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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2275152
(IRS EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
6400 NW 6TH WAY FORT LAUDERDALE, 33309
FLORIDA
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 Par Value
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 19, 1998 (based on the last report sale price on the
Nasdaq National Market as of such date) was $49.50. As of March 19, 1998 there
were 41,723,123 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December
31, 1997. Portions of such proxy statement are incorporated by reference into
Part III of this report.
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ITEM 1. BUSINESS.
GENERAL
Citrix Systems, Inc. ("Citrix" or the "Company") is a leading supplier of
thin client/server application server products and technologies that enable
the effective and efficient enterprise-wide deployment of applications
designed for Windows(R) operating systems. The Company's WinFrame(R) and
WinView(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.
INDUSTRY BACKGROUND
New information technologies have enabled enterprises to provide their
employees with broad access to business-critical information, including sales,
technical, human resources, vendor and supplier information. Because of their
many diverse end-user requirements, enterprises have made significant
investments in information systems infrastructure, frequently incorporating a
variety of software operating environments, computing platforms and
communications protocols. Business-critical enterprise applications and
personal productivity tools have historically been supplied by a variety of
different vendors, often resulting in incompatible systems and applications
within and among company locations. As a result of this proliferation of
technology, demand has increased for systems that offer users a standard
interface, transparent communications and the ability to integrate enterprise
and personal productivity applications to local and remote enterprise users.
Microsoft is the leading provider of desktop operating systems, supported by
a broad base of independent software developers who develop applications for
the Microsoft operating systems. With the introduction of Windows 95 and
Windows NT 32-bit operating system, Windows is the preferred environment for
enterprise applications.
Organizations seeking to broadly deploy line-of-business applications are
faced with a diverse set of challenges, including:
. Remote Users. The diversity of network connection types, protocols and
transmission speeds limits the ability of organizations to deploy
Windows applications on a cost-effective and efficient basis among
remote users such as mobile workers, telecommuters and branch office
personnel.
. Client and Platform Diversity. In addition to Windows, desktop computing
systems within an enterprise may include DOS systems, UNIX workstations,
X-Terminals, Macintosh systems and OS/2 workstations. These systems do
not support 32-bit Windows applications. Additionally, 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 not available.
. Extended Enterprise. The extension of enterprise information systems to
suppliers, distributors, customers and prospects creates Windows
application deployment issues that are outside the control of
information systems managers, such as the quality and security of the
network connection, the client platform involved and the technical
expertise of the external user.
The Company believes that these challenges have impeded effective deployment
of Windows enterprise applications to essential user communities.
THE CITRIX SOLUTION
Citrix develops, markets, sells and supports innovative client and
application server software that enable the effective and efficient
enterprise-wide deployment of Windows line-of-business applications. The
Company's WinFrame and WinView product lines, developed under license and
strategic alliance agreements with
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Microsoft, permit organizations to deploy Windows applications without regard
to location or type of client hardware platforms. These products operate by
executing the Windows applications on a multi-user server and provide end-
users access to the server from a variety of client platforms through the
Company's Independent Computing Architecture ("ICA") protocol. This approach
minimizes the communications, memory and processing requirements of the client
system, resulting in a highly scaleable, bandwidth-independent solution for
deployment of enterprise Windows applications across a range of platforms and
network environments.
Leveraging its core technologies and strategic relationships, Citrix has
developed products which enable the broad deployment of Windows applications
in a variety of environments, including:
. Low bandwidth connections, such as dial-up, wide area networks, wireless
and the Internet.
. Existing Intel-based computer systems, such as 286, 386, 486 and Pentium
computers.
. Non-Intel platforms, such as UNIX workstations, X-Terminals and
Macintosh systems.
. Emerging platforms, such as hand-held wireless devices, PDAs,
information kiosks, Windows-based terminals and network computers.
To address deployment in these diverse environments, the Company has
developed two proprietary technologies: (i) the ICA(R) protocol and (ii)
MultiWin(TM) Windows NT extensions developed under a source code license from
Microsoft.
ICA Protocol. The Company's ICA protocol separates the application's
graphical user interface from the application logic, allowing the user
interface to be displayed on one computer or device while the application
logic itself is executed on an application server. This distributed
architecture allows 16- and 32-bit Windows applications to run remotely over a
wide range of connection speeds including low bandwidth connections. The
Company believes that the ICA protocol significantly reduces many of the
difficulties associated with the manageable deployment of Windows applications
to a broad array of local and remote users.
MultiWin. The Company's multi-user Windows NT v.3.51 extensions, developed
under source code license and strategic alliance agreements with Microsoft,
are integrated into the Windows NT operating system in a manner that is
transparent to the end-user. These 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.
In May 1997, the Company entered into a five year joint development and
marketing agreement with Microsoft. By the terms of that Agreement, the
Company licensed its MultiWin technology to Microsoft for inclusion in future
versions of the Windows NT server. The Company's MultiWin technology forms the
basis of Microsoft's Windows-based Terminal Server product for NT server
versions 4.0 and 5.0. The Company will develop, market, license and support
ICA services technology ("pICAsso") for use with the Microsoft Terminal
Server.
PRODUCTS
Citrix has two product lines:
WinView, first shipped in April 1993, is a Windows application server based
on an OS/2 operating system that is marketed to departments and workgroups to
implement remote applications systems. WinView revenues approximated 1.1% and
6.8% of revenues in 1997 and 1996, respectively.
WinFrame is the primary product of Citrix. WinFrame is a Windows application
server based on Windows NT v.3.51 that is marketed to enterprises 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
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departmental or workgroup environments. The Company also markets several
enhancements to WinFrame software, such as Load Balancing and Security, as
well as products to increase the number of users who can access WinFrame
server software. First shipped in August 1995, WinFrame and its associated
products constituted 68.1% of the Company's revenues in 1997 and 62.9% in
1996. In addition, the Company licenses WinFrame technology to OEM partners
who incorporate that technology into their own product offerings (see "--
Strategic Relationships") which accounted for an additional 19.3% of revenues
in 1997 and 26.0% of revenues in 1996.
The WinView and WinFrame product lines consist of the following two
components:
Application Server Software. WinView and WinFrame application servers run on
industry-standard server hardware containing one or more Intel processors.
These application servers were created using source code licenses for
Microsoft's OS/2 and Windows NT Server v.3.51 operating systems. The
application server provides three areas of functionality: operating system
extensions that allow each user to receive a "virtual" Windows environment,
communications support to allow the Company's ICA protocol to operate on a
variety of analog and digital network connections and configuration management
software. The application server is configured at the time of sale to support
a pre-specified number of concurrent users. This number can be increased
easily with the purchase of additional concurrent user licenses, sold as add-
on kits. The Company's application server software runs with off-the-shelf,
industry standard server hardware peripherals which are purchased from third
parties.
Client Software. Each client that accesses a WinView or WinFrame server
requires software or hardware that runs the ICA protocol. The client
establishes a communications link with the server over dial-up, local area
network ("LAN"), wide area network ("WAN") or Internet connections, and has
two basic functions: establishing a server connection over the specified
network connection and sending and receiving ICA protocol data over the
network link. ICA client software is available for all the common desktop
platforms including DOS, Windows 3.x, Windows for Workgroups, Windows 95,
Windows NT, Unix and Macintosh.
TARGET MARKETS
Remote Computing. In the remote computing market, the Company's products are
used by workgroups, departments and enterprises to deploy applications whose
scale, performance, reliability and security requirements are more demanding
than those associated with simple remote access. Citrix markets its
application servers as a scaleable platform for the widespread deployment of
enterprise applications. Without the use of WinView or WinFrame, remote
deployment of these applications is slow and expensive because LAN
applications typically require a lot of memory and fast processors on the
desktop, and relatively high-speed communication bandwidth.
The remote computing market incorporates dial-in remote access for large
field workforces, branch office locations and deployment of applications over
an enterprise WAN. For enterprises with any of these deployment requirements,
scaleable implementation of legacy and client/server applications can be an
issue.
Web Computing. The Company views the development of intranets as an
important potential market for its application server products. Although the
intranet market is rapidly gaining in popularity and companies are developing
new types of applications, they need to integrate Web technologies and their
Windows applications. A Citrix WinFrame application server, when used in
conjunction with a Web server, allows an organization to provide intranet
access to standard and custom developed Windows applications. For example,
using this approach, an organization could add secure interactive access to a
large Lotus Notes database directly from a Web page without developing any new
programs or changing the existing Lotus Notes application program.
The Company believes that there are a number of opportunities to market its
line of WinFrame servers as a system platform for the deployment of Windows
applications in an Intranet environment. These capabilities are intended to
permit organizations to publish Windows applications using their standard Web
server infrastructure.
4
Specialized Windows Terminals. Citrix has licensed its ICA technology to
companies such as Wyse Technology and Boundless Technologies to enable the
development of low-cost Windows-based terminals. In addition, the Company
intends to continue to develop strategic relationships and work with key
strategic partners to deploy Windows applications on point of sale terminals
and information kiosks. The Company believes that its WinFrame application
servers, when coupled with these new devices, will provide an effective
alternative to character-based UNIX implementations and will capitalize on
existing Windows applications, tools and development facilities.
Wireless Windows Servers and PDAs. The Company believes that there is a
strong and growing demand for wireless, collaborative computing. Many device
manufacturers, including Apple Computer, Inc., Motorola, Inc., Sharp
Corporation, Sony Corporation and others have announced and are shipping
portable wireless devices. In most cases, the acceptance of these devices
requires low-cost, long battery life and portability. These requirements are
inconsistent with the latest generation of Windows applications and Windows
development tools, which need substantial RAM, processing power and
communications bandwidth for adequate performance. The Company believes the
application of its technology will enable these devices to access the latest
generation of Windows 95 and Windows NT applications. Citrix has licensed
technology to Sharp Corporation, Cruise Technologies, Telxon Corporation and
Psion Software PLC for potential inclusion in a line of portable wireless
devices.
UNIX, X-Terminal, DOS and Macintosh Support for Windows. The introduction of
Windows 95 has caused a major transition in the Windows application software
market. As independent software vendors ("ISVs") move to develop applications
which capitalize on the new features of the Windows 95 operating system, they
are expecting organizations to upgrade client systems in order to run these
applications. In many large establishments, there is a heterogeneous mix of
computing platforms, including DOS systems, Windows 3.x systems, UNIX
workstations, X-Terminals and Macintosh computers. In conjunction with the
appropriate ICA client software, Citrix application server products can
deliver Windows 32-bit applications, running on the server, to most types of
network-attached client systems. The Company has licensed Tektronix, Inc.
("Tektronix") and Network Computing Devices ("NCD") to incorporate ICA
technology into their products and to resell application servers to deliver
Windows applications to UNIX systems and X-Terminals. In addition to the
clients supported by these OEM relationships, the standard Citrix products
deliver Windows applications to DOS, Windows 3.x, Windows for Workgroups,
Windows NT and OS/2 and Macintosh systems.
STRATEGIC RELATIONSHIPS
The Company has entered into a number of strategic relationships to develop
its existing and future product lines, develop markets for the application of
its technology and to broaden deployment and acceptance of the ICA protocol as
an emerging industry standard presentation services protocol for distributed
Windows computing. In connection with the Company's development of the
WinFrame and WinView product lines and markets, the Company has entered into
strategic relationships with the following key partners:
Microsoft Corporation. Since its inception, the Company has been a party to
a number of license agreements with Microsoft, including licenses to Microsoft
OS/2, Windows 3.x, Windows for Workgroups and Windows NT v.3.51. Under these
agreements, the Company has access to certain Microsoft source and object
code, technical support and other materials. In addition, the Company is
permitted to sublicense Microsoft Windows NT v.3.51 server as a part of its
WinFrame line of products, pursuant to which the Company pays royalties to
Microsoft. The license agreements had an initial term which expired in
September 1994, and was extended until September 2001. The license agreements
may not be assigned by the Company or Microsoft without the prior written
consent of the other party. For purposes of the agreements, an assignment
shall be deemed to include an acquisition of either the Company or Microsoft
by a third party (by merger, sale of stock or otherwise) or the insolvency or
bankruptcy of either party. These provisions may impede the Company's ability
to enter into certain transactions with third parties, such as mergers with or
acquisitions by third parties. In addition, Microsoft has licensed the
WinFrame ICA client for inclusion in future versions of their Windows 95 and
NT operating systems as well as their Internet Explorer Web browser.
5
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 3.X, Windows NT and the
Internet Explorer for Windows. Pursuant to this agreement, the Company
licenses its ICA technology to Microsoft, royalty-free, as included in the
above Microsoft Windows family of products.
In May 1997, the Company entered into a five year joint development and
marketing agreement with Microsoft pursuant to which the Company licensed its
MultiWin technology to Microsoft for inclusion in future versions of the
Windows NT server. The Company's MultiWin forms the basis of Microsoft's
Windows-based Terminal Server product for NT server versions 4.0 and 5.0. The
Company will develop, market, license and support ICA services software for
use with the Microsoft terminal server. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
Network Computing Devices, Inc. In March 1996, the Company entered into a
software license with Network Computing Devices, Inc. ("NCD") to deliver
Windows applications to X-devices. The agreement allows NCD to implement a
native-X driver for WinFrame and remarket the driver and the WinFrame server
under the name of "WinCenter Pro."
