998 and
1997, respectively. These amounts are included in sales, marketing and support
expenses.
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. In July 1999, the Company changed its
organizational structure whereby it moved certain operational and administrative
processes to overseas subsidiaries. The Company provides current income taxes on
foreign earnings as if those earnings will be repatriated. The Company is in the
process of evaluating what amount, if any, of the foreign earnings that will be
permanently reinvested. Based on the results of the Company's evaluation
process, the level of permanent reinvestment of foreign earnings may change and
may significantly impact results of operations in the period of change.
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.
F-11
54
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS AND OTHER RISKS
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
may vary from these estimates.
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.
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 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
are 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 methods
prescribed by SFAS No. 123.
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 stock options (calculated
using the treasury stock method). All common share and per share data, except
par value per share, have been retroactively adjusted to reflect the
three-for-two stock split of the Company's Common Stock effective February 20,
1998, the two-for-one stock split of the Company's Common Stock effective March
25, 1999 and the two-for-one stock split of the Company's Common Stock effective
February 16, 2000, which are further discussed in Note 7. The convertible
subordinated debentures are common stock equivalents but have been excluded from
the diluted earnings per share calculation as their effect is anti-dilutive.
F-12
55
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In 1999, the Company adopted Accounting Standards Executive Committee
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP requires the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. These costs
generally include external direct costs of materials and services consumed in
the project and internal costs such as payroll and benefits of those employees
directly associated with the development of the software. The amount of costs
capitalized in 1999 and 1998 relating to internal use software were $5.4 million
and $100,000, respectively, consisting principally of software purchased and
services provided from external vendors. These costs are being amortized over
the estimated useful life of the software developed, which is generally three
years, and are included in property and equipment, net, in the accompanying
consolidated balance sheets.
COMPREHENSIVE INCOME
In the second quarter of 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components and requires the classification of
changes in the balances of items that are reported directly in a separate
component of stockholders' equity on the consolidated balance sheets. The
adoption of SFAS 130 had no impact on the Company's consolidated financial
position, results of operations or cash flows.
SEGMENT INFORMATION
During 1999, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments and related disclosures about
products, geographic information and major customers. This information is
required to be reported based on how management internally evaluates operating
performance and allocates resources. The adoption of SFAS 131 had no impact on
the Company's consolidated financial position, results of operations or cash
flows.
RECLASSIFICATIONS
Certain reclassifications of the prior years' financial statements have
been made to conform to the current year's presentation.
3. ACQUISITIONS AND LICENSED TECHNOLOGY
In February 1998, the Company completed its acquisition of certain
in-process software technologies and assets of Insignia Solutions, plc
("Insignia") 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.
In June 1998, the Company completed its acquisition of APM Ltd. ("APM") 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.
In July 1998, the Company completed its acquisition of VDOnet Corporation
Ltd. ("VDOnet") 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 purchased technologies and intangible assets. A
portion of the total purchase price was allocated to in-process research and
development which had not reached
F-13
56
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
technological feasibility and had no alternative future use. The allocation
resulted in a pre-tax charge of approximately $2.4 million to the Company's
operations in the third quarter of 1998.
In July 1999, the Company completed its acquisition of certain in-process
software technologies and assets of ViewSoft, Inc. ("ViewSoft") for
approximately $33.5 million in cash and liabilities assumed. 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 $2.3 million to the
Company's operations in the third quarter of 1999.
In January 1998, the Company licensed certain in-process software
technology from EPiCON, Inc., ("EPiCON") for approximately $8.0 million payable
in cash under a three year licensing agreement. 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. In December
1999, the Company amended its license agreement with EPiCON to allow the Company
access to additional software technology and to extend the exclusive license
term for an additional $4.0 million, of which $1.3 million was paid in cash at
the amendment date.
Each of the transactions was accounted for under the purchase method of
accounting, applying the provisions of APB Opinion No. 16. The consolidated
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 transactions, 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 transactions.