Tektronix, Inc. In September 1994, the Company entered into a software
license agreement with Tektronix pursuant to which the Company granted a
license to Tektronix to incorporate its ICA technology to enable PC
application access from X-Terminals and UNIX workstations. The Company
believes that its collaboration with Tektronix has resulted in the first
product line to deliver Windows 95 applications to X-Terminals and UNIX
workstations. Tektronix implemented a native-X version of the ICA client
program and is re-marketing the Citrix WinFrame server under the name of
WinDD.
Wyse Technology. In June 1995, the Company entered into a software license
agreement with Wyse Technology ("Wyse") pursuant to which the Company and Wyse
began cooperative efforts concerning the design and development of a new class
of Windows-capable client devices that function in conjunction with the
Company's application server. Citrix and Wyse are also working to build sales
and marketing channels to deliver the combined products to the UNIX
marketplace.
CUSTOMERS
Tech Data Corporation ("Tech Data") and Unique Co-operative Solutions, Inc.
("UCSI") distributors of the Company's products pursuant to distributor
agreements, accounted for 17% and 9%, respectively, of the Company's total net
sales in 1997 and 22% and 12%, respectively, in 1996. The Company's agreements
with Tech Data and UCSI are not exclusive, have no stated minimum purchase
obligations and may be terminated by either party without cause. The Company
believes that in the event of a termination of either relationship, the
Company could replace such relationship with an alternate distributor and that
such replacement would not have a material adverse effect on the Company's
business, results of operations and financial condition.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on developing new
products and core technologies for its markets and further enhancing the
functionality, reliability, performance and flexibility of existing products.
Extensive input concerning product development is obtained 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 International
Business Machines Corporation. Since May 1993, this team has been involved in
the development of system software products utilizing Windows NT technology.
The Company has made significant development investments in two key core
technologies: its ICA protocol and multi-user Windows extensions to NT and
OS/2.
6
In 1997, 1996 and 1995, the Company's research and development expenses were
approximately $6.9 million, $3.8 million and $2.3 million, respectively. To
date, all software development costs have been expensed as incurred.
In addition, during 1997 the Company incurred approximately $4.0 million for
purchased research and development expenses that had not yet reached
technological feasibility and had no alternative future use. Furthermore, in
the first quarter of 1998, the Company entered into certain similar
transactions for which an aggregate charge of $24.0 million will be recorded
for purchased research and development.
SALES, MARKETING AND SUPPORT
Citrix markets its products through multiple indirect channels worldwide,
including distributors, value-added resellers, system integrators and OEM
licensees. In January 1996, Citrix announced its Citrix Solutions Network
("CSN"), which provides training and certification to integrators, value-added
resellers and consultants for a full-range of WinFrame based application
deployment solutions and services. As of December 31, 1997, the Company had in
the U.S., sales/marketing relationships with five national distributors, three
regional distributors, approximately 450 CSN Authorized Gold Solutions
Providers, approximately 1,600 CSN Authorized Silver Solutions Providers in
addition to over 550 other Citrix-authorized value-added resellers, system
integrators and OEM licensees. Internationally, the Company had relationships
with approximately 70 distributors and approximately 1,000 Citrix-authorized
value-added resellers. A number of the Company's strategic partners and OEM
licensees provide additional indirect sales channels for Citrix products under
either a Citrix brand or private brand name.
Citrix's sales and marketing organization actively supports its distributors
and resellers. The Company's marketing department provides training, sales
event support, sales collateral, advertising, direct mail and public relations
coverage to its indirect channels to aid in market development and in
attracting new customers. The Company's sales organization consists of field-
based systems sales engineers and corporate sales professionals. These field
personnel are supported by an inside sales group based in Fort Lauderdale,
Florida. Inside 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. In addition, the Company
plans to hire additional direct sales personnel to increase product demand
among large corporate accounts.
Citrix provides most of its distributors 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 amount of additional 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 service and support activities are related to
software and network integration issues. Due to the nature of Citrix products,
remote access via a telephone connection can often be used to troubleshoot and
diagnose network problems. Citrix also provides technical support and training
to channel and strategic partners, who are utilized as the first line of
support for their own customers. Additionally, users can choose from a
comprehensive fee-based support program which ranges from one-time incident
charges to an annual support agreement covering multiple sites and servers.
Citrix also provides on-line services to distribute technical advice and
software updates. These services include a bulletin board service, fax service
and access via CompuServe, the Internet and electronic mail.
Citrix conducts its sales, marketing and support activities from its
principal offices in Fort Lauderdale, Florida as well as through satellite
offices in the United Kingdom, France, Germany, Australia, the Netherlands and
Canada.
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OPERATIONS
The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations. All production and
warehousing is performed by an independent contractor. Shipping is made
primarily from the location of the independent contractor, although limited
shipments are made from the Company's facilities. Master software diskettes,
development of user manuals, packaging designs, initial product quality
control and testing are performed at the Company's facilities. Diskette and
CD-ROM duplication, printing of documentation, packaging and assembly are
performed by the independent contractor to the Company's specifications. To
date, the Company has not experienced any material difficulties or delays in
the manufacture and assembly of its products.
The Company has identified and evaluated alternative manufacturing vendors
and believes that such alternative vendors are capable of producing the
requisite quality and volumes at competitive prices. However, if difficulties
and delays were to be encountered, and transition to an alternate manufacturer
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 markets in which the Company competes are intensely competitive and
offer a variety of solutions. Remote computing products range from simple
remote control software for a single PC to remote node hardware products to
branch office routers. Competitive factors in the remote computing market
include completeness of features, product quality and functionality, marketing
and sales resources and customer service and support. While the Company
believes that it presently competes on a favorable basis with respect to these
factors, there can be no assurance that the Company will be able to establish
and maintain a market position in the face of increased competition. The
Company faces competition from organizations that seek alternative approaches
to remote computing from such companies as 3Com Corp., Bay Networks, Inc.,
Cisco Systems, Inc., Microsoft, Novell, Inc. and Symantec Corporation, all of
whom are significantly larger than the Company and have greater financial
resources.
Additionally, the Company believes that companies, including Microsoft, have
entered or will enter the market with solutions that involve a similar
approach to Citrix's multi-user application server. (See " -- Strategic
Relationships" and "Management's Discussion and Analysis of Operations --
Certain Factors Which May Affect Future Results.") Additionally, the
announcement of the release, and the actual release, of products competitive
to the Company's existing and future product lines such as Microsoft's
Windows-based Terminal Server and related plug-ins, could cause existing and
potential customers of the Company to postpone or cancel plans to license
certain of the Company's existing and future product offerings, which would
adversely impact its net revenues, operating results and financial condition.
Further, the Company's ability to market ICA, pICAsso and other future product
offerings will be dependent on Microsoft's licensing and pricing scheme to
allow client devices implementing ICA, pICAsso or any such future product
offerings to attach to the Windows-based Terminal Server.
In addition, alternative products exist for Internet commerce that directly
or indirectly compete with the Company's products. Existing or new products
that extend Web site software to provide database access or interactive
computing can materially impact the Company's ability to sell its products in
this market. Competitors in this market include Microsoft, Netscape
Communications Corporation, Quarterdeck Corp. and Sun and other makers of Web
server and browser software. In the multi-user graphical platform market, the
key competitor is The Santa Cruz Operation, Inc., and, to a lesser extent,
other manufacturers of UNIX application servers. The Company believes it will
encounter competition from The Santa Cruz Operation to the extent it is able
to provide a low-cost graphical computing platform for Windows applications.
As markets for the Company's products continue to develop, additional
companies, including companies with significant market presence in the
computer
8
hardware, software and networking industries, may enter the markets in which
the Company competes and further intensify competition. Most of these
competitors and potential competitors 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, with a resultant diminution of
profit margins, may become more significant in the future. The Company may not
be able to maintain its historic prices, and an inability to do so could
adversely affect the Company's business, results of operations and financial
condition.
PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon proprietary technology.
While the Company has filed 18 patent applications, to date the Company has no
patents, 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 relies primarily on trade secret
protection and confidentiality and proprietary information agreements to
protect its proprietary technology. The loss of any material trade secret,
trademark, trade name or copyright could have a material adverse effect on the
Company. There can be no assurance that the Company's efforts to protect its
proprietary technology rights will be successful. Despite the Company's
precautions, it may be possible for unauthorized third parties to copy certain
portions of the Company's products or to obtain and use information that the
Company regards as proprietary. Substantially all of the Company's sales are
derived from the licensing of Company products under "shrink wrap" license
agreements that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. Although the Company
does not believe that its products infringe on the rights of third parties,
there can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertion will not
result in costly litigation or require the Company to obtain a license to
proprietary technology rights of such parties. In addition, there can be no
assurance that such licenses will be available on reasonable terms or at all.
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, 1997, the Company had a total of 303 employees. Six of
the Company's employees are represented by a statutory collective bargaining
agreement in France and the Company believes that its relations with employees
are good.
ITEM 2. PROPERTIES.
The Company's corporate offices consist of approximately 100,000 square feet
of leased and subleased office space in Fort Lauderdale, Florida. In addition,
the Company leases and subleases approximately 35,000 square feet of office
space in various other facilities worldwide.
ITEM 3. LEGAL PROCEEDINGS.
The Company has recently received a letter from a third party alleging that
certain technology incorporated in its WinFrame product line may infringe a
patent held by that party, and requesting that the Company contact the third
party to discuss a license to the patent. The Company is in the preliminary
stages of assessing the
9
allegation. There can be no assurance that the Company would prevail in the
defense of an infringement claim, if made, or that the Company could obtain a
license to the patent on a reasonable basis, if at all. Any patent dispute or
litigation, or any royalty-bearing license, could have a material adverse
effect on the Company's business, financial condition or results of
operations.
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 1997.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is currently traded on The Nasdaq National Market
under the symbol "CTXS." Public trading of the Common Stock commenced on
December 8, 1995. Prior to that time, there was no public market for the
Company's Common Stock. The following table sets forth the high and low bid
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 two-for-one stock split in the form of a stock dividend paid on June 4,
1996 to holders of record of the Company's Common Stock on May 28, 1996 and
the three-for-two stock split in the form of a stock dividend paid on February
20, 1998 to holders of record of the Company's Common Stock on February 12,
1998. Such information reflects inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.
HIGH LOW
--------- ---------
FISCAL YEAR 1996:
First Quarter............................................. $18 9/16 $ 7 13/16
Second Quarter............................................ $29 13/16 $15 5/16
Third Quarter............................................. $34 5/16 $16
Fourth Quarter............................................ $37 13/16 $25 3/16
FISCAL YEAR 1997:
First Quarter............................................. $34 5/16 $ 6 1/2
Second Quarter............................................ $29 1/2 $ 7 1/16
Third Quarter............................................. $38 7/16 $27 1/2
Fourth Quarter............................................ $56 5/16 $32 3/4
On March 19, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $49.50 per share. As of March 19, 1998, there were
approximately 437 holders of record of the Common Stock.
The Company paid cash amounting to approximately $3,000 in lieu of
fractional shares in connection with its three-for-two stock split effected
February 20, 1998. The Company currently intends to retain any earnings for
use in its business and does not anticipate paying any cash dividends on its
capital stock in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data set forth below with
respect to the years ended December 31, 1997, 1996 and 1995, and the
consolidated balance sheet data as of December 31, 1997 and 1996 are derived
from the consolidated financial statements of the Company, included herein,
which have been audited by Ernst & Young LLP, independent certified public
accountants. The statement of operations data for the years ended December 31,
1994 and 1993, and the balance sheet data as of December 31, 1995, 1994 and
1993, have been derived from financial statements not included herein. Except
as otherwise noted, all information contained in this Form 10-K reflects a
two-for-three reverse stock split of the Common Stock, two-for-one stock split
of the Common Stock and a three-for-two stock split of the Common Stock,
effected December 7, 1995, June 4, 1996 and February 20, 1998, respectively.
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included as Item 8 in this Form 10-K.
11
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues........................ $123,933 $44,527 $14,568 $10,085 $ 5,164
Cost of goods sold.................. 12,304 5,099 1,956 2,137 929
-------- ------- ------- ------- -------
Gross Margin........................ 111,629 39,428 12,612 7,948 4,235
-------- ------- ------- ------- -------
Operating expenses:
Research and development.......... 6,948 3,843 2,343 1,912 1,722
Sales, marketing and support...... 35,352 13,741 6,670 4,444 3,866
General and administrative........ 10,651 4,126 1,784 1,395 1,370
Purchased research & development.. 3,950 -- -- -- --
-------- ------- ------- ------- -------
Total operating expenses........ 56,901 21,710 10,797 7,751 6,958
-------- ------- ------- ------- -------
Income (loss) from operations....... 54,728 17,718 1,815 197 (2,723)
Other income, net................... 9,894 4,545 173 45 1
-------- ------- ------- ------- -------
Income (loss) before income taxes... 64,622 22,263 1,988 242 (2,722)
Income taxes........................ 23,264 3,562 93 -- --
-------- ------- ------- ------- -------
Net income (loss)................... $ 41,358 $18,701 $ 1,895 $ 242 $(2,722)
======== ======= ======= ======= =======
Diluted earnings per share (1)...... $ 0.95 $ 0.46 $ 0.06
======== ======= =======
Diluted pro forma earnings per share
(2)................................ $ 0.01
=======
Diluted weighted average shares
outstanding
Historical........................ 43,631 40,905 30,370
======== ======= =======
Pro forma (2)..................... 30,291
=======
DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital ............... $222,916 $139,778 $42,688 $ 1,989 $ 366
Total assets................... 282,668 149,580 46,715 3,932 2,306
Long term portion of capital
lease obligations............. -- 8 88 68 --
Redeemable convertible
preferred stock............... -- -- -- 18,608 16,630
Common stockholders' equity
(deficit) (3)................. 196,848 141,851 42,962 (16,473) (16,103)
- --------
(1) The earnings per share amounts for the years ended December 31, 1996 and
1995 have been restated as required to comply with Statement of Financial
Accounting Standards No. 128, "Earnings per Share." See Note 2 of the
Notes to Consolidated Financial Statements.