The purchase consideration was allocated to the acquired assets and
liabilities based on fair values as follows:
Insignia EPiCON APM VDOnet ViewSoft
-------- ------ ------- ------ --------
(IN THOUSANDS)
Net assets acquired (net liabilities
assumed).............................. $ 400 $ -- $ (800) $ (100) $ 128
Purchased intangibles.................... 12,550 5,416 26,900 5,568 2,200
Purchased in-process research and
development........................... 2,700 2,584 10,700 2,432 2,300
Goodwill................................. 1,850 -- 3,600 -- 28,904
------- ------ ------- ------ -------
Total purchase consideration..... $17,500 $8,000 $40,400 $7,900 $33,532
======= ====== ======= ====== =======
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.
F-14
57
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. CASH AND INVESTMENTS
The summary of cash and cash equivalents and investments consist of the
following:
DECEMBER 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Cash and cash equivalents:
Cash...................................................... $ 36,049 $ 29,794
Commercial paper.......................................... 2,106 7,264
Money market funds........................................ 33,139 14,488
Government securities..................................... 86,196 52,712
Corporate securities...................................... 58,626 23,288
-------- --------
Cash and cash equivalents.............................. $216,116 $127,546
======== ========
Short-term investments:
Commercial paper.......................................... $ 12,236 $ --
Corporate securities...................................... 49,989 2,004
Government securities..................................... 159,753 54,930
-------- --------
Short-term investments................................. $221,978 $ 56,934
======== ========
Long-term investments:
Corporate securities...................................... $ 27,801 $ --
Government securities..................................... 292,704 97,108
Other..................................................... 5,250 --
-------- --------
Long-term investments.................................. $325,755 $ 97,108
======== ========
The unrealized gain (loss) associated with each individual category of cash
and investments is not significant.
5. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses consist of the following:
DECEMBER 31
------------------
1999 1998
------- -------
(IN THOUSANDS)
Accounts payable.......................................... $ 6,518 $ 1,609
Accrued compensation and employee benefits................ 6,686 4,546
Accrued royalties......................................... 4,996 47
Acquisition-related liabilities........................... 2,667 1,000
Accrued cooperative advertising and marketing programs.... 16,521 9,085
Accrued taxes............................................. 15,232 7,145
Other..................................................... 6,941 6,303
------- -------
$59,561 $29,735
======= =======
6. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS
STOCK COMPENSATION PLANS
As of December 31, 1999, the Company has four stock-based compensation
plans, which are described below. The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. As mentioned in Note 2, the Company applies APB
F-15
58
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
1999 1998 1997
--------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Net income................................. As reported $116,944 $61,102 $41,358
======== ======= =======
Pro forma $ 64,069 $39,286 $33,016
======== ======= =======
Basic earnings per share................... As reported $ 0.66 $ 0.36 $ 0.25
======== ======= =======
Pro forma $ 0.36 $ 0.23 $ 0.20
======== ======= =======
Diluted earnings per share................. As reported $ 0.61 $ 0.33 $ 0.24
======== ======= =======
Pro forma $ 0.33 $ 0.22 $ 0.19
======== ======= =======
For purposes of the proforma calculations, 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:
1999 GRANTS 1998 GRANTS 1997 GRANTS
----------- ----------- -----------
Dividend yield.............................................. none none none
Expected volatility factor.................................. 0.6 0.6 0.7
Approximate risk free interest rate......................... 5.5% 5.5% 5.5%
Expected lives.............................................. 4.50 years 4.89 years 4.80 years
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.
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 originally provided for
the issuance of a maximum of 36,000,000 (as adjusted for stock splits) shares of
Common Stock, plus, effective January 1, 1997 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 60,000,000 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 typically 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
F-16
59
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase a maximum of 3,600,000 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 $2.49 (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 5,850,600 shares of Common Stock at exercise prices
ranging from $2.67 to $7.17 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 180,000 shares of Common Stock. Options
granted under the Director Option Plan will vest at a rate of 33.33% one year
from the date of grant and will vest at a rate of 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 180,000 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 25,256,544 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 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. Effective November 1999 no further options may be granted under
this Plan.