(2) Pro forma earnings per share and the Pro forma weighted average shares
outstanding are calculated using the weighted average number of common and
common equivalent shares outstanding during the respective periods after
giving effect to the conversion of the redeemable convertible preferred
stock into an aggregate of 23,039,082 shares of Common Stock on the
issuance dates of the various series.
(3) At December 31, 1994 and 1993 the common stockholders' equity (deficit)
included certain amounts attributable to the accretion of redeemable
convertible preferred stock. See Note 7 of the Notes to Consolidated
Financial Statements.
12
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
application server software that enables effective and efficient deployment of
enterprise applications that are designed for certain Windows operating
systems. The Company was incorporated in April 1989, and shipped its initial
products in 1991.
From inception until the introduction of WinView in 1993, substantially all
of the Company's revenue was derived from its initial products. From its
introduction in the second quarter of 1993 through the second quarter of 1995,
the WinView product represented the largest source of the Company's revenue.
The Company's WinFrame products shipped in final form in the third quarter of
1995. WinFrame represented approximately 68.1% of the Company's revenue in
1997 and 62.9% in 1996. The Company anticipates that the WinFrame and
derivative product lines will constitute a majority of its revenue for the
foreseeable future. WinView revenues constituted approximately 1.1% of
revenues in 1997 and 6.8% of revenues in 1996 and are expected to continue to
decline. Revenues from WinFrame and WinView products result primarily from
license fees for "shrink wrapped" product sold to distributors and resellers.
The Company also derives revenue from initial license fees and associated
quarterly royalties from original equipment manufacturers ("OEMs"), non-
recurring engineering fees and training, consulting and service revenue.
As a result of the Development Agreement (defined below) the Company will
continue to support the Microsoft NT platform but will no longer incorporate
Windows NT source code directly into the Company's future offerings. However,
future WinFrame products based upon the Windows NT v.3.51 kernel may continue
to be offered under the terms of the Development Agreement until September 30,
2001. In June 1997, the Company announced a product (code-named "pICAsso")
which, when combined with the Microsoft multi-user version of Windows NT
technology, will provide capabilities similar to those currently offered in
the WinFrame product line. The Company plans to continue developing
enhancements to its pICAsso product and expects that this product, existing
and future enhanced WinFrame products and the royalties derived under the
terms of the Development Agreement will constitute a majority of its revenues
for the foreseeable future.
Product revenues are recognized upon shipment only if no significant Company
obligations remain and collection of the resulting receivable is deemed
probable. The initial fee of $75 million relating to the Development Agreement
is being recognized ratably over the term of the contract, which is five
years. In the case of noncancelable product licensing arrangements under which
certain OEMs have software reproduction rights, recognition of revenue also
requires delivery and customer acceptance of the product master or first copy.
Product returns and sales allowances 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 revenues from customer maintenance fees
for ongoing customer support and product updates 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 income statement.
On May 9, 1997, the Company and Microsoft Corporation ("Microsoft") entered
into a License, Development and Marketing Agreement (the "Development
Agreement") which provides for the licensing to Microsoft of certain of the
Company's multi-user software enhancements to Microsoft's NT Server and for
the cooperation between the parties for the development of certain future
multi-user versions of Microsoft Windows NT Server, known as Windows-based
Terminal Server. The Development Agreement also provides for each party to
develop its own enhancements or "plug-ins" to the jointly developed products
which may provide access to the Windows-based Terminal Server (formerly
referred to as Hydrix) base platform from a wide variety of computing devices,
such as a Company developed plug-in that implements the ICA protocol on the
new platform, code-named pICAsso. Pursuant to the terms of the Development
Agreement, in May 1997, the Company received an aggregate of $75 million as a
non-refundable royalty payment and for engineering and
13
support services to be rendered by the Company. Under the terms of the
Development Agreement, the Company will be eligible to receive royalty
payments of up to an additional $100 million based on Microsoft's release and
shipment of versions 4.x and 5.x of Windows-based Terminal Server products. In
addition, Microsoft and the Company have agreed to engage in certain joint
marketing efforts to promote use of Windows NT Server-based multi-user
software and the Company's ICA protocol. Additionally, until at least November
1999, Microsoft has agreed to endorse only the Company's ICA protocol as the
preferred way to provide multi-user Windows access for devices other than
Windows client devices. Further, subject to the terms of the Development
Agreement, the Company shall be entitled to license versions of its WinFrame
technology based on Windows NT v.3.51 until at least September 30, 2001.
The Company has recently acquired or licensed technology that is related to
its strategy. On October 2, 1997, the Company completed its acquisition of
certain of the assets, technology and operations of DataPac Australasia Pty
Limited for approximately $5.0 million. Additionally, on February 5, 1998, the
Company completed its acquisition of certain software technologies and assets
of Insignia Solutions for approximately $17.5 million. Also, in January 1998,
the Company announced that it has licensed certain technology from EPiCON,
Inc. for approximately $8.0 million.
The discussion below relating to the individual financial statement
captions, the Company's overall financial performance, operations and
financial position should be read in conjunction with the factors and events
described in "Overview" and "Certain Factors Which May Affect Future Results"
which, it is anticipated, will impact the Company's future performance and
financial position.
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, 1997 1996
------------------------- COMPARED TO COMPARED TO
1997 1996 1995 1996 1995
------- ------- ------- ----------- -----------
Net revenues................ 100.0% 100.0% 100.0% 178.3% 205.7%
Cost of goods sold.......... 9.9 11.5 13.4 141.3 160.7
------- ------- ------- ----- -----
Gross margin................ 90.1 88.5 86.6 183.1 212.6
------- ------- ------- ----- -----
Operating expenses:
Research and development.. 5.6 8.6 16.1 80.8 64.0
Sales, marketing and
support.................. 28.5 30.9 45.8 157.3 106.0
General and
administrative........... 8.6 9.2 12.2 158.2 131.2
Purchased research and
development.............. 3.2 0.0 0.0 * 0.0
------- ------- ------- ----- -----
Total operating
expenses............... 45.9 48.7 74.1 162.1 101.1
------- ------- ------- ----- -----
Income from operations...... 44.2 39.8 12.5 208.9 876.1
Interest income, net........ 8.0 10.2 1.2 117.7 *
------- ------- ------- ----- -----
Income before income taxes.. 52.2 50.0 13.6 190.3 *
Income taxes................ 18.8 8.0 0.6 553.2 *
------- ------- ------- ----- -----
Net income.................. 33.4% 42.0% 13.0% 121.2% 886.9%
======= ======= ======= ===== =====
- --------
* not meaningful.
Net Revenues. Net revenues were $123.9 million, $44.5 million and $14.6
million in 1997, 1996 and 1995, respectively, representing increases of 178.3%
and 205.7% from 1996 to 1997 and from 1995 to 1996, respectively. The
Company's net revenues during 1997, 1996 and 1995 were derived primarily from
product license revenues. The increase in net revenues in each year primarily
reflects revenues generated from the Company's WinFrame products, whose first
production version was shipped in August 1995, and, to a lesser
14
extent, increased volume in licensing of OEM products, as well as in 1997, the
initial recognition of revenue on the Development Agreement with Microsoft.
These increases in net revenues in each year were partially offset by a
decline in the Company's WinView product revenues and, to a lesser extent in
1997, an increase in the Company's provision for stock rotation of the
previous version of WinFrame and product returns.
WinFrame, OEM and Development Agreement revenues approximated 68.1%, 19.3%
and 7.6% of revenues, respectively, in 1997 and 62.9%, 26.0% and 0.0% of
revenues, respectively, in 1996. WinView revenues approximated 1.1%, 6.8% and
40.8% of revenues respectively, in 1997, 1996 and 1995. The Company's WinFrame
and OEM revenues represent product license fees based upon the Company's
multi-user NT-based technology.
International. International revenues (sales outside of the United States)
accounted for approximately 20.6%, 15.8% and 18.3% of net revenues for the
years ended December 31, 1997, 1996 and 1995, respectively. See Note 14 to the
Company's Consolidated Financial Statements appearing in Item 8 of this Annual
Report.
Cost of Goods Sold. Cost of goods sold 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 goods sold
primarily consisted of cost of royalties, except where the OEM elected to
purchase shrink wrapped products, in which case such costs were as described
in the previous sentence. All development costs incurred in connection with
the Development Agreement are expensed as incurred as a separate component of
cost of goods sold. Costs associated with non-recurring engineering fees were
included in research and development expenses and are not separately
identifiable. All development costs included in the research and development
of software products and enhancements to existing products have been expensed
as incurred. Consequently, there is no amortization of capitalized research
and development costs included in cost of goods sold.
Gross Margin. Gross margin increased from 88.5% in 1996 to 90.1% in 1997,
and from 86.6% in 1995 to 88.5% in 1996. The increase in gross margin as a
percent of gross revenues from 1996 to 1997 was primarily attributable to
changes in product mix, representing changes in the mix of OEM revenues versus
product sold to distributors and resellers, and different products within the
WinFrame product line, which were partially offset by the gross margin related
to the Development Agreement revenues. The increase in gross margin from 1995
to 1996 was also primarily attributable to changes in product mix,
representing changes in the mix of OEM revenues versus product sold to
distributors and resellers, and different products within the WinFrame product
line.
Research and Development Expenses. Research and development expenses
consisted primarily of personnel-related costs. Increases in research and
development expenses in 1997 and 1996 resulted primarily from additional
staffing, associated salaries and related expenses required to expand and
enhance the Company's product lines and, in 1996, third-party expenses
associated with the translation and localization of the WinFrame products as
well as increased expenses associated with patent filings relating to certain
aspects of the Company's software products and technology. Additionally, in
1997 these costs were partially offset by the allocation of certain research
and development expenses to cost of goods sold for the portion of these
expenses associated with the Development Agreement revenues.
Sales, Marketing and Support Expenses. The increases in sales, marketing and
support expenses in 1997 and 1996 resulted primarily from increases in
promotional and advertising activities, which include co-op advertising
programs and other promotional activities such as those directed at resellers,
training programs, trade shows and other direct mail and advertising
activities. Sales and marketing staff and associated salaries, commissions and
related expenses, also increased, resulting from efforts to expand the
Company's product distribution.
General and Administrative Expenses. The increase in general and
administrative expenses in both 1997 and 1996 was primarily due to increased
staff, associated salaries and related expenses necessary to support overall
increases in the scope of the Company's operations, increased legal fees due
to contract negotiations and
15
litigation defense as well as an increase in the provision for doubtful
accounts due to an increased level of accounts receivable attributable to each
period's respective increase in sales. Additionally, in 1996, the increase was
also due to expenditures associated with being a public company such as
increased legal fees and associated regulatory filing expenses as well as
expenses associated with the investor relations function.
Purchased Research and Development Expenses. On October 2, 1997, the Company
completed its acquisition of certain of the assets, technology and operations
of DataPac Australasia Pty Limited for approximately $5.0 million. This
transaction was accounted for using the purchase method of accounting with the
purchase price being principally allocated to purchased technologies and
intangible assets. Approximately $4.0 million of the total purchase price
represented the value of purchased research and development that had not yet
reached technological feasibility and had no alternative future use and, as
such, was recorded as a charge for purchased research and development. The
value attributed to the purchased research and development was determined by
an independent appraisal. Additionally, in the first quarter of 1998, the
Company has acquired certain technologies from Insignia Solutions and licensed
certain technology from EPiCON, Inc., for approximately $17.5 million and $8.0
million, respectively. Approximately $16.0 million and $7.9 million of the
acquisition and the license, respectively, represent the value of purchased
research and development that had not yet reached technological feasibility
and had no alternative future use, and as such, will be recorded as a non-
recurring pre-tax charge for purchased and research and development in the
first quarter of 1998. The value attributed to the acquisition of certain
technologies from Insignia Solutions was determined by an independent
appraisal.
There can be no assurance that the Company will not incur additional charges
in subsequent periods to reflect costs associated with these transactions or
that the Company will be successful in its efforts to integrate and further
develop these technologies.
Interest Income, Net. The increase in interest income, net, in 1997 was
primarily due to interest income earned on additional cash generated from the
receipt of an initial license fee under the terms of the Development Agreement
and, to a lesser extent, interest income generated from the net proceeds of
the Company's public offering completed in June 1996. The increase in 1996 was
primarily due to interest income generated from the net proceeds of the
Company's public offerings which were completed in June 1996 and December
1995.
Income Taxes. The Company's effective tax rate amounted to 36% and 16% in
1997 and 1996, respectively. The increase in estimated effective annual tax
rate is primarily due to the Company's increased profitability and lack of net
operating loss carryforwards to offset taxable income in the current year.
Such net operating loss carryforwards were included in the computation of the
effective tax rate utilized in 1996. In 1995, the Company incurred income tax
expense of $93,000, representing only Alternative Minimum Taxes due to
limitations in utilizing the Company's net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, the Company generated positive operating cash flows primarily
from the receipt of an initial license fee of $75 million related to the
Development Agreement. The revenues from this Development Agreement are being
recognized ratably over the contract period of five years, which caused a
substantial increase in deferred revenue relating to the Development
Agreement. Additionally, during the same period, the Company increased
profitability, which was partially offset by an increase in deferred tax
assets attributable to the taxability of the initial license fee received
under the terms of the Development Agreement. The Company also recognized tax
benefits from the exercise of non-statutory stock options and disqualifying
dispositions of incentive stock options of approximately $10.7 million. The
Company also purchased and sold short-term investments for approximately
$126.5 million and $75.6 million, respectively, during 1997. Additionally, the
Company expended approximately $6.1 million in the same period for the
purchase of leasehold improvements and equipment. These capital expenditures
were primarily associated with the Company's relocation and expansion in its
new facilities.
16
In 1996 and 1995, the Company generated positive operating cash flows
primarily from increased profitability. In June 1996 and December 1995, the
Company completed public offerings which generated net proceeds of
approximately $73.3 million and $38.9 million, respectively. During 1996, the
Company recognized tax benefits from the exercise of non-statutory stock
options and disqualifying dispositions of incentive stock options of
approximately $6.3 million. Additionally, deferred tax assets increased during
1996 by approximately $3.2 million. The increase in deferred tax assets was
primarily due to a reduction in the valuation allowance of such deferred tax
assets when compared to 1995.
At December 31, 1997, the Company had $229.2 million in cash and cash
equivalents and short-term investments and $222.9 million of working capital.
The Company's cash and cash equivalents are invested in investment grade,
interest-bearing securities to minimize interest rate risk and allow for
flexibility in the event of immediate cash needs. On such date, the Company
had $12.6 million in accounts receivable, net of allowances, and $68.5 million
of deferred revenues, of which the Company anticipates $18.1 million will be
earned over the next 12 months.
On February 5, 1998, the Company completed its acquisition of certain
software technologies and assets of Insignia Solutions for approximately $17.5
million in cash. Additionally, on January 8, 1998, the Company has licensed
certain technology from EPiCON, Inc. for approximately $8.0 million in cash,
payable over a two-year period.
The Company believes existing cash and cash equivalents and short-term
investments will be sufficient to meet operating and capital expenditures
requirements through 1998.
The Company paid cash amounting to approximately $3,000 in lieu of
fractional shares in connection with its three-for-two stock split effected
February 20, 1998. The Company does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The Company's
operating results and financial condition have varied and may in the future
vary significantly depending on a number of factors. Except for the historical
information contained herein, 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.
Reliance Upon Strategic Relationship with Microsoft. Microsoft is the
leading provider of desktop operating systems. The Company is dependent upon
the license of certain key technology from Microsoft, including certain source
and object code licenses, technical support and other materials. The Company
is also dependent on its strategic alliance agreement with Microsoft which
provides for cooperation in the development of technologies for advanced
operating systems, and the promotion of advanced Windows application program
interfaces. On May 9, 1997, the Company and Microsoft entered into a License,
Development and Marketing Agreement (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, known as the Windows-based Terminal Server.
The Development Agreement also provides for each party to develop its own
enhancements or "plug-ins" to the jointly developed products which may provide
access to the Windows-based Terminal Server platform from a wide variety of
computing devices, such as a Company-developed plug-in that implements the
Independent Computing Architecture (ICA(R)) protocol on the new platform.
Pursuant to the terms of the Development Agreement, the Company received an
aggregate of $75 million as a non-refundable royalty payment and for
engineering and support services to be rendered by the Company. Under the
terms of the Development Agreement, the Company will be eligible to receive
royalty
17
payments of up to an additional $100 million based on Microsoft's release and
shipment of versions 4.x and 5.x of Windows-based Terminal Server products. In
addition, Microsoft and the Company have agreed to engage in certain joint
marketing efforts to promote use of Windows NT Server-based multi-user
software and the Company's ICA protocol. Additionally, until at least November
1999, Microsoft has agreed to endorse only the Company's ICA protocol as the
preferred way to provide multi-user Windows access for devices other than
Windows client devices. Further, subject to the terms of the Development
Agreement, the Company shall be entitled to license versions of its WinFrame
technology based on Windows NT v.3.51 until at least September 30, 2001.
The Company's relationship with Microsoft is subject to certain risks and
uncertainties. First, the Windows-based Terminal Server platforms will allow
Microsoft to create plug-in products that will be competitive with at least
some of the Company's current WinFrame products and may in the future compete
with the Company's Windows-based Terminal Server plug-in product offerings.
Second, as stated above, Microsoft has agreed to endorse only the Company's
ICA protocol as the preferred method to provide multi-user Windows access for
devices other than Windows clients until at least November 1999. Subsequent to
November 1999, it is possible that Microsoft will market or endorse other
methods to provide non-Windows client devices multi-user Windows access.
Finally, the Company's royalties pursuant to the Development Agreement rely
significantly on Microsoft's ability to market the Windows-based Terminal
Server products. Microsoft's distributors and resellers are not within the
control of the Company and, to the Company's knowledge, are not obligated to
purchase products from Microsoft. Additionally, the Company may hire
additional development, marketing and support staff to the extent they are
needed in order to fulfill the Company's responsibilities under the terms of
the Development Agreement. Further, if Microsoft (1) develops competitive
plug-in products, (2) endorses in the future other methods to provide non-
Windows client devices multi-user Windows access or (3) is unable to
successfully market the Windows-based Terminal Server products, the Company's
business, results of operations and financial condition could be adversely
affected.
Dependence Upon Broad-Based Acceptance of ICA Protocol. The Company believes
that its success in the markets in which it competes will depend upon its
ability to make its ICA protocol an emerging standard for supporting
distributed Windows applications, thereby creating demand for its server
products.
Dependence Upon Strategic Relationships. In addition to its relationship
with Microsoft, the Company has strategic relationships with NCD, Tektronix,
Wyse and others. The Company is dependent on its strategic partners to
successfully incorporate the Company's technology into their products and to
successfully market and sell such products.
Competition. The markets in which the Company competes are intensely
competitive. Most of the competitors and potential competitors, including
Microsoft, have significantly greater financial, technical, sales and
marketing and other resources than the Company. Additionally, the announcement
of the release, and the actual release of products competitive to the
Company's existing and future product lines such as Microsoft's Windows-based
Terminal Server and related plug-ins, 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
is net revenues, operating results and financial condition. Further, the
Company's ability to market ICA, pICAsso and other future product offerings
will be dependent on Microsoft's licensing and pricing scheme to allow client
devices implementing ICA, pICAsso or any such future product offerings to
attach to the Windows-based Terminal Server.
Dependence on Proprietary Technology. The Company 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. 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. Additionally, 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.
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
18
litigation or require the Company to obtain a license to intellectual property
rights of such third parties. In addition, there can be no assurance that such
licenses will be available on reasonable terms or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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's ability to generate revenue from its pICAsso
technology will be highly dependent upon market acceptance of Windows-based
Terminal Server products, with which its product is intended to be combined to
provide capabilities similar to those currently offered in the WinFrame
technology line. The Company may experience declines in demand for products
based on WinFrame technology, whether as a result of new competitive product
releases, price competition, lack of success of its strategic partners,
technological change or other factors. In addition, the introduction of
products based upon the pICAsso technology may be competitive with its
WinFrame technology line and may delay or replace orders of either technology.
Management of Growth and Anticipated Operating Expenses. The Company has
recently experienced rapid growth in the scope of its operations, the number
of its employees, and the geographic area of its operations. In addition, the
Company has completed certain international acquisitions since October 1997,
assimilating the 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 will be required to continue to implement and improve
additional management and financial systems and controls, and to expand, train
and manage its employee base. Although the Company believes that it has made
adequate allowances for the costs and risks associated with these expansions,
there can be no assurance that the Company's systems, procedures or controls
will be adequate to support the Company's current or future operations or that
Company management will be able to effectively manage this expansion and still
achieve the rapid execution necessary to fully exploit the market window for
the Company's 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 products. If the Company is unable to manage growth effectively or
unable to achieve the rapid execution necessary to fully exploit the market
window for the Company's products and services in a timely and cost-effective
manner, the Company's business, operating results and financial condition may
be materially adversely affected.
Additionally, the Company expects that its requirements for office
facilities and equipment will grow as staffing requirements dictate. The
Company plans to increase its professional staff during 1998 as sales,
marketing and support and product development efforts as well as associated
administrative systems are implemented to support planned growth. As a result
of this planned growth in staff, the Company believes that additional
facilities will be required during 1998. Although the Company believes that
the cost of expanding in such additional facilities will not significantly
impact its financial position or results of operations, the Company
anticipates that operating expenses will increase during 1998 as a result of
its planned growth in staff and that such increase may reduce its income from
operations and cash flows from operating activities in 1998.
Information System Conversion. The Company and its wholly-owned subsidiaries
all utilize separate applications to process their accounting transactions. As
a result, the Company and its subsidiaries are currently in the process of
converting a significant part of its business operations to a single
accounting application purchased from a third-party vendor. Although the
Company believes it has addressed all the significant issues related to this
conversion, there can be no assurance that unanticipated software and hardware
problems will not arise, which may result in delays in customer billings and
vendor payments, as well as extended accounts receivable payment cycles.
Dependence on Key Personnel. The Company's success will depend, in large
part, upon the services of a number of key employees. The effective management
of the Company's anticipated growth will depend, in a large part, upon the
Company's ability to retain its highly skilled technical, managerial and
marketing personnel as well as its ability to attract and maintain
replacements for and additions to such personnel in the future.
19
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. The Company believes it will
incur additional costs and royalties associated with the development,
licensing, or acquisition of new technologies or enhancements to existing
products which will increase the Company's cost of goods sold and operating
expenses. To the extent that such transactions have not yet occurred, the
Company cannot currently quantify such increase. The Company may use a
substantial portion of its cash and cash equivalents and short-term
investments to fund these additional costs, in which case the Company's
interest income will decrease if not offset by cash flows from future
operations. Additionally, the Company and others may announce new products,
new pICAsso capabilities or technologies that could replace or shorten the
life cycle of the Company's existing product offerings. These market
characteristics will require the Company to continuously enhance its current
products and develop and introduce new products to keep pace with
technological developments and respond to evolving end-user requirements. The
Company may hire additional development staff to the extent they are needed in
order to fulfill the Company's responsibilities under the terms of the
Development Agreement. To the extent the Company is unable to add additional
staff and resources in its development efforts, 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 revenues, operating
results and financial condition.
Year 2000 Compliance. Until recently, many computer programs were written
using two digits rather than four digits to define the applicable year in the
twentieth century. Such software may recognize a date using "00" as the year
1900 rather than the year 2000. Utilizing both internal and external
resources, the Company is in the process of defining, assessing and
converting, or replacing, various programs, hardware and instrumentation
systems to make them Year 2000 compatible. The Company's Year 2000 project is
comprised of two components--business applications and equipment. The business
applications component consists of the Company's business computer systems, as
well as the computer systems of third-party suppliers or customers whose Year
2000 problems could potentially impact the Company. Equipment exposures
consist of personal computers, system servers, telephone equipment and
elevators whose Year 2000 problems could also impact the Company. The cost of
the Year 2000 initiatives is not expected to be material to the Company's
results of operation or financial position.
The Company's main product, WinFrame, is an authorized extension to
Microsoft Windows NT v.3.51 server. While the Company believes both Windows NT
v.3.51 server and WinFrame/Enterprise (versions 1.5, 1.6 and 1.7) are
currently capable of storing four digit year data, allowing applications to
differentiate between dates from the 1900s and the year 2000 and beyond, such
potential incompatibility with two digit application programs may limit the
Company's sales of product in those situations. However, it is the
application's responsibility to collect and properly store data. There can be
no assurance that the Company's products will not be integrated by the Company
or its customers with, or otherwise interact with non-compliant software or
other products which may expose the Company to claims from its customers or
other third parties. The foregoing could result in the loss of or delay in
market acceptance of the Company's products and services, increased service
costs to the Company or payment by the Company of compensatory or other
damages. Although most Windows applications do store four-digit year dates
today, it is possible that some applications are now or have historically only
collected two-digit year data, WinFrame cannot create four-digit year data for
applications which have collected only two digits in year fields. Further,
there can be no assurance that the Company's software products that are
designed to be Year 2000 compliant contain all necessary technology to make
them Year 2000 compliant. Many companies are expending significant resources
to correct or patch their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase software
products such as those offered by the Company, thus potentially resulting in
stalled market sales within the industry. The foregoing could result in a
material adverse effect on the Company's business, operating results and
financial condition.
Potential for Undetected Errors. Despite significant testing by the Company
and by current and potential customers, errors may not be found in new
products until after commencement of commercial shipments.
20
Additionally, third party products, upon which the Company's products are
dependent, may contain defects which could reduce the performance of the
Company's products or render them useless.
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's distributors and
resellers are not within the control of the Company, 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 these parties to recommend or distribute the Company's products. In
addition, an integral part of the Company's strategy is to expand its direct
sales force and add third-party distributors both domestically and
internationally. The Company is currently investing, and intends to continue
to invest, significant resources to develop these channels, which could
adversely affect the Company's operating margins and related cash flows from
operating activities.
New Accounting Pronouncements. During October 1997, the Accounting Standards
Executive Committee (AcSEC) of the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 97-2, Software Revenue
Recognition. The SOP is effective for transactions entered into in fiscal
years beginning after December 15, 1997. Different informal and
unauthoritative interpretations of certain provisions of SOP 97-2 have arisen.