A summary of the status and activity of the Company's stock option plans is
as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of year..... 32,279,324 $ 9.50 22,279,272 $ 4.21 19,380,228 $ 2.83
Granted............................ 21,157,900 26.80 17,213,600 14.02 9,106,952 7.04
Exercised.......................... (9,221,440) 7.57 (5,923,760) 2.53 (5,738,804) 0.49
Forfeited.......................... (1,857,434) 15.99 (1,289,788) 10.28 (469,104) 3.52
---------- ---------- ----------
Outstanding at end of year........... 42,358,350 18.28 32,279,324 9.50 22,279,272 4.21
========== ========== ==========
Options exercisable at end of year... 7,062,760 7.86 6,141,596 3.56 5,736,180 0.97
========== ========== ==========
Weighted-average fair value of
options granted during the year.... $14.37 $ 7.21 $ 4.43
F-17
60
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information about fixed stock options outstanding as of December 31, 1999
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, 1999 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
- ------------------------------------- ----------------- ---------------- -------------- ----------------- --------------
$0.02 to $3.81..................... 4,436,782 6.3 $ 2.04 2,220,629 $ 1.59
$5.35 to $11.95.................... 8,091,971 7.6 $ 8.31 2,907,717 $ 7.73
$12.25 to $17.89................... 8,798,211 8.5 $15.39 1,901,784 $15.16
$18.91 to $27.81................... 16,393,336 9.4 $23.82 32,630 $20.23
$29.31 to $53.03................... 4,638,050 9.8 $37.11 -- $ --
---------- ---------
42,358,350 8.6 $18.28 7,062,760 $ 7.86
========== =========
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 9,000,000 shares of Common Stock upon 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 five 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).
The maximum number of shares of Common Stock an employee may purchase in
any Plan Period is 6,000 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 any time or upon termination of employment. Under the
1995 Purchase Plan, the Company issued 27,004, 30,460 and 40,956 shares in 1999,
1998 and 1997, respectively.
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. The Company's matching contributions for 1999 and 1998 were
$605,087 and $327,483, repectively. No matching contributions to the Plan were
made prior to 1998. The Company's contributions vest over a four year period at
25% per year.
F-18
61
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL STOCK
COMMON STOCK
The Company has reserved for future issuance 49,340,302 shares of Common
Stock for the exercise of stock options outstanding or available for grant and
11,952,000 shares for the conversion of the zero coupon convertible debentures
into 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.
On May 13, 1999, the stockholders approved an increase of authorized Common
Stock from 150,000,000 shares, $0.001 par value per share to 400,000,000 shares,
$0.001 par value per share.
STOCK REPURCHASE PROGRAM
On April 15, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to $200 million of the Company's common
stock. Purchases, if any, will be made from time to time in the open market and
paid out of general corporate funds. As of December 31, 1999, none of the
Company's outstanding common stock had been repurchased under this program.
STOCK SPLITS
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.
On March 1, 1999, the Company announced a two-for-one stock split in the
form of a stock dividend paid on March 25, 1999, to stockholders of record as of
March 17, 1999.
On January 19, 2000, the Company announced a two-for-one stock split in the
form of a stock dividend paid on February 16, 2000, to stockholders of record as
of January 31, 2000.
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.
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. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1999, the Company sold $850 million principal amount at maturity
of its zero coupon convertible subordinated debentures (the "Debentures") due
March 22, 2019 in a private placement. The debentures were priced with a yield
to maturity of 5.25% and resulted in net proceeds to the Company of
approximately $291.9 million, net of original issue discount and net of debt
issuance costs of $9.6 million. Except under limited circumstances, no interest
will be paid on the Debentures prior to maturity. The Debentures are convertible
at the option of the security holder at any time on or before the maturity date
at a conversion rate of 14.0612 shares of the Company's common stock for each
$1,000 principal amount at maturity of Debentures, subject to adjustment in
certain events. The Company may redeem the Debentures on or after March 22,
2004. Holders may require the Company to repurchase the debentures, at set
F-19
62
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redemption prices (equal to the issue price plus accrued original issue
discount) beginning on March 22, 2004. Interest expense related to the
Debentures was $12.6 million in 1999.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of the Company's investment in debt securities, by
contractual maturity, is as follows:
DECEMBER 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Due in less than 1 year................................... $402,045 $154,686
Due in 1 to 3 years....................................... 320,505 97,108
Due in greater than 3 years............................... 5,250 --
-------- --------
$727,800 $251,794
======== ========
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their fair value due to the
short maturity of these items. The Company's investments are classified as
available-for-sale securities and are carried at fair value on the accompanying
Consolidated Balance Sheets, based primarily on quoted market prices for such
financial instruments. The carrying amount of the Company's Debentures at
December 31, 1999 was approximately $314 million. The fair value of the
Debentures, based on the quoted market price as of December 31, 1999, was
approximately $434 million.
10. COMMITMENTS
The Company leases certain office space, equipment and software under
various operating leases. Certain of these leases contain stated escalation
clauses while others contain renewal options.
Rental expense for the years ended December 31, 1999, 1998 and 1997 totaled
approximately $4,954,000, $2,787,000 and $715,000, respectively. Lease
commitments under noncancelable operating leases with remaining terms in excess
of one year are as follows:
(IN THOUSANDS)
December 31,
2000................................................... $ 9,414
2001................................................... 9,206
2002................................................... 6,988
2003................................................... 4,711
2004................................................... 2,630
Thereafter............................................. 7,846
-------
$40,795
=======
11. INCOME TAXES
The United States and foreign components of income from continuing
operations before income taxes are as follows:
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
United States............................................ $122,131 $93,219 $64,094
Foreign.................................................. 60,594 2,253 528
-------- ------- -------
Total.......................................... $182,725 $95,472 $64,622
======== ======= =======
F-20
63
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for (benefit from) income taxes are as
follows:
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Current:
Federal................................................. $53,060 $39,026 $39,613
Foreign................................................. 16,782 1,907 565
State................................................... 9,256 7,339 7,448
------- ------- -------
Total current................................... 79,098 48,272 47,626
Deferred.................................................. (13,317) (13,902) (24,362)
------- ------- -------
Total income tax expense........................ $65,781 $34,370 $23,264
======= ======= =======
The significant components of the Company's deferred tax assets and
liabilities consisted of the following:
DECEMBER 31
------------------
1999 1998
------- -------
(IN THOUSANDS)
Deferred tax assets:
Acquired technology....................................... $ 8,827 $ 7,727
Deferred revenue.......................................... 36,752 28,882
Accounts receivable allowances............................ 2,658 2,415
Depreciation and amortization............................. 7,646 298
Tax credits............................................... 8,355 --
Other..................................................... 1,256 2,746
------- -------
Total deferred tax assets......................... 65,494 42,068
Deferred tax liabilities:
Foreign earnings.......................................... (8,753) --
------- -------
Total deferred tax liabilities.................... (8,753) --
------- -------
Total net deferred tax assets..................... $56,741 $42,068
======= =======
During 1999 and 1998, the Company generated approximately $5,251,000 and
$2,542,000 of research and development tax credits, respectively. Due to the Tax
Relief Extension Act of 1999, use of $2,625,000 of the research credit generated
in 1999 is suspended until October 1, 2000 and, therefore, reflected as a
deferred tax asset. During 1999, the Company generated approximately $5,730,000
of foreign tax credit carryforwards in the United Kingdom that expire in the
year 2004.
During the years ended 1999, 1998 and 1997, the Company realized tax
benefits related to the exercise of employee stock options in the amount of
$50,843,000, $24,174,000, and $10,675,000, respectively. This benefit was
recorded to additional paid-in capital.