AcSEC is already deliberating amendments to SOP 97-2, including deferral of
the effective date of certain provisions of the SOP so AcSEC can develop and
issue an interpretation regarding the applicability and the method of
application of those provisions. Because of the uncertainties related to the
outcome of these amendments, the impact on the future financial results of the
Company is not currently determinable.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997. This Statement established standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. The new rule requires that the Company (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company plans to adopt SFAS No. 130
in 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This Statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," and amends SFAS
No. 94, "Consolidation of all Majority-Owned Subsidiaries." This Statement
requires annual financial statements and interim reports to disclose
information about products and services, geographic areas and major customers
based on a management approach. The management approach requires disclosing
financial and descriptive information about an enterprise's reportable
operating segments based on reporting information the way management organizes
the segments for making business decisions and assessing performance. It also
eliminates the requirement to disclose additional information about
subsidiaries that were not consolidated. This new management approach may
result in more information being disclosed than presently practiced and
require new interim information not previously presented. The Company plans to
adopt SFAS No. 131 in 1998 with impact only to the Company's disclosure
information and not its results of operations.
Revenue Recognition Process. The Company continually re-evaluates its
programs, including specific license terms and conditions, to market its
various current and future products and services. The Company may implement
new programs which may include, among other things, specified and unspecified
enhancements to its current and future product lines. Revenues associated with
such enhancements may be recognized after the initial shipment or licensing of
the software product or may be recognized over the product's life cycle. The
timing of the implementation of such programs, the timing of the release of
such enhancements as well as factors such as determining vendor-specific
objective evidence of fair value of each element offered separately and
whether upgrades and enhancements are defined as upgrade rights pursuant to
SOP 97-2 will impact the timing of the
21
Company's recognition of revenues and related expenses associated with its
products, related enhancements and services. Because of the uncertainties
related to the outcome of the re-evaluation of its programs, the determination
of vendor-specific objective evidence of fair value and whether upgrades and
enhancements will be defined as upgrade rights pursuant to SOP 97-2, and its
impact on revenue recognition, the Company cannot currently quantify the
impact of such re-evaluation on its business, results of operations and
financial condition.
Product Returns and Price Reductions. The Company provides most of its
distributors with product return rights for stock balancing or limited product
evaluation. The Company also provides most of its distributors and resellers
with price protection rights. The Company has established reserves for each of
these circumstances where appropriate, based on historical trends and
evaluation of current circumstances. 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.
International Operations. The Company's continued growth and profitability
will require further expansion of its international operations. To
successfully expand international sales, the Company will need to establish
additional foreign operations, hire additional personnel and recruit
additional international resellers. Such international operations are subject
to certain risks, such as difficulties in staffing and managing foreign
operations, dependence on independent relicensors, fluctuations in foreign
currency exchange rates, compliance with foreign regulatory and market
requirements, variability of foreign economic conditions and 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 and the burdens of complying with a wide variety
of foreign laws.
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.
Growth Rate. The Company's revenue growth rate in 1998 may not approach the
levels attained in 1997 and 1996, which were high, due primarily to the
introduction of WinFrame in late 1995. However, to the extent the Company's
revenue growth continues, the Commpany believes that its cost of goods sold
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, the Company's income from operations and cash flows
from operating and investing activities may decrease in 1998.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Company's Financial Statements and Schedules, together with the
auditors' report thereon, appear at pages F-1 through F-22 and S-1,
respectively, of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most
recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1997.
22
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1997.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS.
For a list of the consolidated financial information included herein,
see Index on Page F-1.
2. FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statement schedule is included in
Item 8:
Valuation and Qualifying Accounts
3. LIST OF EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(1) Amended and Restated Certificate of Incorporation of the Company
3.2(1) Amended and Restated By-laws of the Company
3.3(2) Certificate of Amendment of Amended and Restated Certificate of
Incorporation
4.1(1) Specimen certificate representing the Common Stock
10.1(1)* 1989 Stock Option Plan
10.2(1)* 1995 Stock Plan
10.3(1)* 1995 Non-Employee Director Stock Option Plan
10.4(1)* 1995 Employee Stock Purchase Plan, as amended
10.5(1) OEM Software License Agreement between the Company and Digital
Communications Associates, Inc. ("DCA"), dated as of October 5,
1993
10.6(1) Memorandum of Agreement between the Company and DCA, dated October
5, 1993
10.7(1) First Addendum to OEM Software License Agreement between the
Company and DCA, dated May 25, 1994
10.8(1) Amendment No. 1 to OEM Software License Agreement between the
Company and DCA dated March 23, 1995
10.9(1) Client/Server Software License Agreement between the Company and
Insignia Solutions Inc., dated August 4, 1995
10.10(1) Microsoft Corporation Source Code Agreement between the Company
and Microsoft Corporation ("Microsoft") dated November 15, 1989
10.11(1) Amendment No. 1 to the Source Code Agreement between the Company
and Microsoft dated October 1, 1992
10.12(1) License Agreement for Microsoft OS/2 Version Releases 1.x, 2.x
between the Company and Microsoft dated August 15, 1990
10.13(1) Amendment No. 1 to the License Agreement between the Company and
Microsoft dated August 15, 1990, Contract No. 5198-0228 dated May
6, 1991
10.14(1) Amendment No. 2 to License Agreement between the Company and
Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x, dated
October 1, 1992
10.15(1) Amendment No. 3 to the License Agreement between the Company and
Microsoft dated August 15, 1990, Contract No. 5198-0228 dated
January 1, 1994
10.16(1) Amendment No. 4 to the License Agreement between the Company and
Microsoft dated August 15, 1990, dated January 31, 1995
10.17(1) Strategic Alliance Agreement between the Company and Microsoft
dated December 12, 1991
10.18(1) Software Development and License Agreement between the Company and
Novell, Inc. ("Novell"), dated June 15, 1992
10.19(1) Software Development and License Agreement between the Company and
Novell, dated July 1, 1993
10.20(1) First Amendment to the Software Development and License Agreement
between the Company and Novell, dated March 7, 1995
10.21(1) NetWare Client License Agreement between the Company and Novell,
dated June 14, 1995
10.22(1) Software License Agreement between the Company and Tektronix,
Inc., dated September 23, 1994
24
EXHIBIT NO. DESCRIPTION
----------- -----------
10.23(1) Client Software License Agreement between the Company and Wyse
Technology dated June 15, 1995
10.24(1) Client/Server Software License Agreement between the Company and
Zenith Data Systems Corporation dated June 21, 1995
10.25(1) Form of Indemnification Agreement
10.26(2) Lease Agreement between Halmos Trading and Investment Company and
the Company dated June 6, 1996
10.27(3) License, Development and Marketing Agreement dated July 19, 1996
between the Company and Microsoft Corporation
10.28(4) License, Development and Marketing Agreement dated May 9, 1997
between the Company and Microsoft Corporation
21.1** List of Subsidiaries
23.1** Consent of Ernst & Young LLP
24.1** Power of Attorney (Included in signature page)
27.1** Financial Data Schedule
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(2) Incorporated herein by reference to Exhibit 10 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(3) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(4) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith.
(B) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Company during the
fourth quarter of 1997.
(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.
25
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:
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Income--Years ended December 31, 1997, 1996 and
1995
Consolidated Statements of Redeemable Convertible Preferred Stock and
Common Stockholders' Equity (Deficit)--Years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements--December 31, 1997
The following consolidated financial statement schedule of Citrix Systems,
Inc. is included in Item 14(d):
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Citrix Systems, Inc.
We have audited the accompanying consolidated balance sheets of Citrix
Systems, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, redeemable convertible preferred stock and common
stockholders' (deficit) equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Citrix
Systems, Inc. and its subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
West Palm Beach, Florida
January 14, 1998, except for the second
paragraph of Note 18, the third paragraph of
Note 16, the first paragraph of Note 18 and
the third paragraph of Note 18, as to which
the dates are January 8, 1998, January 25,
1998, February 5, 1998 and February 25, 1998,
respectively
F-2
CITRIX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $140,080,550 $ 99,135,049
Short-term investments........................... 89,111,093 38,206,495
Accounts receivable, net of allowances of
$6,297,986 and $2,552,039 at December 31, 1997
and 1996, respectively.......................... 12,631,413 5,525,315
Inventories...................................... 2,273,196 696,336
Prepaid expenses................................. 3,497,890 765,818
Current portion of deferred tax assets........... 10,767,437 3,168,964
------------ ------------
Total current assets........................... 258,361,579 147,497,977
Property and equipment:
Computer equipment under capital leases.......... 365,725 365,725
Computer equipment and software.................. 4,106,360 1,099,012
Office equipment and furniture................... 1,364,035 354,640
Leasehold improvements........................... 2,906,417 739,111
------------ ------------
8,742,537 2,558,488
Less accumulated depreciation and amortization... (2,064,284) (476,929)
------------ ------------
6,678,253 2,081,559
Long-term portion of deferred tax assets........... 16,763,680 --
Other assets, net.................................. 864,513 --
------------ ------------
$282,668,025 $149,579,536
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 984,463 $ 755,908
Accrued royalties and other accounts payable to
stockholder..................................... 3,043,836 1,524,126
Other accrued expenses........................... 13,024,947 3,283,197
Deferred revenue................................. 3,147,220 2,074,670
Current portion of deferred revenues on contract
with stockholder................................ 15,000,000 --
Current portion of capital lease obligations
payable......................................... 8,396 82,434
Income taxes payable............................. 236,410 --
------------ ------------
Total current liabilities...................... 35,445,272 7,720,335
Long-term liabilities:
Capital lease obligations payable................ -- 8,217
Deferred revenues on contract with stockholder... 50,375,000 --
------------ ------------
Total long-term liabilities.................... 50,375,000 8,217
Commitments and contingency
Stockholders' equity:
Preferred stock at $.01 par value: 5,000,000
shares authorized, none issued and outstanding.. -- --
Common stock at $.001 par value: 60,000,000
shares authorized; 41,473,088 and 40,020,354
issued and outstanding at 1997 and 1996,
respectively.................................... 41,473 40,020
Additional paid-in capital....................... 148,747,326 135,110,115
Retained earnings................................ 48,058,954 6,700,849
------------ ------------
Total stockholders' equity..................... 196,847,753 141,850,984
------------ ------------
$282,668,025 $149,579,536
============ ============
See accompanying notes.
F-3
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
------------ ----------- -----------
Revenues:
Net revenues from unrelated parties..... $114,307,807 $44,527,082 $14,567,922
Net revenues attributable to a
stockholder............................ 9,625,000 -- --
------------ ----------- -----------
Net revenues.............................. 123,932,807 44,527,082 14,567,922
------------ ----------- -----------
Cost of goods sold:
Cost of goods sold from unrelated
parties................................ 11,264,941 5,098,975 1,955,838
Cost of goods sold on contract with
stockholder............................ 1,039,112 -- --
------------ ----------- -----------
Total cost of goods sold.................. 12,304,053 5,098,975 1,955,838
------------ ----------- -----------
Gross margin.............................. 111,628,754 39,428,107 12,612,084
Operating expenses:
Research and development................ 6,947,872 3,843,162 2,343,313
Sales, marketing and support............ 35,351,495 13,741,474 6,669,560
General and administrative.............. 10,651,408 4,125,760 1,784,011
Purchased research and development...... 3,950,000 -- --
------------ ----------- -----------
Total operating expenses.................. 56,900,775 21,710,396 10,796,884
------------ ----------- -----------
Income from operations.................... 54,727,979 17,717,711 1,815,200
Interest income, net...................... 9,894,059 4,545,176 172,915
------------ ----------- -----------
Income before income taxes................ 64,622,038 22,262,887 1,988,115
Income taxes.............................. 23,263,933 3,561,507 93,100
------------ ----------- -----------
Net income................................ $ 41,358,105 $18,701,380 $ 1,895,015
============ =========== ===========
Earnings per common share:
Basic earnings per share................ $ 1 .01 $ 0 .50 $ 0.07
============ =========== ===========
Weighted average shares outstanding..... 40,861,046 37,770,779 27,013,593
============ =========== ===========
Earnings per common share-assuming
dilution:
Diluted earnings per share.............. $ 0 .95 $ 0 .46 $ 0 .06
============ =========== ===========
Weighted average shares outstanding..... 43,630,947 40,904,813 30,369,636
============ =========== ===========
See accompanying notes.
F-4
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F-5
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------------
SERIES A SERIES B SERIES C
------------------------ ----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ----------- ---------- ------------
Balance at December 31,
1994................... 3,039,000 $ 4,444,160 2,431,200 $ 3,756,581 3,455,173 $ 5,608,386
Exercise of stock
options...............
Repurchase and
cancellation of common
stock previously
issued................
Accretion to redemption
value................. 10,275,789 7,788,333 10,303,373
Restoration of previous
accretion............. (11,680,949) (8,505,914) (10,901,759)
Exercise of warrants... 66,661 450
Issuance of common
stock through public
offering (net of
offering costs of
$4,237,717)...........
Conversion of preferred
stock to common
stock................. (3,039,000) (3,039,000) (2,431,200) (3,039,000) (3,521,834) (5,010,450)
Net income.............
---------- ------------ ---------- ----------- ---------- ------------
Balance at December 31,
1995................... -- -- -- -- -- --
Exercise of stock
options...............
Exercise of warrants...
Common stock issued
under employee stock
purchase plan.........
Issuance of common
stock through public
offering (net of
offering costs of
$4,148,056)...........
Tax benefit from
employer stock plans..
Net income.............
---------- ------------ ---------- ----------- ---------- ------------
Balance at December 31,
1996................... -- -- -- -- -- --
Exercise of stock
options...............