F-21
64
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's income taxes to amounts calculated at the
statutory federal rate is as follows:
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Federal statutory taxes................................... $63,954 $33,415 $22,618
State income taxes, net of federal tax benefit............ 5,378 3,476 2,942
Foreign sales corporation benefits........................ (2,556) (1,226) (957)
Interest income........................................... (4,555) -- --
Intangible assets......................................... 8,260 -- --
Other permanent differences............................... 5,220 109 180
Tax credits............................................... (10,981) (2,542) (1,492)
Other..................................................... 1,061 1,138 (27)
------- ------- -------
$65,781 $34,370 $23,264
======= ======= =======
12. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
During 1999, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments and related disclosures about
products, geographic information and major customers. This information is
required to be reported based on how management internally evaluates operating
performance and allocates resources.
The Company operates in a single market consisting of the design,
development, marketing and support of client and server-based computing software
for enterprise applications. Design, development, marketing and support
operations outside of the United States are conducted through subsidiaries
located primarily in Europe and the Asia Pacific region.
The Company tracks revenue and gross margin by geography and product
category but does not track operating expenses nor identifiable assets on a
product category basis. The Company does not engage in intercompany transfers
between segments. The Company's management evaluates performance based primarily
on revenues and profit in the geographic locations that the Company operates.
Segment profit for each segment includes sales and marketing expenses directly
attributable to the segment and excludes certain expenses which are managed
outside the reportable segments. Costs excluded from segment profit primarily
consist of cost of revenues, research and development costs, interest, corporate
expenses, including income taxes, as well as non-recurring charges for purchased
in-process technology, and overhead costs, including rent, utilities,
depreciation and amortization. Corporate expenses are comprised primarily of
corporate marketing costs, operations and other general and administrative
expenses which are separately managed. Accounting policies of the segments are
the same as the Company's consolidated accounting policies.
During 1999, wholly-owned subsidiaries were formed in various locations
within Europe, Middle East and Africa ("EMEA") and these subsidiaries are
responsible for sales and distribution of the Company's products. Prior to this
change, sales in this geographic segment were classified as export sales from
the Americas segment (see below). For purposes of the presentation of segment
information, the sales previously reported as Americas export sales have been
reclassified to the geographical segments where the sale was made for each of
the periods presented.
F-22
65
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net revenues and segment profit, classified by the major geographic area in
which the Company operates, are as follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Net revenues:
Americas............................................. $205,267 $119,376 $ 67,038
EMEA................................................. 128,242 64,130 20,014
Asia Pacific......................................... 20,192 10,762 2,707
Other(1)............................................. 49,584 54,368 34,174
-------- -------- --------
Consolidated......................................... $403,285 $248,636 $123,933
======== ======== ========
Segment profit:
Americas............................................. $166,521 $ 82,468 $ 46,094
EMEA................................................. 102,404 46,540 14,476
Asia Pacific......................................... 10,795 6,510 1,422
Other (1)............................................ 49,584 54,368 34,174
Unallocated expenses (2):
Cost of revenues................................ (14,579) (16,682) (12,304)
Overhead costs.................................. (51,721) (28,298) (7,658)
Research and development........................ (37,363) (22,858) (6,948)
In-process research and development............. (2,300) (18,416) (3,950)
Net interest.................................... 11,221 9,968 9,894
Other corporate expenses........................ (51,837) (18,128) (10,578)
-------- -------- --------
Consolidated income before income taxes................ $182,725 $ 95,472 $ 64,622
======== ======== ========
- ---------------
(1) Represents OEM revenue and royalty fees in connection with the Development
Agreement.
(2) Represents expenses presented to management only on a consolidated basis and
not allocated to the geographic operating segments.
The Americas' identifiable assets accounted for greater than 90% of the
total identifiable assets for all segments as of December 31, 1999, 1998 and
1997.
Export revenue represents shipments of finished goods and services from the
United States to international customers. As of July 1, 1999, the Company began
shipping finished goods to European customers from its warehouse location in
Europe. Shipments from the United States were as follows:
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
EMEA...................................................... $60,590 $64,130 $19,214
Asia Pacific.............................................. 20,202 10,762 4,022
Other..................................................... 6,289 2,760 2,320
------- ------- -------
$87,081 $77,652 $25,556
======= ======= =======
For the years ended December 31, 1999, 1998 and 1997, sales to four
customers in the Americas accounted for 42%, 38% and 40% of net revenues,
respectively.
F-23
66
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information regarding revenue by products and services groups is
as follows:
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Revenue:
Windows Application Servers............................... $299,510 $172,663 $ 82,372
Computing Appliances Products............................. 9,754 21,776 24,080
Management Services Products.............................. 38,441 11,916 2,862
Microsoft Royalties....................................... 39,830 31,735 9,625
Other Revenue............................................. 15,750 10,546 4,994
-------- -------- --------
Net Revenues.............................................. $403,285 $248,636 $123,933
======== ======== ========
13. RELATED PARTY TRANSACTIONS
An entity which held a greater than 5% interest in the Company at December
31, 1999, 1998 and 1997 is a party to one of the licensing agreements discussed
in Note 2. The Company recognized $1.9 million, $8.5 million and $7.8 million of
royalty expense in cost of revenues in the years ended December 31, 1999, 1998
and 1997, respectively, and has accrued royalties and other accounts payable of
$0.4 million and $2.9 million at December 31, 1999 and 1998, 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, as amended, the Company received non-refundable payments of an
additional $100 million, of which $10 million was received on July 2, 1998 and
$15 million was received at the beginning of each quarter through the fourth
quarter of 1999. The Company has recognized revenue of approximately $39.8
million, $31.7 million and $9.6 million in 1999, 1998 and 1997, respectively, in
connection with the Development Agreement, as amended.
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31
-------------------------------
1999 1998 1997
--------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Numerator:
Net income............................................. $116,944 $61,102 $41,358
======== ======= =======
Denominator:
Denominator for basic earnings per share -- weighted
average shares...................................... 176,260 168,473 163,444
Effect of dilutive securities:
Employee stock options.............................. 16,306 14,121 11,080
-------- ------- -------
Denominator for diluted earnings per share -- adjusted
weighted-average shares............................. 192,566 182,594 174,524
======== ======= =======
Basic earnings per share................................. $ 0.66 $ 0.36 $ 0.25
======== ======= =======
Diluted earnings per share............................... $ 0.61 $ 0.33 $ 0.24
======== ======= =======
F-24
67
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement 133. The Statement defers the effective
date of SFAS 133 to fiscal 2001. Management is evaluating SFAS 133 and does not
believe that adoption of the Statement will have a material impact on its
financial statements.
16. SUBSEQUENT EVENTS
On February 15, 2000, the Company acquired all of the operating assets of
the Innovex Group, Inc., a privately owned e-business consulting services
organization specializing in the design, development and implementation of
Web-based solutions and systems integration, for approximately $47.8 million in
cash of which $28.7 million was paid at the closing date and the balance is
payable, in equal installments, 18 and 24 months after the closing date,
contingent on future events, as defined in the acquisition agreement.
F-25
68
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
------- ------- -------- -------- ----------
1999
Net revenues.................................. $85,039 $94,415 $105,780 $118,051 $403,285
Gross margin.................................. 80,517 91,314 102,477 114,398 388,706
Income from operations........................ 37,154 41,120 43,035 50,195 171,504
Net income.................................... 25,768 27,785 29,346 34,045 116,944
Basic earnings per common share (a)........... 0.15 0.16 0.17 0.19 0.66
Diluted earnings per common share (a)......... 0.14 0.15 0.15 0.17 0.61
1998
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 (a)........... 0.07 0.06 0.10 0.13 0.36
Diluted earnings per common share (a)......... 0.07 0.05 0.09 0.12 0.33
- ---------------
(a) The above quarterly information has been adjusted to reflect the stock split
as further discussed in Note 7.