Repurchase and
cancellation of common
stock previously
issued................
Common stock issued
under employee stock
purchase plan.........
Tax benefit from
employer stock plans..
Net income.............
---------- ------------ ---------- ----------- ---------- ------------
Balance at December 31,
1997................... -- $ -- -- $ -- -- $ --
========== ============ ========== =========== ========== ============
See accompanying notes.
F-6
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
- ------------------------ --------------------------------------------------------
SERIES D COMMON STOCK ADDITIONAL
- ------------------------ ------------------- PAID-IN RETAINED EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (ACCUMULATED DEFICIT)
- ----------- ----------- ---------- ------- ------------ ---------------------
2,594,168 $ 4,799,213 3,261,549 $ 3,262 $ -- $(16,476,739)
469,914 470 48,479
(52,500) (53) (4,804)
6,167,449 (29,360) (34,505,584)
(6,167,449) 169,294 37,086,777
8,625,000 8,625 38,878,658
(2,594,168) (4,799,213) 23,172,411 23,172 15,864,491
1,895,015
- ----------- ----------- ---------- ------- ------------ ------------
-- -- 35,476,374 35,476 54,926,758 (12,000,531)
819,305 819 332,292
145,056 145 (48)
32,288 32 224,672
3,547,331 3,548 73,298,478
6,327,963
18,701,380
- ----------- ----------- ---------- ------- ------------ ------------
-- -- 40,020,354 40,020 135,110,115 6,700,849
1,443,938 1,444 2,720,724
(1,443) (1) (901)
10,239 10 241,765
10,675,623
41,358,105
- ----------- ----------- ---------- ------- ------------ ------------
-- $ -- 41,473,088 $41,473 $148,747,326 $ 48,058,954
=========== =========== ========== ======= ============ ============
F-7
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------------
1997 1996 1995
------------- ------------ -----------
OPERATING ACTIVITIES
Net income.......................... $ 41,358,105 $ 18,701,380 $ 1,895,015
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization..... 1,711,763 375,720 185,157
Tax benefit related to the
exercise of non-statutory stock
options and disqualified
dispositions of incentive stock
options.......................... 10,675,623 6,327,963 --
Deferred tax assets............... (24,362,153) (3,168,964) --
Provision for doubtful accounts... 1,398,608 624,427 241,253
Provision for product returns..... 2,671,403 1,318,869 311,469
Purchased research and
development...................... 3,950,000 -- --
Changes in operating assets and
liabilities:
Accounts receivable............. (12,111,977) (5,140,099) (1,425,755)
Inventories..................... (1,550,335) (502,313) (65,176)
Prepaid expenses................ (2,732,072) (535,503) (130,003)
Other assets.................... -- 59,941 (59,941)
Interest on note receivable from
officer........................ -- 28,910 (8,090)
Deferred revenue................ 1,072,550 852,902 813,647
Deferred revenue on contract
with stockholder............... 65,375,000 -- --
Accounts payable................ 228,555 209,642 256,087
Accrued royalties and other
accounts payable to
stockholder.................... 1,519,710 1,002,609 165,077
Income taxes payable............ 236,410 (93,100) 93,100
Other accrued expenses.......... 8,243,471 2,145,719 526,970
------------- ------------ -----------
Net cash provided by operating
activities......................... 97,684,661 22,208,103 2,798,810
INVESTING ACTIVITIES
Purchases of short-term
investments........................ (126,536,385) (38,206,495) --
Proceeds from sale of short-term
investments........................ 75,631,787 -- --
Cash paid for acquisition........... (2,610,962) -- --
Purchases of property and
equipment.......................... (6,104,386) (2,155,284) (62,282)
Proceeds from note receivable from
officer............................ -- 100,000 --
------------- ------------ -----------
Net cash used in investing
activities......................... (59,619,946) (40,261,779) (62,282)
FINANCING ACTIVITIES
Net proceeds from issuance of common
stock.............................. 2,963,943 73,859,938 38,936,681
Repurchase of common stock
previously issued.................. (902) -- (4,856)
Proceeds from line of credit........ -- -- 600,000
Payment on line of credit........... -- -- (600,000)
Payments on capital lease
obligations........................ (82,255) (142,704) (109,643)
------------- ------------ -----------
Net cash provided by financing
activities......................... 2,880,786 73,717,234 38,822,182
------------- ------------ -----------
Increase in cash and cash
equivalents........................ 40,945,501 55,663,558 41,558,710
Cash and cash equivalents at
beginning of year.................. 99,135,049 43,471,491 1,912,781
------------- ------------ -----------
Cash and cash equivalents at end of
year............................... $ 140,080,550 $ 99,135,049 $43,471,491
============= ============ ===========
YEAR ENDED DECEMBER 31
----------------------------------------
1997 1996 1995
------------- ------------ -----------
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired
under capital lease................ $ -- $ -- $ 211,338
============= ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of approximately $37,976,000 in 1997 and
$829,000 in 1996. Additionally, the Company paid interest of approximately
$9,000, $19,000 and $36,000 during the years ended December 31, 1997, 1996 and
1995, respectively.
See accompanying notes.
F-8
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
Citrix Systems, Inc. (the Company), a Delaware corporation, was founded on
April 17, 1989 for the purpose of designing, developing and selling personal
computer-based operating system software. Customers for the Company's products
span a broad range of industries. The Company markets its products through
multiple indirect channels such as distributors, value-added resellers and
original equipment manufacturers, primarily in the United States and in
Europe.
The Company has formed wholly-owned subsidiaries, primarily in Europe and
the Asia-Pacific region, for the purpose of expanding its international
presence.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements of the Company include the accounts of
its wholly-owned subsidiaries. All significant transactions between the
Company and its subsidiaries have been eliminated in consolidation.
Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, cash and cash
equivalents include marketable securities which are primarily commercial
paper, government securities, corporate notes, bonds and paper and money
market funds consisting of various instruments with contractual maturities of
three months or less. The Company minimizes its credit risk associated with
cash and cash equivalents by using high quality credit instruments.
Short-Term Investments
Short-term investments at December 31, 1997 primarily consist of various
government securities and commercial paper. The Company minimizes its credit
risk associated with short-term investments by using high quality credit
instruments. The Company follows the provisions of Statement of Financial
Accounting Standards Board No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (FASB No. 115). FASB No. 115 requires investments
to be classified based on management's intent in three categories: held-to-
maturity securities, available-for-sale securities and trading securities.
Held-to-maturity securities are recorded at amortized cost. Available-for-sale
securities are recorded at market value with unrealized gains and losses
reported as a separate component of stockholders' equity. Trading securities
are recorded at market value with unrealized gains and losses reported in
earnings. The Company classifies its short-term investments as available-for-
sale securities. The average contractual maturity of the Company's short-term
investments does not exceed ten months. Substantially all of the Company's
short-term investments had a contractual maturity of 12 months or less.
Accounts Receivable
Substantially all of the Company's accounts receivable are due from
distributors and value-added resellers of microcomputer software. Collateral
is not required. Credit losses are provided for in the consolidated financial
statements and have been within management's expectations. No significant
customer or group of customers within a certain geographical region represent
a significant concentration of credit risks.
F-9
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
Inventories
Inventories, consisting primarily of finished goods, are stated at the lower
of cost (determined by the first-in, first-out method) or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which is
approximately three years for computer equipment, software, office equipment
and furniture, and approximately five years for leasehold improvements. Assets
under capital lease are amortized over the shorter of the asset life or the
remaining lease term which is approximately 30 months. Amortization of assets
under capital lease is included in depreciation expense. Accumulated
amortization of computer equipment under capital leases approximated $360,000
and $280,000 at December 31, 1997 and 1996, respectively.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
(SOP) 91-1, "Software Revenue Recognition," issued by the American Institute
of Certified Public Accountants (AICPA).
Revenue from product sales is recognized upon product shipment only if no
significant Company obligations remain and collection of the resulting
receivable is deemed probable. Revenue from advance payments of license
revenue and fees from products licensed to original equipment manufacturers is
recognized when all significant obligations of performance under the terms of
the license agreement have been completed and any amounts received are no
longer refundable; in the event that advance payments are not received,
revenue is recognized when collectibility is reasonably assured. Revenue from
fees representing charges to third parties to incorporate the Company's
products into their systems, and fees for research and development services
integral to facilitating licensing arrangements are recognized as development
efforts are completed or contract milestones are achieved.
The Company provides most of its distributors and resellers with product
return rights for stock balancing and price protection rights. Stock balancing
rights permit distributors and resellers 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 or resellers if the Company lowers its prices for such
products. Allowances for product returns amounted to approximately $4,599,000
and $1,928,000 at December 31, 1997 and 1996, 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, 1997 and 1996.
During the year, the Company entered into a License, Development and
Marketing Agreement (the "Development Agreement") with a stockholder. Pursuant
to the terms of the Development Agreement, the Company received an aggregate
of $75 million as a non-refundable royalty payment and for engineering and
support services to be rendered by the Company. This initial fee is being
recognized ratably over the term of the five year contract.
Revenue from training programs and software maintenance, service and support
arrangements totaling $4,289,705, $1,474,106 and $591,368 for the years ended
December 31, 1997, 1996 and 1995, respectively, is
F-10
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
recognized when the services are provided. Such items are included in net
revenue. The costs of providing training and services are included in sales,
marketing and support expenses.
Cost of Goods Sold
All development costs incurred in connection with the Development Agreement
are expensed as incurred as a separate component of cost of goods sold.
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 goods sold.
Advertising Expense
The Company expenses advertising costs as incurred. The Company recognized
advertising expenses of $4,551,000, $1,733,000 and $576,000 during the years
ended December 31, 1997, 1996 and 1995, respectively. These amounts are
included in sales, marketing and support expenses. The Company did not incur
any direct response advertising cost, as defined by SOP 93-7, "Reporting on
Advertising Costs," during 1997, 1996 or 1995.
Income Taxes
Deferred income tax assets and liabilities are determined based upon
differences between the financial statement and income tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Software Development Costs
FASB No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" requires software development costs to be
capitalized upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management
with respect to certain external factors such as anticipated future revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalizable software development costs have not been significant and have
been expensed as incurred.
Risks and Uncertainties
The Company's operating results and financial condition have varied and may
in the future vary significantly depending on a number of factors. The
following factors may have a material adverse effect upon the Company's
business, results of operations and financial conditions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. While the Company believes that such
estimates are fair when considered
F-11
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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.
New Product Enhancements and Technical Changes
The market for the Company's products is relatively new and is characterized
by rapid technological change, evolving industry standards, changes in end-
user requirements and frequent new product introductions and enhancements,
including enhancements to certain key technology licensed from a stockholder.
The Company believes it will incur additional costs and royalties associated
with the development, licensing, or acquisition of new technologies or
enhancements to existing products which will increase the Company's costs of
good sold and operating expenses.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for
Stock-Based Compensation," became effective January 1, 1996. The new standard
defines a fair value method of accounting for issuance of stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB Opinion 25) but would be required to disclose
in a note to the consolidated financial statements pro forma net income and
per share amounts as if the Company had applied the new method of accounting.
The Company applies APB Opinion 25 and related interpretations in accounting
for its plans and has complied with the disclosure requirements of SFAS No.
123.
Earnings Per Share
In 1997, the Financial Accounting Standard Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities.
F-12
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the
Statement 128 requirements.
Dilutive common stock equivalents consist of warrants and stock options
(calculated using the treasury stock method in 1997, 1996 and 1995). All
common share and per share data, except par value per share, have been
retroactively adjusted to reflect the two-for-three stock split of the
Company's Common Stock effective December 7, 1995, the two-for-one stock split
of the Company's Common Stock effective June 4, 1996 and the three-for-two
stock split of the Company's Common Stock effective subsequent to December 31,
1997, which are further discussed in Note 16.
Reclassifications
Certain reclassifications to the prior years' financial statements have been
made to conform to the current year's presentation.
3. ACQUISITION
On October 2, 1997, the Company completed its acquisition of DataPac
Australasia Pty Limited for approximately $5.0 million. Based on appraised
value, a portion of the purchase price was allocated to purchased 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 $4.0 million to the Company's operations in the fourth quarter
of 1997.
4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The summary of cash and cash equivalents and short-term investments consist
of the following:
DECEMBER 31
------------------------
1997 1996
------------ -----------
Cash and cash equivalents:
Cash............................................. $ 16,800,033 $ 9,065,924
Commercial paper................................. 57,827,381 3,997,100
Money market funds............................... 3,063,048 7,162,420
Certificates of deposit.......................... -- 600,000
Government securities............................ 43,519,541 63,409,605
Corporate notes, bonds and paper................. 18,870,547 14,900,000
------------ -----------
Cash and cash equivalents...................... $140,080,550 $99,135,049
============ ===========
Short-term investments:
Treasury bills................................... $ 8,007,160 $ --
Commercial paper................................. 25,661,121 3,461,450
Corporate notes, bonds and paper................. 7,098,153 3,655,731
Government securities............................ 48,344,659 31,089,314
------------ -----------
Short-term investments......................... $ 89,111,093 $38,206,495
============ ===========
The carrying value of each marketable security including cash and cash
equivalents and short-term investments approximate their fair value. The fair
values of cash and cash equivalents and short-term investments are based
primarily on quoted market prices for such financial instruments.
F-13
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
5. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
DECEMBER 31
----------------------
1997 1996
----------- ----------
Accrued employee benefits............................ $ 2,104,102 $1,033,000
Accrued sales commissions............................ 321,145 161,489
Accrued cooperative advertising...................... 6,120,178 1,190,762
Other................................................ 4,479,522 897,946
----------- ----------
$13,024,947 $3,283,197
=========== ==========
6. LEASE CREDIT LINE
The Company has available a $500,000 lease credit facility. During the year
ended December 31, 1995, the Company leased approximately $211,000 of computer
equipment and software under the terms of this facility. The leases are
collateralized by the related equipment. These leases have been accounted for
as capitalized lease obligations and are for a term of 30 months. An average
interest rate of 9.5% is implicit in the leases. The related computer
equipment is included in property and equipment.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND RELATED WARRANTS
The Company issued an aggregate of 682,128 shares of Series D Redeemable
Convertible Preferred Stock during 1994. These shares were sold at $1.85 per
share in exchange for the following:
Cash............................................................. $ 353,667
Conversion of short-term bridge notes............................ 908,270
----------
$1,261,937
==========
No shares of preferred stock were issued during 1997, 1996 or 1995. Prior to
October 1995, the carrying value of the Company's Redeemable Convertible
Preferred Stock (the Preferred Stock) was equal to the original issuance
proceeds from the various series plus periodic accretions to redemption value.
In October 1995, the terms of the Preferred Stock were amended to provide that
the redemption price be equal to the original purchase price of the Preferred
Stock plus any declared Preferred Stock dividends. As a result of this
amendment, the Company restored all previously accreted amounts.
On December 7, 1995, all outstanding preferred stock was converted into the
Company's Common Stock at a ratio of three shares of preferred stock for two
shares of Common Stock.
Dividends on all series of the Preferred Stock are determined solely by the
Board of Directors and are noncumulative. No dividends have been declared as
of December 31, 1997.
The Company has issued warrants to purchase 48,000 shares of Series B
Redeemable Convertible Preferred Stock at an exercise price of $1.25 per share
and warrants to purchase 27,586, 25,966 and 51,928 shares of Series C
Redeemable Convertible Preferred Stock at an exercise price of $1.45 per
share. The warrants expire on June 7, 1998, March 13, 2000, November 2, 1997
and January 25, 1998, respectively. Upon the consummation of the Company's
initial public offering and the automatic conversion of the Redeemable
Convertible Preferred Stock,
F-14
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
the warrants became exercisable on a three-for-one basis into the Company's
Common Stock (adjusted to reflect the stock splits discussed in Note 16) at an
exercise price of $ .63 per common share for the Series B warrants and $.73
per common share for the Series C warrants. The exercise price of the
outstanding warrants is subject to adjustment in the event of
recapitalizations, reorganizations, stock splits and combinations and in the
event of dilutive issuances of capital stock by the Company.
On December 7, 1995, 77,914 warrants to purchase Series C Redeemable
Convertible Preferred Stock were exercised, of which 77,604 warrants were
exercised on a net basis to obtain 68,350 shares of Preferred Stock. Upon the
automatic conversion of the Preferred Stock into Common Stock, the Company
issued 133,329 shares of Common Stock to the former warrant holders.
8. STOCKHOLDERS' EQUITY
Stock Compensation Plans
As of December 31, 1997, the Company has four stock-based compensation
plans, which are described below. As mentioned in Note 2, the Company applies
APB Opinion 25 and Related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
plans and its stock purchase plan. Had compensation cost for the Company's
four stock-based compensation plans been determined based on the fair value at
the grant dates for grants under those plans consistent with the method of
FASB Statement 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
1997 1996 1995
----------- ----------- ----------
Net income
As reported............................ $41,358,105 $18,701,380 $1,895,015
=========== =========== ==========
Pro forma.............................. $33,015,715 $16,643,951 $1,895,015
=========== =========== ==========
Basic earnings per share
As reported............................ $ 1.01 $ 0.50 $ 0.07
=========== =========== ==========
Pro forma.............................. $ 0.81 $ 0.44 $ 0.07
=========== =========== ==========
Diluted earnings per share
As reported............................ $ 0.95 $ 0.46 $ 0.06
=========== =========== ==========
Pro forma.............................. $ 0.76 $ 0.41 $ 0.06
=========== =========== ==========
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:
1997 GRANTS 1996 GRANTS
----------- -----------
Dividend yield....................................... none none
Expected volatility factor........................... 0.7 0.8
Approximate risk free interest rate.................. 5.5% 5.5%
Expected lives....................................... 4.8 years 5 years
Substantially all of the options granted during 1995 were granted prior to
the Company's initial public offering and the value of such options are deemed
to approximate their fair value, as defined pursuant to SFAS
F-15
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
No. 123. Because the determination of the fair value of all options is based
on the assumptions described in the preceding paragraph, and because
additional option grants are expected to be made each year, the above proforma
disclosures are not representative of proforma 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.
The 1995 Plan provides for the issuance of a maximum of 9,000,000 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,
up to a maximum of 15,000,000 shares. 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. Under the 1995 Plan, ISOs may be granted at exercise prices no less
than market value at the date of grant, except for ISOs granted to employees
who own more than 10% of the Company's combined voting power, for which the
exercise prices will be no less than 110% of the market value at the date of
grant. NSOs, stock awards or stock purchases may be granted or authorized, as
applicable, at prices no less than the minimum legal consideration required.
ISOs and NSOs expire ten years from the date of grant. All options are
exercisable upon vesting. The options vest at a rate of 25.00% of the shares
underlying the option one year from the date of grant and at a rate of 2.08%
monthly thereafter. The 1995 Non-Employee Director Stock Option Plan (the
Director Option Plan) was adopted by the Board of Directors on September 28,
1995 and approved by the Company's stockholders in October 1995. The Director
Option Plan provides for the grant of options to purchase a maximum of 900,000
shares of Common Stock of the Company to nonemployee directors of the Company.
In April 1997, certain options previously granted during 1996 under the 1995
Option Plan were amended by reducing the exercise prices under the options to
$9.96 (which was the last sale price of the Company's Common Stock on the
Nasdaq on the date of the repricing). The options before amendment provided
the right to acquire up to 1,462,650 shares of Common Stock at exercise prices
ranging from $10.67 to $28.67 per share. In addition, employees electing to
reprice their options agreed to a change in vesting which provided for a six
month delay in the vesting schedule of each grant which was repriced. The
Compensation Committee offered the option reprice because the Committee felt
that due to changed circumstances, including the reduction in the trading
price of the Company's Common Stock, the options were no longer providing the
incentive they were designed to provide.
Under the Director Option Plan, each director who is not also an employee of
the Company and who is first elected as a director after the date of the
Company's initial public offering will receive, upon the date of his or her
initial election, an option to purchase 45,000 shares of Common Stock. Options
granted under the Director Option Plan will vest as to 33.33% one year from
the date of grant and will vest as to an additional 2.78% monthly thereafter.
In addition, on each three-year anniversary of such director's first election
to the Board of Directors, such director will receive an additional option to
purchase 45,000 shares of Common Stock, vesting in accordance with the
aforementioned schedule, provided that such director continues to serve on the
Board of Directors at the time of grant. All options granted under the
Director Option Plan will have an exercise price equal to the fair market
value of the Common Stock on the date of grant and a term of ten years from
the date of grant. Options are exercisable to the extent vested only while the
optionee is serving as a director of the Company or within 90 days after the
optionee ceases to serve as a director of the Company.
On July 11, 1989, the Company adopted its 1989 Stock Option Plan (the 1989
Plan). The 1989 Plan, as amended, permitted the Company to grant ISOs and NSOs
to purchase up to 6,314,136 shares of the Company's
F-16
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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. The Company does not
intend to grant options under the 1989 Plan in the foreseeable future.
A summary of the status and activity of the Company's three fixed stock
option plans is as follows:
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- --------- -------- --------- --------
Outstanding at beginning
of year................ 4,845,057 $11.29 3,447,726 $ 0.61 3,475,974 $0.19
Granted............... 2,276,738 28.13 2,266,729 23.37 756,789 2.13
Exercised............. (1,434,701) 1.93 (819,155) 0.41 (469,995) 0.11
Forfeited............. (117,276) 14.08 (50,243) 0.96 (315,042) 0.29
---------- --------- ---------
Outstanding at end of
year................... 5,569,818 16.82 4,845,057 11.29 3,447,726 0.61
========== ========= =========
Options exercisable at
end of year............ 1,434,045 3.86 2,544,582 0.62 3,447,726 0.61
========== ========= =========
Weighted-average fair
value of options
granted during the
year................... $17.70 $15.75 $2.13
Information about fixed stock options outstanding as of December 31, 1997 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------------
WEIGHTED OPTIONS
OPTIONS AVERAGE EXERCISABLE
OUTSTANDING REMAINING WEIGHTED AT WEIGHTED
AT CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1997 LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- ------------------------ ----------------- ----------- -------------- ------------ --------------
$0.05 to $7.67.......... 1,273,582 6.51 $ 1.06 1,213,282 $ 0.78
$9.96 to $9.96.......... 1,583,319 8.76 $ 9.96 26,886 $ 9.96
$10.00 to $31.33........ 2,039,042 9.17 $25.51 193,877 $22.25
$31.92 to $45.33........ 673,875 9.79 $36.42 -- $ --
--------- ---- ------ --------- ------
5,569,818 8.52 $16.82 1,434,045 $ 3.86
========= =========
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 2,250,000 shares of Common Stock
pursuant to the exercise of nontransferable options granted to participating
employees. All U.S.-based employees of the Company, whose customary employment
is 20 hours or more per week and more than 5 months in any calendar year and
who have completed at least one year of employment are eligible to participate
in the 1995 Purchase Plan. Employees who would
F-17
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
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 first such period commenced upon the
date of the Company's initial public offering and to end on the last market
trading day on or before June 30, 1996. The maximum number of shares of Common
Stock an employee may purchase in any Plan Period is 1,500 shares subject to
certain other limitations. The exercise price for the option for each Plan
Period is 85% of the lesser of the market price of the Common Stock on the
first or last business day of the Plan Period. If an employee is not a
participant on the last day of the Plan Period, such employee is not entitled
to exercise his or her option, and the amount of his or her accumulated
payroll deductions will be refunded. An employee's rights under the 1995
Purchase Plan terminate upon his or her voluntary withdrawal from the 1995
Purchase Plan at anytime or upon termination of employment. Under the 1995
Purchase Plan, the Company issued 10,239 and 32,288 shares in 1997 and 1996,
respectively.
Common Stock
The Company has reserved for future issuance 15,185,167 shares of Common
Stock for the exercise of stock options outstanding or available for grant.
In September 1995, the stockholders approved an increase in authorized
Common Stock from 16,750,000 shares, $0.001 par value per share to 30,000,000
shares, $0.001 par value per share.
In December 1995, the Company issued 8,625,000 shares in connection with the
initial public offering of its Common Stock. In June 1996, the Company issued
an additional 3,547,332 shares in connection with the second public offering
of its common stock.
On May 17, 1996, the stockholders approved an increase in authorized Common
Stock from 30,000,000 shares, $0.001 par value per share to 60,000,000 shares,
$0.001 par value per share.
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.
9. COMMITMENTS
The Company leases certain office space, equipment and software under
various noncancelable operating leases. Certain of these leases contain stated
escalation clauses while others contain renewal options.
Rental expense for the years ended December 31, 1997, 1996 and 1995 totaled
approximately $715,000, $620,000 and $327,000 respectively. Lease commitments
under these noncancelable operating leases for the years ended December 31 are
as follows:
1998............................................................. $1,754,046
1999............................................................. 1,900,037
2000............................................................. 1,922,636
2001............................................................. 1,577,934
2002............................................................. 743,569
Thereafter....................................................... 176,315
----------
Total future minimum lease payments.............................. $8,074,537
==========
F-18
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
10. INCOME TAXES
Income tax expense consists of the following:
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
------------ ----------- -------
Current:
Federal................................ $ 39,613,000 $ 5,868,000 $93,000
Foreign................................ 565,000 -- --
State.................................. 7,448,000 863,000 --
------------ ----------- -------
Total current............................ 47,626,000 6,731,000 93,000
Deferred................................. (24,362,000) (3,169,000) --
------------ ----------- -------
Total income tax expense............... $ 23,264,000 $ 3,562,000 $93,000
============ =========== =======
At December 31, 1997, the Company had no tax credits available for future
use.
The significant components of the Company's deferred income taxes are
approximately as follows:
DECEMBER 31
----------------------
1997 1996
----------- ----------
Deferred tax assets:
Tax credits....................................... $ -- $ 607,000
Revenue deferred for book but not for tax
purposes......................................... 22,087,000 809,000
Accounts receivable allowances.................... 2,364,000 995,000
Other............................................. 3,080,000 758,000
----------- ----------
$27,531,000 $3,169,000
=========== ==========
During 1997, the Company generated and utilized approximately $1,492,000 of
research and development tax credits. The Company also utilized all available
research and development and alternative minimum tax credit carryforwards of
approximately $535,000 and $72,000, respectively. At December 31, 1997, the
Company had no tax credits available for future use.
There was no change in the valuation allowance for deferred tax assets for
the year ended December 31, 1997. The Company's net change in its valuation
allowance for the years ended December 31, 1996 and 1995 was a decrease of
$5,072,000 and $624,000, respectively.