F-26
69
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
--------- ---------- ---------- ---------- -------------
(IN THOUSANDS)
1999
Deducted from asset accounts:
Allowance for doubtful accounts....... $1,593 $ 584 $ -- $ 632(2) $1,545
Allowance for returns................. 4,641 -- 17,996(1) 15,941 6,696
Provision for inventory............... 402 1,982 -- 1,472 912
------ ------ ------- ------- ------
$6,636 $2,566 $17,996 $18,045 $9,153
====== ====== ======= ======= ======
1998
Deducted from asset accounts:
Allowance for doubtful accounts....... $1,699 $ 620 $ -- $ 726(2) $1,593
Allowance for returns................. 4,599 -- 8,580(1) 8,538 4,641
Provision for inventory............... -- 417 -- 15 402
------ ------ ------- ------- ------
$6,298 $1,037 $ 8,580 $ 9,279 $6,636
====== ====== ======= ======= ======
1997
Deducted from asset accounts:
Allowance for doubtful accounts....... $ 624 $1,399 $ -- $ 324(2) $1,699
Allowance for returns................. 1,928 -- 5,809(1) 3,138 4,599
------ ------ ------- ------- ------
$2,552 $1,399 $ 5,809 $ 3,462 $6,298
====== ====== ======= ======= ======
- ---------------
(1) Netted against revenues.
(2) Uncollectible accounts written off, net of recoveries.
F-27
70
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1(1) -- 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(1) -- Recommended Offers by Citrix Systems, Inc. for APM Limited
2.3 -- Asset Purchase Agreement dated February 15, 2000 by and
among the Company, Innovex Group, Inc. and certain
stockholders of Innovex
3.1(2) -- Amended and Restated Certificate of Incorporation of the
Company
3.2(2) -- Amended and Restated By-laws of the Company
3.3(3) -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation
4.1(2) -- Specimen certificate representing the Common Stock
4.2(4) -- Indenture by and between the Company and State Street Bank
and Trust Company as Trustee dated as of March 22, 1999,
including the form of Debenture.
4.3(4) -- Form of Debenture (included in Exhibit 4.1).
4.3(4) -- Registration Rights Agreement by and between the Company and
Credit Suisse First Boston Corporation dated as of March 22,
1999.
10.1(2)* -- 1989 Stock Option Plan
10.2(2)* -- 1995 Stock Plan
10.3(2)* -- 1995 Non-Employee Director Stock Option Plan
10.4(2)* -- 1995 Employee Stock Purchase Plan
10.5(2) -- Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.6(2) -- Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.7(2) -- License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15, 1990
10.8(2) -- 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(2) -- 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(2) -- 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(2) -- Amendment No. 4 to the License Agreement between the Company
and Microsoft dated August 15, 1990, dated January 31, 1995
10.12(2) -- Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.13(2) -- Form of Indemnification Agreement
10.14(5) -- Lease Agreement between Halmos Trading and Investment
Company and the Company dated June 6, 1996
10.15(6) -- License, Development and Marketing Agreement dated July 9,
1996 between the Company and Microsoft Corporation
10.16(7) -- License, Development and Marketing Agreement dated May 9,
1997 between the Company and Microsoft Corporation
10.17(8) -- Amendment No. 1 to License, Development and Marketing
Agreement dated May 9, 1997 between the Company and
Microsoft Corporation
10.18(9) -- 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
I-1
71
EXHIBIT NO. DESCRIPTION
- ----------- -----------
24.1 -- Power of Attorney (Included in signature page)
27 -- Financial Data Schedule
- ---------------
(1) Incorporated herein by reference to the exhibits of the Company's Current
Report on Form 8-K dated as of June 30, 1998.
(2) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(3) Incorporated herein by reference to Exhibits 3 and 4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(4) Incorporated herein by reference to exhibits of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(5) Incorporated herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(6) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(7) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
(8) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(9) Incorporated herein by reference to Exhibit 10.18 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
I-2