The differences between the provision for income taxes and the amount which
results from applying the federal and state statutory tax rate of 39% in 1997
and 1996 and 38% in 1995, to income before income taxes are as follows:
YEAR ENDED DECEMBER 31
-----------------------------------
1997 1996 1995
----------- ----------- ---------
Federal and state income
tax expense............ $25,560,000 $ 8,683,000 $ 755,000
Foreign sales
corporation benefits... (957,000) (95,000) --
Other permanent
differences............ 180,000 98,000 --
Tax credits............. (1,492,000) -- --
Change in valuation
allowance.............. -- (5,072,000) (624,000)
Other................... (27,000) (52,000) (38,000)
----------- ----------- ---------
$23,264,000 $ 3,562,000 $ 93,000
=========== =========== =========
F-19
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
11. BENEFIT PLAN
The Company has a 401(k) benefit plan allowing an employee to contribute up
to a maximum of 15% of gross salary, limited to the maximum allowed by the
Internal Revenue Service. To date, the Company has made no contributions to
the Plan.
12. SIGNIFICANT CUSTOMERS
The Company had net revenue attributed to individual customers in excess of
10% of total net sales as follows:
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
------- ------- -------
Customer A.......................................... 17% 22% 22%
Customer B.......................................... 9% 12% 6%
13. RELATED PARTY TRANSACTIONS
An entity which held a greater than 5% interest in the Company at December
31, 1997 and 1996 is a party to one of the licensing agreements discussed in
Note 2. The Company recognized $7,789,000, $3,461,000 and $962,000 of royalty
expense in cost of sales and $-0-, $-0- and $60,000 of offsetting royalty
credits in net revenue in the years ended December 31, 1997, 1996 and 1995,
respectively, and has accrued royalties and other accounts payable of
$3,044,000 and $1,524,000 at December 31, 1997 and 1996, 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. Additionally, the Company will be
eligible to receive royalty payments of up to an additional $100 million based
on the release and shipment of the jointly developed products. The Company has
recognized approximately $9.6 million in 1997 in connection with the
Development Agreement.
During 1991 and 1992, the Company advanced an aggregate $100,000 to an
officer who is also a stockholder. This advance is evidenced by a promissory
note and bears interest at 6.73% with principal and interest due in August
1996. The note is secured by 160,000 shares of Common Stock of the Company.
The related accrued interest amounts to approximately $29,000 at December 31,
1995. The principal and related accrued interest on this note receivable were
paid to the Company during 1996.
14. INFORMATION RELATING TO EXPORT REVENUE
Export revenue representing shipments of finished goods and services
provided to international customers, by geographical areas are as follows:
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
----------- ---------- ----------
Europe..................................... $19,213,703 $4,976,829 $1,678,454
Pacific Rim................................ 4,021,939 1,342,155 637,912
Other...................................... 2,319,781 734,102 350,747
----------- ---------- ----------
$25,555,423 $7,053,086 $2,667,113
=========== ========== ==========
F-20
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
YEAR ENDED DECEMBER 31
-----------------------------------
1997 1996 1995
----------- ----------- -----------
Numerator:
Net income............................... $41,358,105 $18,701,380 $ 1,895,015
=========== =========== ===========
Denominator:
Denominator for basic earnings per
share--weighted average shares.......... 40,861,046 37,770,779 27,013,593
Effect of dilutive securities:
Employee stock options................... 2,769,901 2,988,978 3,049,083
Warrants................................. -- 145,056 306,960
----------- ----------- -----------
Dilutive potential common shares......... 2,769,901 3,134,034 3,356,043
Denominator for diluted earnings per
share--adjusted weighted-average
shares.................................. 43,630,947 40,904,813 30,369,636
=========== =========== ===========
Basic earnings per share................... $ 1.01 $ 0.50 $ 0.07
=========== =========== ===========
Diluted earnings per share................. $ 0.95 $ 0.46 $ 0.06
=========== =========== ===========
16. STOCK SPLITS
In October 1995, the Company declared a two-for-three stock split effective
December 7, 1995.
On May 17, 1996, the Board of Directors declared a two-for-one stock split
in the form of a stock dividend to be paid on or about June 4, 1996 to
stockholders of record of the Company's Common Stock on May 28, 1996.
On January 25, 1998, the Board of Directors declared a three-for-two stock
split in the form of a stock dividend to be paid on or about February 20, 1998
to stockholders of record of the Company's Common Stock on February 12, 1998.
The number of options issuable and previously granted and their respective
exercise prices under the Company's stock option plans have been
proportionately adjusted to reflect these stock splits.
The accompanying consolidated financial statements have been retroactively
restated to reflect these stock splits.
17. RECENT ACCOUNTING PRONOUNCEMENTS
During October 1997, the Accounting Standards Executive Committee (AcSEC) of
the AICPA issued SOP 97-2, Software Revenue Recognition. SOP 97-2 replaces the
SOP 91-1 method of distinguishing between significant and insignificant vendor
obligations as a basis for recording revenue with a requirement that each
element of a software licensing arrangement (e.g., postcontract customer
support (PCS), specified upgrades and enhancements--even on a when-and-if
available basis, additional software products and services) be separately
identified and accounted for based on relative fair values of each element.
Further, in order to recognize revenue for each element as delivered,
stringent requirements for "vendor-specific objective evidence" must be met
for each element's fair value, and no remaining undelivered elements can be
essential to the functionality of the
F-21
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1997
delivered elements. The SOP is effective for transactions entered into in
fiscal years beginning after December 15, 1997. Different informal and
unauthoritative interpretations of certain provisions of SOP 97-2 have arisen.
AcSEC is already deliberating amendments to SOP 97-2, including deferral of
the effective date of certain provisions of the SOP so AcSEC can develop and
issue an interpretation regarding the applicability and the method of
application of those provisions. Because of the uncertainties related to the
outcome of these amendments, the impact on the future financial results of the
Company is not currently determinable.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15,
1997. This Statement established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The new rule requires that the Company (a) classify
items of other comprehensive income by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company plans to adopt SFAS No. 130 in 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This Statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," and amends SFAS
No. 94, "Consolidation of all Majority-Owned Subsidiaries." This Statement
requires annual financial statements and interim reports to disclose
information about products and services, geographic areas and major customers
based on a management approach. The management approach requires disclosing
financial and descriptive information about an enterprise's reportable
operating segments based on reporting information the way management organizes
the segments for making business decisions and assessing performance. It also
eliminates the requirement to disclose additional information about
subsidiaries that were not consolidated. This new management approach may
result in more information being disclosed than presently practiced and
require new interim information not previously presented. The Company plans to
adopt SFAS No. 131 in 1998 with impact only to the Company's disclosure
information and not its results of operations.
18. SUBSEQUENT EVENTS
On February 5, 1998, the Company completed its acquisition of certain
software technologies and assets of Insignia Solutions for approximately $17.5
million. In the first quarter of 1998, a non-recurring pre-tax charge of
approximately $16.0 million will be recognized for purchased research and
development of technology related to this acquisition.
On January 8, 1998, the Company licensed certain technology from EPiCON,
Inc. for approximately $8.0 million. The Company expects to record a charge
for purchased research and development of approximately $7.9 million in the
first quarter of 1998.
The Company has recently received a letter dated February 25, 1998 from a
third party alleging that certain technology incorporated in its WinFrame
product line may infringe a patent held by that party, and requesting that the
Company contact the third party to discuss a license to patent. The Company is
in the preliminary stages of assessing the allegation. There can be no
assurance that the Company would prevail in the defense of an infringement
claim, if made, or that the Company could obtain a license to the patent on a
reasonable basis, if at all. Any patent dispute or litigation, or any royalty-
bearing license, could have a material adverse effect on the Company's
business, financial condition or results of operations.
F-22
CITRIX SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
1997
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 624,204 $1,398,608 -- $ 324,064(2) $1,698,748
Allowance for re-
turns................ 1,927,835 -- $2,671,403(1) -- 4,599,238
---------- ---------- ---------- ---------- ----------
$2,552,039 $1,398,608 $2,671,403 $ 324,064 $6,297,986
========== ========== ========== ========== ==========
1996
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 399,459 $ 624,427 -- $ 399,682(2) $ 624,204
Allowance for re-
turns................ 608,966 -- 1,318,869(1) -- 1,927,835
Valuation allowance
for deferred tax
assets............... 5,072,000 -- -- 5,072,000(4) --
---------- ---------- ---------- ---------- ----------
$6,080,425 $ 624,427 $1,318,869 $5,471,682 $2,552,039
========== ========== ========== ========== ==========
1995
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 164,983 $ 241,253 -- $ 6,777(2) $ 399,459
Allowance for re-
turns................ 297,497 -- 311,469(1) -- 608,966
Valuation allowance
for deferred tax
assets............... 5,694,801 -- -- 622,801(3) 5,072,000
---------- ---------- ---------- ---------- ----------
$6,157,281 $ 241,253 $ 311,469 $ 629,578 $6,080,425
========== ========== ========== ========== ==========
- --------
(1) Netted against net revenues.
(2) Uncollectible accounts written off, net of recoveries.
(3) Netted against income tax expense.
(4) Recognition of deferred tax asset.
S-1
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 24TH DAY OF MARCH, 1997.
CITRIX SYSTEMS, INC.
/s/ Roger W. Roberts
By: _________________________________
ROGER W. ROBERTS 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 24TH DAY OF MARCH,
1997.
SIGNATURE TITLE(S)
/s/ Edward E. Iacobucci Chairman of the Board of Directors
- -------------------------------------
EDWARD E. IACOBUCCI
/s/ Roger W. Roberts Chief Executive Officer and Director
- ------------------------------------- (Principal Executive Officer)
ROGER W. ROBERTS
/s/ Mark B. Templeton President
- -------------------------------------
MARK B. TEMPLETON
/s/ James J. Felcyn, Jr. Vice President of Finance and
- ------------------------------------- Administration and Chief Financial
JAMES J. FELCYN, JR. Officer (Principal Financial Officer)
/s/ Marc-Andre Boisseau Controller (Principal Accounting
- ------------------------------------- Officer)
MARC-ANDRE BOISSEAU
/s/ Kevin R. Compton Director
- -------------------------------------
KEVIN R. COMPTON
/s/ Stephen M. Dow Director
- -------------------------------------
STEPHEN M. DOW
/s/ Robert N. Goldman Director
- -------------------------------------
ROBERT N. GOLDMAN
/s/ Michael W. Brown Director
- -------------------------------------
MICHAEL W. BROWN
/s/ Tyrone F. Pike Director
- -------------------------------------
TYRONE F. PIKE
II-1
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
3.1(1) Amended and Restated Certificate of Incorporation of the
Company
3.2(1) Amended and Restated By-laws of the Company
3.3(2) Certificate of Amendment of Amended and Restated
Certificate of Incorporation
4.1(1) Specimen certificate representing the Common Stock
10.1(1)* 1989 Stock Option Plan
10.2(1)* 1995 Stock Plan
10.3(1)* 1995 Non-Employee Director Stock Option Plan
10.4(1)* 1995 Employee Stock Purchase Plan, as amended
10.5(1) OEM Software License Agreement between the Company and
Digital Communications Associates, Inc. ("DCA"), dated as
of October 5, 1993
10.6(1) Memorandum of Agreement between the Company and DCA, dated
October 5, 1993
10.7(1) First Addendum to OEM Software License Agreement between
the Company and DCA, dated May 25, 1994
10.8(1) Amendment No. 1 to OEM Software License Agreement between
the Company and DCA dated March 23, 1995
10.9(1) Client/Server Software License Agreement between the
Company and Insignia Solutions Inc., dated August 4, 1995
10.10(1) Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.11(1) Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.12(1) License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15,
1990
10.13(1) Amendment No. 1 to the License Agreement between the
Company and Microsoft dated August 15, 1990, Contract No.
5198-0228 dated May 6, 1991
10.14(1) Amendment No. 2 to License Agreement between the Company
and Microsoft for Microsoft OS/2 Version Releases 1.x,
2.x, dated October 1, 1992
10.15(1) Amendment No. 3 to the License Agreement between the
Company and Microsoft dated August 15, 1990, Contract No.
5198-0228 dated January 1, 1994
10.16(1) Amendment No. 4 to the License Agreement between the
Company and Microsoft dated August 15, 1990, dated January
31, 1995
10.17(1) Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.18(1) Software Development and License Agreement between the
Company and Novell, Inc. ("Novell"), dated June 15, 1992
10.19(1) Software Development and License Agreement between the
Company and Novell, dated July 1, 1993
10.20(1) First Amendment to the Software Development and License
Agreement between the Company and Novell, dated March 7,
1995
10.21(1) NetWare Client License Agreement between the Company and
Novell, dated June 14, 1995
10.22(1) Software License Agreement between the Company and
Tektronix, Inc., dated September 23, 1994
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
10.23(1) Client Software License Agreement between the Company and
Wyse Technology dated June 15, 1995
10.24(1) Client/Server Software License Agreement between the
Company and Zenith Data Systems Corporation dated June 21,
1995
10.25(1) Form of Indemnification Agreement
10.26(2) Lease Agreement between Halmos Trading and Investment
Company and the Company dated June 6, 1996
10.27(3) License, Development and Marketing Agreement dated July 19,
1996 between the Company and Microsoft Corporation
10.28(4) License, Development and Marketing Agreement dated May 9,
1997 between the Company and Microsoft Corporation
21.1** List of Subsidiaries
23.1** Consent of Ernst & Young LLP
24.1** Power of Attorney (Included in signature page)
27.1** Financial Data Schedule
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(2) In corporated herein by reference to Exhibit 10 of the Company's
registration Statement on Form S-1 (File No. 333-4515), as amended.
(3) In corporated herein by reference to Exhibit 10 of the Company's Quarterly
report on Form 10-Q for the quarter ended September 30, 1996.
(4) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith.