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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998March 31, 1999
OR
[ ][_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
COMMISSION FILE NUMBERCommission File Number 0-27084
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWAREDelaware 75-2275152
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6400 N. W. 6TH WAY
FORT LAUDERDALE, FLORIDA6th Way 33309
Fort Lauderdale, Florida (Zip Code)
(Address of principal executive offices) 33309
(Zip Code)
Registrant's telephone number, including area code: (954) 267-3000
Not Applicable
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Former Name, Former Address and Former Fiscal Year if Changed Since Last Report.
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 Xx No ---___
---
As of November 6, 1998April 30, 1999 there were 42,644,89887,269,955 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
Total Number of Pages: 31
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CITRIX SYSTEMS, INC.
FORMForm 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998For the Quarter Ended March 31, 1999
CONTENTS
Page Number
-----------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 1998March 31, 1999 and December 31, 19971998 3
Condensed Consolidated Statements of Income:
Three Months Ended March 31, 1999 and Nine Months ended September 30,
1998 and 1997 5
Condensed Consolidated Statements of Cash Flows:
NineThree Months Ended September 30,March 31, 1999 and 1998 and 1997 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Qualitative & Quantitative Disclosures About Market Risk 24
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
Exhibit 3,4 281.1
Exhibit 27.1 304.1, 10.1
Exhibit 27.2 314.2
Exhibit 4.3, 10.2
Exhibit 27.1
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETSCitrix Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
SEPTEMBER 30, DECEMBERMarch 31, December 31,
1999 1998
1997
------------------------------------------------------------------------
(in thousands)
ASSETSAssets
Current assets:
Cash and cash equivalents $133,117,973 $140,080,550$413,104 $127,546
Short-term investments 84,942,267 89,111,093
Trade receivables,43,375 56,934
Accounts receivable, net of allowances of
$6,801,453$6,171 and $6,297,986$6,234 at September 30, 1998March 31, 1999 and
December 31, 1997,1998, respectively 33,149,929 12,631,41343,774 32,798
Inventories 4,346,815 2,273,1964,761 4,071
Prepaid expenses 4,869,089 3,497,8902,751 6,745
Other current assets 3,746 3,037
Current portion of deferred tax assets 29,697,309 10,767,437
--------------------------------25,148 12,885
-------- --------
Total current assets 290,123,382 258,361,579536,659 244,016
Long-term investments 162,771 97,108
Property and equipment, net 14,130,563 6,678,25315,252 14,183
Long-term portion of deferred tax assets 25,275,540 16,763,68031,501 29,183
Other assets 16,041 91
Intangible assets, net 8,872,230 864,513
--------------------------------
$338,401,715 $282,668,025
================================43,021 46,799
-------- --------
$805,245 $431,380
======== ========
Continued on following page.
3
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)Citrix Systems, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
SEPTEMBER 30, DECEMBERMarch 31, December 31,
1999 1998
1997
------------------------------------------------------------------------
(in thousands, except par value)
LIABILITIES AND STOCKHOLDERS' EQUITYLiabilities and stockholders' equity
Current liabilities:
Accounts payable and other accrued expenses $ 2,948,78344,333 $ 984,46329,735
Accrued royalties and other accounts payable
to stockholder 2,563,646 3,043,836
Acquisition related liabilities 822,184 1,312,569
Other accrued expenses 20,385,192 11,712,3783,198 2,891
Deferred revenue 7,068,172 3,147,22014,868 10,107
Current portion of deferred revenues on
contract with stockholder 29,523,809 15,000,000
Current portion of capital lease obligations payable 9,188 8,39639,898 39,830
Income taxes payable 3,624,027 236,410
---------------------------------19,347 2,553
-------- --------
Total current liabilities 66,945,001 35,445,272121,644 85,116
Long-term liabilities:
Capital lease obligations payable 179,336 -
Deferred revenues on contract with stockholder 39,125,000 50,375,000
---------------------------------38,870 48,810
Convertible subordinated debentures 301,894 --
-------- --------
Total long-term liabilities 39,304,336 50,375,000340,764 48,810
Stockholders' equity:
Preferred stock at $.01 par value--5,000,000 shares authorized, none
issued and outstanding at September 30, 1998 and December 31, 1997 - -
Common stock at $.001 par value--150,000,000 and 60,000,000value--150,000 shares
authorized; and 42,432,20387,254 and 41,473,08885,923 issued and
outstanding at September 30, 1998March 31, 1999 and
December 31, 1997,1998, respectively 42,432 41,47387 86
Additional paid-in capital 171,961,275 148,747,326207,821 188,207
Retained earnings 60,148,671 48,058,954
---------------------------------134,929 109,161
-------- --------
Total stockholders' equity 232,152,378 196,847,753
---------------------------------
$338,401,715 $282,668,025
=================================342,837 297,454
-------- --------
$805,245 $431,380
======== ========
See accompanying notes.
4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMECitrix Systems, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------Three Months Ended
March 31,
------------------------------------------
1999 1998
1997 1998 1997
----------------------------------------------------------------------------------------------
(in thousands, except per share information)
RevenuesRevenues:
Net revenues--unrelated parties $75,166 $45,552
Net revenues--stockholder 9,873 3,750
------- -------
Net revenues from unrelated parties $57,612,659 $31,191,160 $151,400,612 $75,103,914
Net revenues - stockholder 10,008,504 3,750,000 21,726,191 5,875,000
--------------------------------------------------------
Net revenues 67,621,163 34,941,160 173,126,803 80,978,91485,039 49,302
Cost of revenuesrevenues:
Cost of revenues from unrelatedrevenues--unrelated parties 3,288,008 3,441,412 10,590,486 7,925,7924,280 3,673
Cost of revenues - stockholder 620,630 - 2,848,150 -
--------------------------------------------------------revenues--stockholder 242 1,176
------- -------
Total cost of revenues 3,908,638 3,441,412 13,438,636 7,925,792
--------------------------------------------------------4,522 4,849
------- -------
Gross margin 63,712,525 31,499,748 159,688,167 73,053,12280,517 44,453
Operating expensesexpenses:
Research and development 8,829,664 1,656,414 16,614,241 4,791,7918,406 3,278
Sales, marketing and support 20,115,714 9,515,451 53,613,860 23,193,93024,769 14,888
General and administrative 5,456,826 3,035,646 13,407,009 6,943,9146,410 3,705
Amortization of intangible assets 3,778 774
In-process research and development 7,200,000 - 64,796,995 -
---------------------------------------------------------- 5,284
------- -------
Total operating expenses 41,602,204 14,207,511 148,432,105 34,929,635
--------------------------------------------------------43,363 27,929
------- -------
Income from operations 22,110,321 17,292,237 11,256,062 38,123,48737,154 16,524
Interest income, net 2,414,690 3,134,839 7,634,120 6,978,021
--------------------------------------------------------3,513 2,659
Interest expense (404) --
------- -------
Income before income taxes 24,525,011 20,427,076 18,890,182 45,101,50840,263 19,183
Income taxes provision 8,822,852 7,353,748 6,800,465 16,236,543
--------------------------------------------------------14,495 6,906
------- -------
Net income $15,702,159 $13,073,328 $ 12,089,717 $28,864,965
========================================================$25,768 $12,277
======= =======
Earnings per common share:
Basic earnings per share $ 0.37 $ 0.32 $ 0.29 $ 0.71
========================================================$0.30 $0.15
======= =======
Weighted average shares outstanding 42,218,841 41,003,745 41,907,043 40,689,777
========================================================86,492 83,248
======= =======
Earnings per common share assumingshare--assuming dilution:
Diluted earnings per share $ 0.34 $ 0.30 $ 0.27 $ 0.66
========================================================$0.28 $0.14
======= =======
Weighted average shares outstanding 45,908,840 44,097,527 45,362,626 43,668,287
========================================================93,682 89,616
======= =======
See accompanying notes.
5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCitrix Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------Three Months Ended
March 31,
----------------------------------------
1999 1998
1997
----------------------------------------------------------------
(in thousands)
Operating activities
Net income $ 12,089,71725,768 $ 28,864,96512,277
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,338,635 1,012,578
Provision5,400 1,586
(Recovery of) provision for doubtful accounts and(63) 555
Recovery of product returns 503,466 4,177,772-- (824)
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options 14,698,308 3,406,613
Deferred tax assets (27,441,732) (25,305,333)7,860 4,078
Accretion of original issue discount 391 --
In-process research and development 64,796,995 --- 5,284
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade receivables (20,579,089) (7,213,449)Accounts receivable (10,913) (7,755)
Inventories (2,073,619) (661,531)(690) (2)
Prepaid expenses (440,484) (288,922)3,994 (518)
Other current assets (709) --
Other assets (6,904) --
Deferred tax assets (14,581) 1,508
Deferred revenue 3,920,952 863,0934,761 865
Deferred revenue on contract with stockholder 3,273,809 69,125,000(9,872) (3,750)
Accounts payable 1,562,348 (175,842)and other accrued expenses 14,861 776
Accrued royalties and other accounts payable to stockholder (480,190) 1,309,477307 185
Income taxes payable 3,387,617 6,520,870
Other accrued expenses 842,564 4,617,665
---------------------------16,794 252
-------- --------
Net cash provided by operating activities 60,399,297 86,252,956
INVESTING ACTIVITIES36,404 14,517
Investing activities
Purchases of short-term investments (155,127,907) (71,775,345)(102,411) (33,442)
Proceeds from sale of short-term investments 159,296,733 38,167,40450,308 19,785
Cash paid for acquisitions (63,449,474) --- (17,500)
Cash paid for licensing agreement (5,375,000) -(250) (2,125)
Purchases of property and equipment (11,194,787) (3,464,901)
---------------------------(2,691) (4,184)
-------- --------
Net cash used in investing activities (75,850,435) (37,072,842)
FINANCING ACTIVITIES(55,044) (37,466)
Financing activities
Net proceeds from issuance of common stock 8,516,600 815,560
Repurchase11,755 1,849
Net proceeds from issuance of common stock previously issued - (902)convertible subordinated debentures 292,458 --
Payments on capital lease obligations (28,039) (75,290)
---------------------------(15) 35
-------- --------
Net cash provided by financing activities 8,488,561 739,368
Increase/(Decrease)304,198 1,884
-------- --------
Increase (decrease) in cash and cash equivalents (6,962,577) 49,919,482285,558 (21,065)
Cash and cash equivalents at beginning of period 140,080,550 99,135,049
---------------------------127,546 140,081
-------- --------
Cash and cash equivalents at end of period $ 133,117,973 $149,054,531
===========================$413,104 $119,016
======== ========
See accompanying notes.
6
Citrix Systems, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
1. BASIS OF PRESENTATIONBasis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
adjustments which, in the opinion of management, are considered necessary for a
fair presentation of the results of operations for the periods shown are of a
normal recurring nature and have been reflected in the unaudited condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the full
fiscal year or for any future period. The information included in these
unaudited condensed consolidated financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations hereincontained in this report and the consolidated financial
statements and accompanying notes included in the Citrix Systems, Inc. (the
Company)"Company") Annual Report on Form 10-K for the fiscal year ended December 31,
1997.1998.
2. USE OF ESTIMATESUse 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 condensed consolidated financial statements
and accompanying notes. While the Company believes that such estimates are fair
when considered in conjunction with the condensed consolidated financial
position and results of operations taken as a whole, the actual amount of such
estimates, when known, maywill vary from these estimates.
3. REVENUE RECOGNITION
In October 1997,Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with the American Institute of Certified Public Accountants
(AICPA)
issued Statement of Position (SOP)("SOP") 97-2 (as amended by SOP 98-4 and SOP 98-9),
"Software Revenue Recognition,"Recognition". Product revenues are recognized upon shipment of
the software product only if no significant Company obligations remain, the fee
is fixed or determinable, and collection of the resulting receivable is deemed
probable. In the case of non-cancelable product licensing arrangements under
which certain Original Equipment Manufacturers ("OEMs") have software
reproduction rights, initial recognition of revenue also requires delivery and
customer acceptance of the product master or first copy. Subsequent recognition
of revenues is based upon reported royalties from the OEMs as well as estimates
of royalties due through the Company's reporting date. Revenue from packaged
product sales to distributors and resellers is recorded when related products
are shipped. In software arrangements that include rights to multiple software
products, post-contract customer support, and/or other services, the Company
has adopted for transactions entered duringallocates the year beginning
January 1, 1998. SOP 97-2 provides guidance for recognizing revenuetotal arrangement fee among each deliverable based on software
transactions and supersedes SOP 91-1, "Software Revenue Recognition." In March
1998, the AICPA issued SOP 98-4, "Deferralrelative
fair value of each of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition." SOP 98-4 defers, for one year, the
application of certain passages in SOP 97-2 which limit what is considereddeliverables determined based on vendor-specific
objective evidence necessary to recognize revenueevidence. Product returns and sales allowances, including stock
rotations, are estimated and provided for software
licenses in multiple-element arrangementsat the time of sale. Revenues from
training and consulting are recognized when the services are performed. Service
and subscription revenues from customer maintenance fees for ongoing customer
support and product updates and upgrades are based on the price charged or
derived value of the undelivered elements exist.
Additional guidance is expected to be provided prior to adoptionand are recognized ratably over the
term of the deferred
provision of SOP 97-2. The Company will determinecontract, which is typically twelve months. Service revenues, which
are immaterial when compared to net revenues, are included in net revenues on
the impact, if any, the
additional guidance will have on current revenue recognition practices when
issued. Adoptionface of the remaining provisionsstatement of SOP 97-2 did not have a material
impact on revenue recognition during the first three quarters of 1998.income.
7
4. ACQUISITIONS AND LICENSED TECHNOLOGY
During 1998Convertible Subordinated Debentures
In March 1999, the Company completedsold $850.0 million principal amount at maturity of
its zero coupon convertible subordinated debentures (the "debentures") due March
22, 2019 in a private placement. The debentures were priced with a yield to
maturity of 5.25% and resulted in net proceeds to the acquisitionCompany of approximately
$292.5 million (net of original issue discount and licensingdebt issuance costs). Except
under limited circumstances, no interest will be paid on the debentures prior to
maturity. The debentures are convertible at the option of certain in-
process software technologies as detailed in the table below. The
transactions involving Insignia Solutions, plc ("Insignia") and APM Limited
("APM/Digitivity") weresecurity holder at
any time on or before the maturity date at a conversion rate of 7.0306 shares of
the Company's common stock for each $1,000 principal amount at maturity of
debentures, subject to independent valuation appraisals, whileadjustment in certain events. The Company may redeem the
transactions involving EPiCON, Inc. ("EPiCON") and VDOnet Corporation, Ltd.
("VDOnet") were baseddebentures on internal valuation studies. Basedor after March 22, 2004. Holders may require the Company to
repurchase the debentures, at set redemption prices (equal to the issue price
plus accrued original issue discount) beginning on these valuations,
each transaction resulted in a portion of the purchase price being allocated to
in-process research and development, which had not reached technological
feasibility and had no alternative future use. Purchase price allocations
relating to these 1998 transactions are based on estimated amounts. Final
amounts may vary from these estimates based on the completion of related
allocation studies.
COST IN-PROCESS R&D NATURE OF
DATE NAME (IN THOUSANDS) (IN THOUSANDS) TRANSACTION
- ---- ---- -------------- --------------- -----------
January 1998 EPiCON, Inc. $ 8,000 $ 7,850 License of certain
technology
February 1998 Insignia Solutions, $17,500 $15,950 Acquisition of
plc. certain in-process
technologies and
assets
June 1998 APM Limited. $40,350 $33,797 Acquisition of all
the outstanding
securities
July 1998 VDOnet $ 7,900 $ 7,200 Acquisition of
Corporation,Ltd certain technologies
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Certain Factors Which May Affect Future Results--Uncertainty as to
IPRD Valuation."March 22, 2004.
5. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share." Statement 128 replaced the calculation of primary and
fully diluted earningsEarnings per share. Unlike primaryShare
Basic earnings per share basic
earnings per share excludes any dilutive effectsis computed using the weighted average number of options, warrants and
convertible securities.common
shares outstanding during the period. Diluted earnings per share is very similarcomputed
using the weighted average number of common and dilutive common share
equivalents outstanding during the period. Dilutive common share equivalents
consist of shares issuable upon the exercise of stock options. Convertible
shares related to the previously reported fullyconvertible subordinated debentures were excluded from the
computation of diluted earnings per share.share because of their antidilutive effect.
All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement No. 128 requirements. All common share and per share data havehas been retroactively adjusted to reflect the three-for-twotwo-
for-one stock split in the form of a stock dividend paid on February 20, 1998, which stock dividend
was paidMarch 25, 1999 to
stockholders of record as of February 12, 1998.
8
March 17, 1999.
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------Three Months Ended
March 31,
--------------------------------------
1999 1998
1997 1998 1997
--------------------------------------------------------------------------------------------
Numerator:
Net income $15,702,159 $13,073,328 $12,089,717 $28,864,965
=========== =========== =========== ===========$25,768 $12,277
======= =======
Denominator:
Denominator for basic earnings per share weighted average--
weighted-average shares 42,218,841 41,003,745 41,907,043 40,689,777outstanding 86,492 83,248
Effect of dilutive securities:
Employee stock options 3,689,999 3,093,782 3,455,583 2,978,510
----------- ----------- ----------- -----------
Dilutive potential common shares 3,689,999 3,093,782 3,455,583 2,978,510
----------- ----------- ----------- -----------7,190 6,368
------- -------
Denominator for diluted earnings per share --
adjusted weighted-average shares 45,908,840 44,097,527 45,362,626 43,668,287
=========== =========== =========== ===========outstanding 93,682 89,616
======= =======
Basic earnings per share $ 0.370.30 $ 0.32 $ 0.29 $ 0.71
=========== =========== =========== ===========0.15
======= =======
Diluted earnings per share $ 0.340.28 $ 0.30 $ 0.27 $ 0.66
=========== =========== =========== ===========0.14
======= =======
7. RECLASSIFICATIONS6. Reclassifications
Certain prior period amountsreclassifications have been reclassified to conform to current
periodmade for consistent presentation.
8. LEGAL MATTERS7. Recent Accounting Pronouncements
In March 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The Company received a letter dated February 25, 1998 from a third party
alleging thathas adopted the SOP during the current
quarter. The SOP requires the capitalization of certain technology incorporatedcosts incurred after the
date of adoption in the Company's WinFrame product
line may infringe a patent held by the third party, and requesting that the
Company contact the third party to discuss a licensing arrangementconnection with
8
developing or obtaining software for such
patent.internal use. The Company believes that its existing products dodoes not infringeexpect
the patent held byadoption of the third party. 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 licenseSOP 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.
In addition, the Company may from time to time be a party to legal claims
arising in the ordinary course of business. The Company believes the ultimate
resolution of such claims will not have a material adverse effect on itsconsolidated
financial position, results of operations or cash flows.
In December 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions". The SOP addresses software revenue recognition
as it applies to certain multiple-element arrangements. SOP 98-9 also amends SOP
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2", to extend the
deferral of application of certain passages of SOP 97-2 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company will comply with the requirements of this SOP as they
become effective, which the Company does not expect to have a material effect on
the Company's consolidated financial position, results of operations or cash
flows.
8. Subsequent Events
On April 15, 1999, the Board of Directors approved a stock repurchase program
authorizing the repurchase of up to $200 million of the Company's common stock.
Purchases will be made from time to time in the open market and paid out of
general corporate funds.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEWOverview
The Company develops, markets, sells and supports innovative client and
application serverserverbased computing software that enables effective and efficient deployment
of enterprise applications that isare designed for Microsoft Windows operating
systems. The Company was incorporated in April 1989, and shipped its initial
products in 1991.
From its introduction in the second quarter of 1993 through the second
quarter of 1995, the Company's WinView product represented the largest source of
the Company's revenues. The Company began shipping its WinFrame product in final form in the
third quarter of 1995 and MetaFrame(TM)its MetaFrame product in the second quarter of 1998, and these1998.
These products, together with their related options, have beencomprised the largest
source of the Company's revenue.
On May 9, 1997, the Company and Microsoft Corporation ("Microsoft") entered into a License, Development
and Marketing Agreement, as amended (the "Development Agreement"), which
provides for the licensing to Microsoft of certain of the Company's multi-user
software enhancements to Microsoft's Windows NT Server and for the cooperation
between the parties for the development of certain future multi-user versions of
Microsoft Windows NT Server, called
Windows NT Server Terminal Server Edition. 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 NT Server
Terminal Server Edition base platform from a wide variety of computing devices.
In June 1998, the Company released its MetaFrame product, a Company-developed
plug-in that implements the Independent Computing Architecture (ICA) protocol on
the new platform that provides capabilities similar to those currently offered
in the WinFrame product line. Pursuant to("NT Terminal Server").
Under the terms of the Development Agreement, in May 1997, the Company received an aggregate of $75 million as a
non-refundable royalty payment and for engineering and support services to be
rendered by the Company. Under the terms of the Development Agreement,amended, the Company is
entitled to receive payments of an additional $100 million, in quarterly payments, a portion$55 million
of which has already been received. In addition,
Microsoft and the Company have agreed to engage in certain joint marketing
efforts to promote use of Windows NT Server-based multi-user software and the
Company's ICA protocol. Additionally, subject to the terms of the Development
Agreement, Microsoft has agreed to endorse only the Company's ICA protocol as
the preferred way to provide multi-user Windows access for devices, other than
Windows client devices until at least November 1999 and the Company shall be
entitled to license its WinFrame technology based on Windows NT v.3.51 until at
least September 30, 2001.
As a result of the Development Agreement, the Company will continue to support
the Microsoft Windows NT platform, but the MetaFrame products and later releases
will no longer directly incorporate Windows NT technology directly into the Company's
future offerings. The MetaFrame product line was first shipped in June 1998.technology. The Company plans to
continue developing enhancements to its MetaFrame product line and expects that
this product, WinFrame products and associated options and royalties derived
under the terms of the Development Agreement will constitute a majority of its
revenues for the foreseeable future.
Revenue is recognized when earned. The Company's revenue recognition policies are in compliance with the American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2 (as
amended by SOP 98-4)98-4 and SOP 98-9), "Software Revenue Recognition." Product revenues are recognized upon shipment only if no
significant Company obligations remain and collectionRecognition" as described
in Note 3 of the resulting
receivable is deemed probable. The initial feeNotes to Condensed Consolidated Financial Statements included
in this report.
On March 22, 1999, the Company completed a private placement of $75 million relatingzero coupon
convertible subordinated debentures due March 22, 2019 (the "debentures") which
resulted in net proceeds to the Development Agreement is being recognized ratably overCompany of approximately $292.5 million (net of
original issue discount and debt issuance costs). The debentures were offered
at an issue price to investors equal to the termprincipal amount at maturity of each
debenture less original issue discount. The debentures are general unsecured
obligations of the contract,
which is five years.Company and are subordinated to all existing and future
senior indebtedness of the Company. The additional $100 million due pursuantdebentures were priced with a yield to
maturity of 5.25%. Except under limited circumstances, no interest will be paid
on the debentures prior to maturity. The Company intends to use the net proceeds
of the offering for working capital and other general corporate purposes. The
debentures are convertible, unless previously redeemed or purchased, at any time
on or before the maturity date at a conversion rate of 7.0306 shares of the
Company's common stock for each $1,000 principal amount at maturity of
debentures, subject to adjustment in certain events. The Company may redeem the
debentures on or after March 22, 2004. In the event of a redemption, the
debentures will be purchased for cash at a price equal to the Development
Agreement, as amended, is being recognized ratably over the remaining termissue price of the
contract, effective April 1998.debentures plus accrued original issue discount through the date of redemption.
Holders may also require the Company to repurchase the debentures upon a change
in control. In the caseevent of non-cancelable product
licensing arrangements under which certain Original Equipment Manufacturers
(OEMs) have software reproduction rights, initial recognition of revenue also
requires delivery and customer acceptancea change in control, debentures will be purchased
for cash at a price equal to the issue price of the product master or first copy.
Subsequent recognitiondebentures plus accrued
original issue discount through the date of revenues is based upon reported royalties from the
OEMs as well as estimates of royalties due through
10
the Company's reporting date. Product returns and sales allowances, including
stock rotations, are estimated and provided for at the time of sale. Non-
recurring engineering fees are recognized ratably as the work is performed.
Revenues from training and consulting are recognized when the services are
performed. Service 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 statement of income.purchase. The Company has acquired or licensed technology that is relatedagreed
to its
strategic objectives. On October 2, 1997,file with the Company completed its acquisition
of certainSecurities and Exchange Commission a registration statement in
respect of the assets, technology and operations of DataPac Australasia Pty
Limited for approximately $5.0 million. In January 1998, the Company licensed
certain software technology from EPiCON, Inc. for approximately $8.0 million.
Additionally, on February 5, 1998, the Company completed its acquisition of
certain in-process software technologies and assets of Insignia Solutions, plc
for approximately $17.5 million. Also, on June 30, 1998 the Company acquired allresale of the outstanding securitiesdebentures and the Common Stock issuable upon
conversion of APM Limited, the parent company of Digitivity
Inc, for approximately $40.4 million. In July 1998,debentures. The Company will be required to pay additional
interest on the Company completed its
acquisition ofdebentures if it fails to comply with certain technologies of VDOnet Corporation Ltd. for approximately
$8.0 million.obligations under
the registration rights agreement.
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"factors which may affect future results" which, it is
anticipated, willmay impact the Company's future performance and financial position.
RESULTS OF OPERATIONS10
Results of operations
The following table sets forth statement of incomeoperations 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.
INCREASE/(DECREASE) FROM
------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, SEPTEMBER 30,Change from Three
Three Months Ended Months Ended
March 31, March 31, 1999
--------------------- vs.
1999 1998 VS.March 31, 1998
VS.
------------------ -----------------
1998 1997 1998 1997 1997 1997
----- ----- ----- ----- ---- ------------------------------------------------
Net revenues.................................revenues...................................................... 100.0% 100.0% 100.0% 100.0% 93.5% 113.8%72.4%
Cost of revenues............................. 5.8revenues.................................................. 5.3 9.8 7.8 9.8 13.6 69.6
----- ----- ---- ----(6.7)
----- -----
Gross margin................................. 94.2margin...................................................... 94.7 90.2 92.2 90.2 102.3 118.681.1
Operating expenses:
Research and development.................... 13.1 4.8 9.6 5.9 433.1 246.7development......................................... 9.9 6.6 156.4
Sales, marketing and support................ 29.7 27.2 31.0 28.6 111.4 131.2support..................................... 29.1 30.2 66.4
General and administrative.................. 8.1 8.7 7.6 8.6 79.8 93.1administrative....................................... 7.5 7.5 73.0
Amortization of intangible assets................................ 4.4 1.6 *
In-process research and development......... 10.6 - 37.5 -development.............................. -- 10.7 * *
----- ----- ---- ----
----- -----
Total operating expenses................... 61.5 40.7 85.7 43.1 192.8 324.9
----- ----- ---- ----expenses........................................ 50.9 56.6 55.3
----- -----
Income from operations...................... 32.7 49.5 6.5 47.1 27.9 (70.5)operations............................................ 43.8 33.6 124.8
Interest income, net......................... 3.6 9.0 4.4 8.6 (23.0) 9.4
----- ----- ---- ----net.............................................. 4.1 5.4 32.1
Interest expense.................................................. (0.5) -- *
----- -----
Income before income taxes.................. 36.3 58.5 10.9 55.7 20.1 (58.1)taxes........................................ 47.4 39.0 109.9
Income taxes provision....................... 13.1 21.1 3.9 20.0 20.0 (58.1)
----- ----- ---- ----taxes...................................................... 17.0 14.0 109.9
----- -----
Net income................................... 23.2% 37.4% 7.0% 35.7% 20.1% (58.1%)
===== ===== ==== ====income........................................................ 30.4% 25.0% 109.9%
===== =====
* Not meaningful.
Net Revenues. The increaseincreases in net revenues in the thirdfirst quarter of 1999
compared to the first quarter of 1998 compared to the third quarter of 1997 waswere primarily attributable to revenues
recognizedan increase
in connection with the shipmentvolume of shipments of the Company's MetaFrame product,
the inter-operable products associated with the MetaFrame and WinFramesystem options products
and, the recognition ofto a lesser extent, an increase in revenue related to the Development
Agreement with Microsoft, which were partially off-set by a decline in the volume of shipments
of its WinFrame products. The increase in net revenue in the nine month period
ended September 30, 1998 compared to the nine month period ended September 30,
11
1997 was primarily attributable to the inter-operable products associated with
the MetaFrame and WinFrame products, revenues recognized in connection with the
shipment of the Company's MetaFrame product, the recognition of revenue related
to the Development Agreement with Microsoft and an increase in the volume of
shipments of its WinFrame products.
An analysis of Company net revenue is detailed in the table below. Net
revenue is segregated into five main categories: WinFrame-based products,
MetaFrame-based products, Inter-operable products, OEM revenue, Microsoft
royalties and Other revenue. Inter-operableMicrosoft. System option products include additional user
licenses as well as other options, which are applicable to both the MetaFrame
and WinFrame product lines. The overall increase in net revenues was offset by
a decrease in the volume of shipments of the WinFrame product and decreased
volume in licensing of OEM products.
An analysis of Company net revenue is detailed in the table below. Net
revenue is segregated into six categories: WinFrame-based products, MetaFrame-
based products, system options products, OEM revenue, Microsoft royalties and
other revenue. The Company's WinFrame, MetaFrame, system options products and
OEM revenues represent product license fees based upon the Company's multi-user
NT-based technology. The OEM revenue consists of license fees and royalties from
third party manufacturers who are granted a license to incorporate and/or market
the Company's multi-user technologies in their own product offerings. Both the Company's WinFrame/MetaFrame and OEM revenues
represent product license fees based upon the Company's multi-user NT-based
technology. Microsoft
royalties represent fees recognized in connection with the Development
Agreement (see discussion above).Agreement.
INCREASE/(DECREASE) FROM
------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, SEPTEMBER 30,Revenue Growth for
Three Months Ended the Three Months Ended
March 31, March 31, 1999
---------------------------------------- vs.
1999 1998 VS.March 31, 1998
VS.------------------ -------------------- -------------------
1998 1997 1998 1997 1997 1997
--------- -------- -------- -------- ---- --------------------------
WinFrame- basedWinFrame-based products...................... 8% 53% (75%)
MetaFrame-based products..................... 15% 50% 34% 51% (42%) 42%
MetaFrame- based products....................46 - *
System options products...................... 30 0 16 0 * *
Inter-operable products...................... 25 17 21 15 176 20118 177
OEM revenue.................................. 10 17 12 212 16 19(73)
Microsoft royalties.......................... 15 11 12 7 167 2708 163
Other revenue...............................revenue................................ 3 5 5 5 6 118 87
--- --- --- --- ---(4)
---- ---- ---
Net revenues................................. 100% 100% 100% 100% 94% 114%
* Not meaningful.
11
International. International revenues (sales outside of the United States)
accounted for approximately 27%39% and 18%28% of net revenues for the three months
ended September 30,March 31, 1999 and 1998, respectively. The Company expects international
revenue to account for a larger percentage of total revenue in 1999 than in
1998.
The Company will continue investing in international markets and 1997, respectively.expanding its
international operations by establishing additional foreign operations, hiring
personnel, expanding its international direct sales force and adding third party
channel partners. International revenues accounted for approximately 27%may fluctuate in future periods as a
result of difficulties in staffing, dependence on an independent distribution
channel, competition, variability of foreign economic and 17% of net revenues for the nine months
ended September 30, 1998political conditions
and 1997, respectively.changing restrictions imposed by regulatory requirements, localized product
release timing and marketing such products in foreign countries.
Cost of Goods Sold.Revenues. Cost of goods soldrevenues consists 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 soldrevenues primarily
consists of cost of royalties, except where the OEM elects to purchase shrink-shrink
wrapped products in which case such costs are 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 are includedrevenues.
Gross Margin. Gross margin increased from 90.2% in the first quarter of 1998
to 94.7% in the first quarter of 1999 primarily due to the introduction of the
MetaFrame product line and an increase in system options products. The MetaFrame
product line began shipping in June 1998 and has a relatively high gross margin
contribution compared to the WinFrame product line as the MetaFrame product
line bears no royalties. The increase in gross margin as a percentage of revenue
related to the Development Agreement also increased due to an increase in
revenue related to the Development Agreement and a decrease in related
development costs. The increase in gross margin was partially offset by an
increase in inventory reserves.
Research and Development Expenses. Research and development expenses
consisted primarily of personnel-related costs. To date, all internal software
development costs have been expensed as incurred. The increase in research and
development expenses resulted primarily from additional staffing, associated
salaries and are not separately identifiable.related expenses required to expand and enhance the Company's
product lines. 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. The increases in gross margin in the three month and the nine
month periods ended September 30, 1998, was primarily attributable to changes in
product mix, representing initial licensing since June 1998, of the MetaFrame
product, which has a higher gross margin percentage, an increase in the volume
of shipments of inter-operable products and different products within the
WinFrame product line.
Research and Development Expenses. Research and development expenses
consisted primarily of personnel-related costs. The increases in research and
development expenses in the three months and nine months ended September 30,
1998 as comparedincurred except for certain intangible assets related to the prior respective periods, resulted mainly from
additional staffing, associated salaries and related expenses as a result of
recent acquisitions and
additional hirings required to expand and enhance the
Company's product lines. These increases
12
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
Development Agreement revenues.licensing arrangement described herein.
Sales, Marketing and Support Expenses. The increasesincrease in sales, marketing and
support expenses in the three months and nine months ended September 30,
1998 as compared to the prior respective periods, resulted primarily from increasesincreased efforts in promotional and
advertising activities related to specific product lines and corporate branding.
Promotional activities include co-op advertising programs and other promotional
activities such as advertising literature production
and distribution andthose directed at resellers, training programs, trade shows
as well as distributor programs, largely in
connection with the launch of the MetaFrame product.and other direct mail programs. Sales, marketing and support staff and
associated salaries, commissions and related expenses also increased resulting fromdue to
efforts to expandincrease the Company's product distribution.international sales force and marketing
programs.
General and Administrative Expenses. The increasesincrease in general and
administrative expenses in the three months and nine months ended September 30,
1998 as compared to the prior respective periods, is primarily due to increased expenses associated with
additional staff, associated salaries and related expenses necessary to support
overall increases in the scope of the Company's operations. The increase in
the nine months ended September 30, 1998general and administrative expenses was partially offset by a declinelower bad debt
expenses as compared to the same quarter of 1998.
Amortization of Intangible Assets. The increase in legal fees from the levels incurred in the
previous period, which were highamortization of goodwill
and identifiable intangible assets is primarily due to the costs associated with non-recurring
contractual negotiationsAPM Ltd. and litigation defense incurredVDOnet
Corporation Ltd. acquisitions. The Company acquired APM Ltd. for approximately
$40.4 million in 1997.June 1998 and acquired VDOnet Corporation Ltd. for
approximately $8.0 million in July 1998.
In-Process Research and Development Expenses. In connection with the
acquisition or licensing of certain businesses, assets or technologies,
including Datapac, EPiCON, Insignia, APM/Digitivity and VDOnetDuring 1998, the Company
made
allocations of the purchase price to in-process research and development,
totaling approximately $65 million in 1998 and $3.95 million in 1997. These
amounts were expensed as non-recurring charges on the effective dates of the
respectivecompleted certain acquisitions and licensing because the acquired in-process
technology had not yet reached technological feasibility and had no future
alternative uses.arrangement. Since the respective
dates of acquisition and licensing, the Company has used the acquired in-process
technology to develop new product offerings and enhancements, which have or will
become part of the Company's suite of products when completed. FunctionalitiesFunctionality
included in products using the acquired in-
processin-process technology have been
introduced at various times following the respective transaction dates of the
acquired assets and licensing, and the Company currently expects to complete
12
the development of the remaining projects at various dates between 19981999 and
2000. Upon completion, the Company offershas offered and intends to offer the related
products to its customers.
The nature of the efforts required to develop and integrate the acquired
in-process technology into commercially viable products or features and
functionalities within the Citrix suite of existing products principally relate
to the completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet design
requirements, including functions, features and technical performance
requirements. The Company currently expects that products utilizing the acquired
in-process technology will be successfully developed, but there can be no
assurance that commercial viability of any of these products will be achieved.
Furthermore, future developments in the software industry, particularly the
thin client-
serverserver-based computing environment, changes in technology, changes in other
products and offerings or other developments may cause the Company to alter or
abandon product plans.
The fair value for the in-process technology in each acquisition was based
on analysis of the markets, projected cash flows and risks associated with
achieving such projected cash flows. In developing these cash flow projections,
revenues were forecasted based on relevant factors, including aggregate revenue
growth rates for the business as a whole, individual service offering revenues,
characteristics of the potential market for the service offerings and the
anticipated life of the underlying technology. Operating expenses and resulting
profit margins were forecasted based on the characteristics and cash flow
generating potential of the acquired in-process research and development, and
included assumptions that certain expenses would decline over time as operating
efficiencies were obtained. Appropriate adjustments were made to operating
income to derive net cash flow, and the estimated net cash flows of the in-
process technologies in each acquisition were then discounted to present value
using rates of return that the Company believes reflect the specific risk/return
characteristics of these research and development projects. The selection of
discount rates for application in each acquisition were based on the
consideration of: (i) the weighted average cost of capital ("WACC"), which
measures a company's cost of debt and equity financing weighted by the
percentage of debt and percentage of equity in its target capital structure;
(ii) the corresponding weighted average return on assets
13
("WARA") which measures the after-tax return required on the assets employed in
the business weighted by each asset group's percentage of the total asset
portfolio; and (iii) venture capital required rates of return which typically
relate to equity financing for relatively high-risk business projects. Failure to complete the development of these projects in
their entirety, or in a timely manner, could have a material, adverse impact on
the Company's operating results, financial condition and results of operations. No assurance
can be given that actual revenues and operating profit attributable to acquired
in-process research and development will not deviate from the projections used
to value such technology in connection with each of the respective acquisitions.
Ongoing operations and financial results for acquired assets or licensed
technology and the Company as a whole, are subject to a variety of factors which
may not have been known or estimable at the date of such transaction, and the
estimates discussed below should not be considered the Company's current
projections for operating results for the acquired assets or licensed technology
or the Company as a whole.
Revenues attributable to the acquired in-process technology were assumed to
increase depending on the product between the first two to five years of six to
seven year projection periods at annual rates ranging from 23% to 246% before
decreasing over the remaining years at rates ranging from 12% to 84% as other
products are released in the marketplace. Projected annual revenue attributable
to the products ranged from approximately $400,000 to $255 million over the term
of the projections. These projections were based on aggregate revenue growth
rates for the business as a whole, individual product revenues, giving
consideration to transaction volumes and prices, anticipated growth rates for
the client-server market, anticipated product development and product
introduction cycles, and the estimated life of the underlying technology.
Projected revenues from the in-process research and development were assumed to
peak during periods between 1999 and 2002, depending on the product, and decline
from 2000 to 2003 as other new products are expected to enter the market.
Gross profit was assumed to increase in the first two to five years of the
projection period, depending on the product, at annual rates ranging from 23% to
248%, decreasing over the remaining years at rates ranging from 11% to 84%
annually, resulting in incremental annual gross profits ranging from
approximately $400,000 to $237 million. The gross profit projections assumed a
growth rate approximately the same as the revenue growth rate.
Operating profit was assumed to increase, depending on the product, in the
first two to four years of the projection period at annual rates ranging between
22% and 849%, and decrease over the remaining years at rates between 3% and 75%
annually, resulting in incremental annual operating profits of approximately
$200,000 to $107 million. Operating profit is projected to increase at a faster
rate than revenues in the earlier years of the projection primarily because all
product developments costs were assumed to be incurred in the first year,
reducing operating expenses as a percentage of revenue after the first year.
The Company used discount rates ranging from 15% to 50% for valuing the in-
process research and development acquired in these transactions, which the
Company believes reflected the risk associated with the completion of the
individual research and development projects acquired and the estimated future
economic benefits to be generated subsequent to the projects' completion.
A description of the in-process research and development and the estimates
made by the Company for each of Datapac, EPiCON, Insignia, APM/DigitivityAPM and VDOnet is summarized below.
All of the acquired projects are targeted for the client-
serverserver-based computing market.
After the acquisition or license of each technology, the Company has continued
the development of these in-process projects.
14
DATAPAC
TheEPiCON
In January 1998, the Company licensed certain in-process research and development acquired in the Datapac acquisition
consisted primarily of one significant research and development project, VGA
Connect, together with two minor projects. VGA Connect is designed as an add-on
to WinFrame software and allows MVGA cards to be used as direct connect
workstations. The Company estimated these projects were less than 25% complete
at the date of acquisition. The aggregate value assigned to the Datapac in-
process research and development was $3.95 million. At the time of the
valuation, the expected cost to complete all such projects was approximately
$220,000.
EPICONtechnology
from EPiCON, Inc. The in-process research and development acquired in the
license of EPiCON technology consisted of one significant research and
development project, termed Application Cloning.Installation Services. This project
enablesinvolved the development of software to enable an application to be installed
once on a server and then replicated to all other servers in a server farm
configuration, and is targeted for the client-server market. After licensing the
EPiCON technology,configuration. As of March 31, 1999, the Company continued the development ofhas completed this in-process
project which the Company estimated was less than 75% complete atand
has incurred expenses totaling approximately $1.1 million since the date of
licensing.
Insignia
On February 5, 1998, the Company completed its acquisition of certain in-
process software technologies and assets of Insignia Solutions, plc. The aggregate value assigned to the EPiCON in-process research and
development was $7.9 million. At the time of the valuation, the expected cost to
complete the project was approximately $300,000.
INSIGNIA
The in-processin-
process research and development acquired in the Insignia acquisition consisted
primarily of one significant research and development project, Keoke, together with three minor projects. Keoke, is a video
display protocol designed to add performance and bandwidth management
enhancements to ICA in WinFrame and MetaFrame software. The Company estimated these projects
were between 25% and 50% complete atAs of March 31, 1999,
expenses totaling approximately $1.0 million had been incurred since the date of
acquisition. The aggregate
value assignedCompany estimates approximately $800,000 will be required
to complete the Insignia in-processremaining research and development was $15.95
million. Atproject and it is expected to
be completed by the timeend of 1999. The remaining efforts to complete the project
are primarily the utilization of performance enhancements and algorithmic
methodologies of the valuation,Keoke protocol to create similar improvements in the
expected costCompany's ICA protocol. The research and development risks associated with this
project primarily relate to complete all such
projects was approximately $1.9 million.
APM/DIGITIVITYthe integration of key performance features of Keoke
into the Company's ICA protocol.
APM
On June 30, 1998, the Company completed its acquisition of APM Ltd. The in-processin-
process research and development acquired in the APM/DigitivityAPM acquisition consisted
primarily of one significant research and development project, Java Server.project. The project is a
JavaWindows NT-based application server for Java, which is similar to WinFrame
software, but actually runs Java applications rather than Windows
applications. The Company estimated this project was less than 40% complete atAs of March 31, 1999, expenses totaling
approximately $2.5 million had been incurred since the date of acquisition. The
aggregate value assignedCompany estimates approximately $2.3 million will be required to complete the
APM/Digitivity in-
processremaining research and development was $33.8 million. At the time of the
valuation, theproject and it is expected costto be completed in
2000. The remaining effort to complete the project was approximately $8.0
million.
VDONETis primarily the utilization
of acquired technology to develop an application server for Java that would
operate in a MetaFrame and WinFrame server environment. The research and
development risks associated with this project relate primarily to updating the
acquired technology to be compatible with Sun Microsystems' Java 2.0
application, integrating and porting such technology into a variety of server-
based computing architectures.
VDOnet
In July 1998, the Company completed its acquisition of VDOnet Corporation,
Ltd. The in-process research and development acquired in the VDOnet acquisition
consisted primarily of one significant research and development project, ICA
Video Server.Services. This project allows video applications and applications
containing video to be viewed on an ICA client, and is targeted for the client-server
market. After acquiring VDOnet, the Company continued the developmentclient. As of
this
in-process project, which the Company estimates was less than 40% complete at13
March 31, 1999, expenses totaling approximately $1.8 million had been incurred
since the date of acquisition. The aggregate value assignedCompany estimates approximately $2.4 million
will be required to complete the VDOnet in-processremaining research and development was $7.2 million. At the time of the valuation, theproject and
it is expected costto be completed in 2000. The remaining effort to complete the
project was approximately $200,000.
See "--Certain Factors Which May Affect Future Results--Uncertainty asis primarily the utilization of acquired technology to IPRD Valuation."
15
develop a video
server that will provide video applications to an ICA client. The research and
development risks associated with this project relate primarily to integrating
this product into a server-based computing environment.
There can be no assurance that the Company will not incur additional charges
in subsequent periods to reflect costs associated with these transactions or
that the Company will be successful in its efforts to integrate and further
develop these technologies.
Interest Income, Net. InterestThe increase in interest income, net, increased duringfor the ninethree
months ended September 30, 1998 compared to the respective period in the prior
yearMarch 31, 1999 was primarily due to interest income earned on additional cash
generated from operations and additional cash obtained from the receipt of an initial license fee under the termsissuance of the
Development
Agreement.zero coupon convertible subordinated debentures in March 1999.
Interest Expense. The increase in interest expense for the three months ended
March 31, 1999 was due to the issuance of the zero coupon convertible
subordinated debentures in March 1999.
Income Taxes. The Company's effective tax rate amounted to 36% for the three
months ended March 31, 1999 and nine1998.
Liquidity and capital resources
During the three months ended September 30, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
DuringMarch 31, 1999, the nine months ended September 30, 1998, the Company's activities
resulted in negativeCompany generated positive
operating cash flows of approximately $7.0 million, which
includes cash used$36.4 million. Cash provided by operating
activities relate primarily to purchase and license in-process research and development
of $68.8 million. These amounts were also affected by an increase in trade
receivables during the period. During the same period, the Company also
recognizednet income as adjusted for tax benefits fromrelated
to the exercise of non-statutory stock options and disqualifyingdisqualified dispositions of
incentive stock options of approximately $14.7
million. The Company purchased and sold short-term investments for
approximately $155.1$7.9 million and $159.3a $14.6 million respectively, duringincrease in deferred
tax assets. Accounts receivable increased $10.9 million due to higher revenue
levels. Accounts payable and other accrued expenses increased $14.9 million due
to accrued royalty fees and increased expenses resulting from higher levels of
operating activity. Income tax payable increased $16.8 million due to greater
profitability generated from higher revenue levels. Cash used in investing
activities of $55.0 million related primarily to the nine
months ended September 30, 1998. Additionally,use of a portion of the
Company expendedproceeds from the issuance of convertible subordinated debentures to purchase
longer maturity investments. This cash outflow was partially offset by cash
inflows from the sale of investments of approximately $11.2$50.3 million. Cash
provided by financing activities of $304.2 million inrelated primarily to $292.5
million of net proceeds from the same period forissuance of convertible subordinated debentures
and $11.8 million from the purchaseissuance of leasehold
improvements and equipment. These capital expenditures were primarily
associated withcommon stock under the Company's expansion into new facilities.stock
option plan.
As of September 30, 1998,March 31, 1999, the Company had approximately $133.1$619.3 million in cash and
cash equivalents, $84.9 million in short-term investments and $223.2$415.0 million of working capital. The net proceeds from the
issuance of convertible subordinated debentures have been invested in cash
equivalents and investments. The Company intends to use the net proceeds for
working capital and other general corporate purposes. The Company's cash and
cash equivalents and short-
term investments are invested in investment grade, interest bearinghighly liquid securities to
minimize interest rate risk and allow for flexibility in the event of immediate
cash needs. At September 30, 1998,March 31, 1999, the Company had approximately $33.1$43.8 million in
trade receivables,accounts receivable, net of allowances, and $75.7$93.6 million of deferred revenues,
of which the Company anticipates $36.6$54.8 million will be earned over the next
twelve months.
On April 15, 1999, the Board of Directors approved a stock repurchase program
authorizing the repurchase of up to $200 million of the Company's common stock.
Purchases will be made from time to time in the open market and paid out of
general corporate funds.
The Company believes existing cash and investments together with cash equivalents and short-term
investmentsflow
from operations, if any, will be sufficient to meet operating and capital
expenditureexpenditures requirements for at least the next twelve months. The Company paid cash amountingmay
also from time 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.
YEARtime seek to raise additional funds through public or private
financings.
Year 2000 READINESS DISCLOSURE STATEMENT AND RELATED INFORMATION.readiness disclosure
Until recently, many computer programs were written using two digits rather
than four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. The
14
consequences of this issue may include systems failures and business
process interruption to the extent companies fail to upgrade, replace or
otherwise address year 2000 problems. The year 2000 problem may also result in
additional business and competitive differentiation. Aside from the well-known
calculation problems with the use of 2-digit date formats as the year changes
from 1999 to 2000, the year 2000 is a special case leap year. As a result,
significant uncertainty exists in the software industry concerning the potential
impact of the year 2000 problem.
The Company believes that it has four general areas of potential exposure with
respect to the year 2000 problem: (1)(i) its own software products; (2)(ii) its
internal information systems; (3)(iii) computer hardware and other equipment
related systems; and (4)(iv) the effects of third party compliance efforts.
16
The Company's existing principal software product lines consist of WinFrame
and MetaFrame.MetaFrame software. The Company's WinFrame product line is an authorized
extension to Microsoft Windows NT, v.3.51.3.51. The Company's MetaFrame product line
adds additional functionality to Microsoft's Windows NT Server, Terminal Server
Edition.Server. Customers can obtain
current information about the year 2000 compliance of the Company's products
from the Company's web site. Information on the Company's Webweb site is provided
to customers for the sole purpose of assisting in planning for the transition to
the year 2000. Such information is the most currently available concerning the
behavior of the Company's products in the next century and is provided "as is"
without warranty of any kind.
While the Company believes that the current versions of its WinFrame and
MetaFrame products are currently capable of storing four-digit year data, allowing
applications to differentiate between dates from the 1900s and the year 2000 and
beyond, the potential incompatibility with two-digit application programs may
limit the Company's sales of product in those situations. Further,
notwithstanding the operating system's ability to store four-digit year data, it
is typically the application's function to collect and properly store date data.
There can be no assurance that the Company's products will not be integrated by
the Company or its customers with, or otherwise interact with, non-year 2000
compliant software or other products which may malfunction and expose the
Company to claims from its customers or other third parties. The foregoing
could result in the loss of or delay in market acceptance of the Company's
products and services, increased service costs to the Company or payment by the
Company of compensatory or other damages. Although the Company believes that
many Windows applications do store four-digit year dates today, it is possible
that some applications are now or have historically only collected two-digit
year data, and in such cases WinFrame cannot create four-digit year data for
applications which have collected only two digits in year fields. Further,
there can be no assurance that the Company's software products that are designed
to be year 2000 compliant contain all necessary technology to make them year
2000 compliant. If any of the Company's licensees experience year 2000
problems, such licensees could assert claims for damages against the Company.
With respect to internal information systems, the Company has commenced, but
has not yet completed, a testing and compliance program to identify any year
2000 problems. An audit will behas been conducted to identify all business critical
applications and responses sought from vendors as to whether the application is
compliant or not and what plans they have in place to ensure compliance before
December 31, 1999. The Company expects to complete this portion of its
compliance plan by the end of the third quarter of 1999.
The third type of potential year 2000 exposure relates to the Company's
computer hardware and other equipment related systems including such equipment
as the Company's workstations, phone systems, security systems and elevator
systems. The Company is in the earlyfinal stages of identifying and evaluating such
systems' year 2000 exposure. Due toAt this point, the early stage of analysis with respect to
the Company'sCompany has not discovered any
significant potential year 2000 exposure regarding its computer hardware and
other equipment related systems,systems. The Company expects to complete this portion
of its compliance plan by the Company
cannot yet estimateend of the costs involved, although thesecond quarter of 1999. The Company
does not expect such costs incurred to have a material adverse effect on its
financial condition.
The fourth aspect of the Company's year 2000 analysis involves evaluating the
year 2000 efforts of third parties, including critical suppliers and other
partners with whom the Company has strategic relationships. The Company intends to contacthas
contacted critical suppliers and other strategic relationshipsparties through written and/or telephone
inquiries. Substantially all suppliers and other parties that have responded to
the Company's inquires have indicated they are compliant or will be compliant
before December 31, 1999. The Company is conducting such inquirieswill continue to follow up with existing personnelsuppliers
and doesother parties that have not expect
the costsyet responded or have indicated a current status
of such inquiries to be material.noncompliance. If the Company determines after
conducting the aforementioned survey, that the year 2000 exposure of any
critical suppliers or other strategic relationships could result in material
disruptions to their respective businesses, the Company may develop appropriate
contingency plans. Further, if certain critical third party providers, such as
those supplying outsourced manufacturing,
15
electricity, water, or telecommunications services, experience difficulties
resulting in a material interruption of services to the Company, such
interruption would likely result in a material adverse effect on the Company's
business, results of operations and financial condition.
To date, the Company has not incurred any material expenditure in connection
with identifying or evaluating year 2000 compliance issues. The Company
estimates it will not incur any material levels of expenditure on this issue
during 1998 and 1999 to support its compliance initiatives. Most of these
expenses have been, and in the future are expected to be, related to the
17
opportunity costs of employees evaluating the Company's financial and accounting
software, the current versions of the Company's products, and year 2000
compliance matters generally. The Company believes that it
is unlikely to experience a material adverse impact on its financial condition
or results of operations due to the Company's internal year 2000 compliance
issues. However, since the assessment process is ongoing, year 2000
complications are not fully known, and potential liability issues are not clear,
the full potential impact of the year 2000 on the Company is not known at this
time.
As the Company has recently replaced its fundamental financial and accounting
software, no significant problems are anticipated which would result in either
the delay or the inability to process accounting and financial data. If the
audit of the other software applications used by Company lead to the discovery
of further year 2000 compliance issues, the Company intends to evaluate the need
for one or more contingency plans relating to such issues.
The Company's expectations as to the extent and timeliness of modifications
required in order to achieve year 2000 compliance is a forward-looking statement
subject to risks and uncertainties. Actual results may vary materially as a
result of a number of factors, including, among others, those described in this
paragraph. There can be no assurance however, that the Company will be able to
successfully modify on a timely basis such products, services and systems to
comply with year 2000 requirements, which failure could have a material adverse
effect on the Company's operating results. Further, while the Company believes
that its year 2000 compliance efforts will be completed on a timely basis, and
in advance of the year 2000 date transition, there can be no assurance that
unexpected delays or problems, including the failure to ensure year 2000
compliance by systems or products supplied to the Company by a third party, will
not have an adverse effect on the Company, its financial performance, or the
competitiveness or customer acceptance of its products. Further, the Company's
current understanding of expected costs is subject to change as the project
progresses and does not include potential costs related to actual customer
claims, or the cost of internal software and hardware replaced in the normal
course of business unless such installation has been accelerated to provide
solutions to year 2000 compliance issues.
EUROPEAN MONETARY UNION
On January 1, 1999 eleven of the existing members of the European Union
(the "EU") will join the European Monetary Union (the "EMU"). This will lead,
among many other things, to fundamental changes in the way participating EU
states implement their monetary policies and manage local currency exchange
rates. Ultimately, there will be a single currency within certain countries of
the EU, known as the Euro and one organization, the European Central Bank,
responsible for setting European monetary policy. While some believe that the
change will bring a higher level of competition within Europe and a greater
sense of economic stability within that region, there is no certainty that the
Company's activity in this region will necessarily realize any benefits as a
result of such changes. The Company has reviewed the impact the Euro will have
on its business and whether this will give rise to a need for significant
changes in its' commercial operations or treasury management functions. While it
is uncertain whether there will be any immediate direct benefits from the
planned conversion, the Company believes it is properly prepared to accommodate
any changes deemed necessary after January 1, 1999 without any significant
changes to its current commercial operations, treasury management and management
information systems.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company doesCertain factors which may affect future results
We do not provide financial performance forecasts. The Company'sOur operating results and
financial condition have varied in the past and may in the future vary
significantly depending on a number of factors. Except for the historical
information contained herein,in this report, the matters contained in this report include
forward-looking statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ materially from
those contained in 18
forward-looking statements made in this report and presented elsewhere by
management from time to time.report. Such
factors, among others, may have a material adverse effect upon the Company'sour business,
results of operations and financial condition.
Reliance Upon Strategic RelationshipOur success is substantially dependent upon our strategic relationship with
Microsoft.Microsoft
Microsoft is the leading provider of desktop operating systems. The Company is dependentWe depend
upon the license of certain key technology from Microsoft, including certain source and
object code licenses, and technical support and other materials. The Company issupport. We also dependent on itsdepend upon our strategic
alliance agreement with Microsoft pursuant to which provides for
cooperation in the development of technologies forCitrix and Microsoft have
agreed to cooperate to develop advanced operating systems and the promotion of advancedpromote Windows
application program interfaces. On May 9,
1997, the Company andOur relationship with Microsoft entered into a License, Development and
Marketing Agreement, as amended (the "Development Agreement"), which provides
for the licensing to Microsoft of certain of the Company's multi-user software
enhancements to Microsoft's Windows NT Server and for the cooperation between
the parties for the development of certain future multi-user versions of
Microsoft Windows NT Server, known as the Windows NT Server, Terminal Server
Edition. 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 NT Server, Terminal Server Edition base platform
from a wide variety of computing devices. In June 1998, the Company released its
MetaFrame product, a Company-developed plug-in that implements the Independent
Computing Architecture (ICA(R)) protocol on the new platform, that provides
capabilities similar to those currently offered in the WinFrame product line.
Pursuant to the terms of the Development Agreement, in May 1997 the Company
received an aggregate of $75 million as a non-refundable royalty payment and for
engineering and support services to be rendered by the Company. Under the terms
of the Development Agreement, the Company is entitled to receive payments of an
additional $100 million, in quarterly payments, a portion of which has already
been received. In addition, Microsoft and the Company have agreed to engage in
certain joint marketing efforts to promote use of Windows NT Server-based multi-
user software and the Company's ICA protocol. Additionally, subject to
the termsfollowing risks and uncertainties:
. Competition with Microsoft. NT Terminal Server is, and future product
offerings by Microsoft may be,
16
competitive with our current WinFrame and MetaFrame products, and any future
product offerings by Citrix.
. Termination of Microsoft's Endorsement of the Development Agreement,ICA Protocol. Microsoft has
agreed to endorse only the Company's
ICA protocol as the preferred way to provide multi-user Windows access for
devices other than Windows client devices, until at least November 1999 and the
Company shall be entitled to license its WinFrame technology based on Windows NT
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 NT Server, Terminal Server Edition based
platforms will allow Microsoft to create products that may be competitive with
the Company's current WinFrame and MetaFrame products. Second, as stated above,
Microsoft has agreed to endorse only the Company'sour ICA protocol as the preferred method to provide
multi-user Windows access for devices other than Windows clients until at
least November 1999. Subsequent to November 1999, or before such date upon the occurrence ofNovember 1999 if
certain events contemplated by the Development
Agreement,occur as provided in our development agreement with Microsoft,
it is possible that Microsoft will market or endorse other methods to provide
non-Windows client devices multi-user Windows access.
Third, the
Company's. Dependence on Microsoft for Commercialization. Our ability to successfully
commercialize itsour MetaFrame product will be
dependentdepends on Microsoft's ability to market
and sell its Windows NT Server, Terminal Server Edition products. Finally, thereWe do not have control over Microsoft's
distributors and resellers and, to our knowledge, Microsoft's distributors and
resellers are not obligated to purchase products from Microsoft.
. Product Release Delays. There may be delays in the release and shipment of
future releasesversions of Windows NT Server, Terminal Server Edition.
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, ifServer.
If our relationship with Microsoft (1) develops competitive plug-in products, (2) endorses
other methods to provide non-Windows client devices multi-user Windows access,
(3) is unable to successfully market and sell the Windows NT Server, Terminal
Server Edition products,were terminated or (4) encounters delays in the release and shipment of
future releases of Windows NT Server, Terminal Server Edition, the Company'sadversely affected for
any reason, our business, operating results of operations and financial condition couldwould be
materially adversely affected.
Dependence Upon Broad-Based AcceptanceOur continued growth depends upon broad-based acceptance of our ICA Protocol. The Company
believesprotocol
We believe that itsour success in the markets in which it competeswe compete will depend
upon itsour ability to cause broad-basedmake the ICA protocol a widely accepted standard for
supporting Windows applications. Microsoft includes as a component of NT
Terminal Server its Remote Desktop Protocol (RDP) which has certain of the
capabilities of our ICA protocol, and may offer customers a competitive
solution. We believe that our success is dependent on our ability to enhance
and differentiate our ICA protocol, and foster broad acceptance of the ICA
protocol based on its performance, scalability, reliability and enhanced
features. In addition, our ability to win broad market acceptance of our ICA
protocol will depend upon the degree of success achieved by our strategic
partners in marketing their respective product offerings, product pricing and
customers' assessment of our technical, managerial, service and support
expertise. If another standard emerges or if we otherwise fail to achieve wide
acceptance of the ICA protocol as an emerginga standard for supporting distributed Windows
applications, thereby creating
demand for its server products.
19
Dependence Upon Strategic Relationships.our business, operating results and financial condition could be
materially adversely affected.
The success of our business also depends upon our strategic relationships with
parties other than Microsoft
In addition to itsour relationship with Microsoft, the Company haswe have strategic
relationships with NCD, Tektronix,IBM, Compaq, Wyse and others. The Company is dependent on itsWe depend upon our strategic
partners to successfully incorporatemarket and promote the use of the Company's products
and incorporate our technology into their products and to successfully
market and sell such
products. Competition.If we are unable to maintain our current strategic relationships or
develop additional strategic relationships, or if any of our key strategic
partners are unsuccessful in incorporating our technology into their products or
marketing or selling such products, our business, operating results and
financial condition could be materially adversely affected.
We face significant competition from other technology companies
The markets in which the Company competeswe compete are intensely competitive. Most of theour
competitors and potential competitors, including Microsoft, have significantly
greater financial, technical, sales, and marketing and other resources than the Company. Additionally, theresources. The
announcement of the release and the actual release of products competitive to the Company'swith
our existing and future product lines, such as Microsoft's Windows NT Server, Terminal Server Edition and related
plug-ins,enhancements by Microsoft or third parties, could cause our existing and
potential customers of the Company to postpone or cancel plans to license certain of the
Company's existing and futureour product offerings, whichlines.
This would adversely impact its net revenues,our business, operating results and financial
condition. Further, the
Company'sour
17
ability to market ICA, MetaFrame and other future product offerings willmay be dependent onaffected
by Microsoft's licensing and pricing scheme to allowfor client devices implementing ICA, MetaFrame or any such futureour
product offerings towhich attach to NT Terminal Server.
In addition, alternative products exist for Internet commerce that directly or
indirectly compete with our products. Existing or new products that extend
web site software to provide database access or interactive computing could
materially impact our ability to sell our products in this market. As markets
for our products continue to develop, additional companies, including companies
with significant market presence in the Windowscomputer hardware, software and
networking industries, may enter the markets in which we compete and further
intensify competition. Finally, although we believe that price has historically
been a less significant competitive factor than product performance, reliability
and functionality, we believe that price competition may become more significant
in the future. We may not be able to maintain our historic prices, and any
inability to do so could adversely affect our business, results of operations
and financial condition.
As a result of these and other factors, we may not be able to compete
effectively with current or future competitors, which would have a material
adverse effect on our business, operating results and financial condition.
Our reliance on a few products for a majority of our revenue could adversely
affect our business
We anticipate that our MetaFrame and WinFrame product lines and related
enhancements will constitute the majority of our revenue for the foreseeable
future. The MetaFrame product, when combined with NT Server, Terminal Server, Edition.
Dependenceprovides
capabilities similar to those offered in the WinFrame technology line.
Therefore, our ability to generate revenue from our MetaFrame product will
depend upon market acceptance of NT Terminal Server products. We expect that
revenue from MetaFrame-based products will constitute an increasing percentage
of total revenue in the near future and that revenue from WinFrame-based
products will decrease over time as a percentage of total revenue. We may
experience declines in demand for our products as a result of new competitive
product releases, price competition, lack of success of our strategic partners,
technological change or other factors. In addition, the introduction of
products based on Proprietary Technology.MetaFrame technology may create competition with our WinFrame
product line and may delay or replace orders of either product line. If we are
unable to successfully sell our MetaFrame and WinFrame product lines and related
enhancements, our business, operating results and financial condition would be
materially adversely affected.
Failure to properly manage our growth could adversely affect our business
We have recently experienced rapid growth in the scope of our operations, the
number of our employees and the geographic area of our operations. In addition,
we have completed certain international acquisitions since October 1997. Such
growth and assimilation of operations and personnel of such acquired companies
has placed and may continue to place a significant strain on our managerial,
operational and financial resources. To manage our growth effectively, we must
continue to implement and improve additional management and financial systems
and controls. Our systems, procedures or controls may not be adequate to
support our current or future operations. In addition, we may not be able to
effectively manage this expansion and still achieve the rapid execution
necessary to fully exploit the market opportunity for our products and services
in a timely and cost-effective manner. Our future operating results will also
depend on our ability to manage our expanding product line, expand our sales and
marketing organizations and expand our support organization commensurate with
the increasing base of our installed product. Our failure to properly manage
our growth could adversely affect our business, operating results and financial
condition.
We plan to increase our professional staff during 1999 as we implement sales,
marketing and support and product developments efforts, as well as associated
administrative systems, to support planned growth. As a result of this planned
growth in the size of our staff, we believe that we will require additional
facilities during 1999. Although we believe that the cost
18
of such additional facilities will not significantly impact our financial
position or results of operations, we anticipate that operating expenses will
increase during 1999 as a result of our planned growth in staff. Such an
increase in operating expenses may reduce our income from operations and cash
flows from operating activities in 1999.
Loss of key personnel could materially affect our business
Our future success depends, in large part, upon the services of a number of
key employees. Any officer or employee can terminate his relationship at any
time. The Company relieseffective management of our anticipated growth will depend, in large
part, upon our ability to retain our highly skilled technical, managerial and
marketing personnel, and attract and maintain replacements for and additions to
such personnel in the future. Competition for such personnel is intense and may
affect our ability to successfully attract, assimilate or retain sufficiently
qualified personnel. The loss of one or more of our key personnel could have a
material adverse affect on our business, operating results and financial
condition.
Our success depends upon our ability to protect our proprietary technology
We rely primarily on a combination of copyright, trademark and trade secret
laws, as well as confidentiality procedures and contractual provisions, to
protect itsour proprietary rights. Our efforts to protect our proprietary
technology rights may not be successful. The loss of any material trade secret,
trademark, trade name or copyright could have a material adverse effect on us.
Despite the Company'sour precautions, it may be possible for unauthorized third parties to
copy certain portions of the Company'sour products or to obtain and use information regarded
as proprietary. Additionally,Substantially all of our sales are derived from the licensing
of our products under "shrink wrap" license agreements that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, our ability to protect our proprietary rights may
be affected by the following:
. Differences in International Law. The laws of some foreign countries do not
protect the Company'sour intellectual property to the same extent as do the laws of the
United States and Canada.
There can be no
assurance that third. Third Party Infringement Claims. Third parties will notmay assert infringement
claims against the
Companyus in the future or that any such assertion will notfuture. This may result in costly litigation or
require the Companyus to obtain a license to intellectual property rights of such third
parties. In addition, there can be no assurance that suchSuch licenses willmay not be available on reasonable terms or at all,all.
As a result of these and other factors, we may not be able to compete
effectively with current or future competitors, which would have a material
adverse effect on our business, operating results and financial condition.
If we fail to introduce new products and enhance our existing products to keep
up with rapid technological change, demand for our products may decline
The markets for our products are relatively new and are characterized by:
. rapid technological change;
. evolving industry standards;
. changes in customer requirements; and
. frequent new product introductions and enhancements, including enhancements to
certain key technology licensed from Microsoft.
These market characteristics will require us to continuously enhance our
current products and develop and introduce new products to keep pace with
technological developments and respond to evolving customer requirements.
Additionally, we and
19
others may announce new products, new product enhancements or technologies that
could replace or shorten the life cycle of our existing product offerings.
We believe we will incur additional costs and royalties associated with the
development, licensing or acquisition of new technologies or enhancements to
existing products. This will increase our cost of revenues and operating
expenses. We cannot currently quantify such increase with respect to
transactions that have not occurred. We may use a substantial portion of our
cash and investments to fund these additional costs, resulting in a decrease in
interest income, unless such decrease is offset by cash flows from future
operations.
We may need to hire additional personnel to develop new products, product
enhancements and technologies. If we are unable to add staff and resources,
future enhancement and additional features to our existing or future products
may be delayed, which may have a material adverse effect on our business,
results of operations and financial condition.
If our products contain errors, they may be costly to correct, revenue may be
delayed, we could get sued and our reputation could be harmed
Despite significant testing by us and by current and potential customers, our
products may contain errors after commencement of commercial shipments. If
errors are discovered, we may not be able to successfully correct them in a
timely manner or at all. In addition, we may need to make significant
expenditures of capital resources in order to eliminate errors and failures.
Errors and failures in our products could result in loss of or delay in market
acceptance of our products and could damage our reputation. If one or more of
our products fails, a customer may assert warranty and other claims for
substantial damages against us. The occurrence or discovery of these types of
errors or failures could have a material adverse effect on the Company'sour business,
operating results of operations and financial condition.
Product Concentration. The Company anticipates that its MetaFrameOur success depends on our ability to expand and WinFrame product lines will constitute a majority of its revenuesmanage distribution channels
and major distributors
To increase our sales, we must further expand and manage our indirect
distribution channels, including OEMs, distributors, resellers, system
integrators and service providers. We rely significantly on independent
distributors and resellers for the foreseeable future. The Company's abilitymarketing and distribution of our products.
We do not control our distributors and resellers. Additionally, our
distributors and resellers as well as our other indirect distribution channels
are not obligated to generate revenuepurchase products from its
MetaFrame product will be highly dependentus and may also represent other
lines of products. Our inability to expand and manage our relationship with our
partners, the inability or unwillingness of our partners to effectively market
and sell our products or the loss of existing partnerships could have a material
adverse effect on market acceptance of Windows NT
Server, Terminal Server Edition products,our business, operating results and financial condition. We
intend to leverage our relationships with which its product is intendedhardware and software vendors and
systems integrators to be combinedencourage them to provide capabilities similar to those currently offered in the
WinFrame technology line. The Company expects that revenue from the
MetaFrame-based products will constitute an increasing percentage of total
revenue in the foreseeable future and that the revenue from WinFrame-based
products will decrease over time as a percentage of total revenue. 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 changerecommend or other factors.distribute our products.
In addition, the introductionan integral part of products based upon the MetaFrame technology may
be competitive with the Company's WinFrame product lineour strategy is to expand our direct sales
force and may delay or replace
orders of either technology.
Management of Growthadd third-party distributors both domestically and Anticipated Operating Expenses. The Company has
recently experienced rapid growth in the scope of its operations, the number of
its employees,internationally.
We are currently investing, and the geographic area of its operations. In addition, the
Company has completed certain international acquisitions since October 1997, and
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 requiredintend to continue to implement and improve additional
management and financial systems and controls, andinvest, significant
resources to expand, train and manage
its employee base. Although the Company believes that it has made adequate
allowances for the costs and risks associated withdevelop 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 opportunity 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
20
market window for the Company's products and services in a timely and cost-
effective manner, the Company'schannels, which could reduce our profits.
Our business results of operations 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 and 1999 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 and 1999. 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 and 1999.
Year 2000.affected by unexpected year 2000 problems
Until recently, many computer programs were written using two digits rather
than four digits to define the applicable year in the twentieth century. Such
software may recognize a date using "00" as the year 1900 rather than the year
2000. The consequences of this issue may include systems failures and business
process interruption to the extent companies fail to upgrade, replace or
otherwise address year 2000 problems. The year 2000 problem may also result in
additional business and competitive differentiation. Aside from the well-known
calculation problems with the use of 2-digit date formats as the year changes
from 1999 to 2000, the year 2000 is a special case leap year and in many
organizations using older technology, dates
20
were used for special programmatic functions. As a result, significant
uncertainty exists in the software industry concerning the potential impact of
the year 2000 problem. The Company believes
that it hasWe believe we have four general areas of potential
exposure with respect to the year 2000 problem:
(1) its. our own software products;
(2) its. our internal information systems;
(3). our computer hardware and other equipment related systems; and
(4). the effects of compliance efforts by third party compliance efforts. The Company hasparties, including our partners,
suppliers and vendors.
While we believe that the current versions of our WinFrame and MetaFrame
products are capable of storing four-digit year data allowing applications to
differentiate between dates from the 1900s and the year 2000 and beyond, the
potential incompatibility with two-digit application programs may limit our
sales of product in those situations. There can be no assurance that our
products will not be integrated by us or our customers with, or otherwise
interact with, non-year 2000 compliant software or other products which may
malfunction and expose us to warranty and other claims from our customers or
other third parties.
We have not yet completed itsour assessment of the Yearyear 2000 compliance issues with
respect to all of these areas. Since the year 2000 complications are not fully
known, there can be no
assurance that potential year 2000 problems, will not result in the Company's
business, resultsincluding changing purchasing patterns of
operations and financial condition beingcustomers impacted by year 2000 issues, could materially adversely affected.
Information Systems 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 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.
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 MetaFrame 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
21
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 enhancements and
additional features to its existing or future products may be delayed, which may
have a material adverse effect on the Company'saffect our
business, results of operations and financial condition.
Potential for Undetected Errors. Despite significant testing by the Company
and by current and potential customers, errorsIf our growth rate does not continue our financial condition could be affected
Our revenue growth rate in 1999 may not be foundapproach the levels attained in new products
until after commencement1998,
1997 and 1996. Our growth during those three years was largely attributable to
the introduction of commercial shipments. Additionally, third party
products, upon whichMetaFrame in mid-1998 and WinFrame in late 1995. To the
Company's productsextent our revenue growth continues, we believe that our cost of revenues and
certain operating expenses will also increase. A significant portion of our
expenses, such as employee compensation and rent, are dependent, may contain defects,
which could reducerelatively fixed in the
performance of the Company's products or render them
useless.
Reliance Upon Indirect Distribution Channelsshort term. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. Our income from operations 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.
Revenue Recognition Process. The Companyand investing activities may decrease as a percentage
of revenues in 1999. If we are unable to continue to manage our growth
efficiently, our business, financial condition and results of operations could
be materially adversely affected.
Our quarterly operating results may fluctuate
Our quarterly operating results have in the past varied and may in the future
vary significantly depending on a number of factors, including:
. the success of our MetaFrame products;
. the effects of acquisitions or licenses of additional technology;
. the size, timing and recognition of revenue from significant orders;
. increased competition;
. changes in our pricing policies or those of our competitors, including
Microsoft;
. new product introductions or enhancements by competitors;
. delays in the introduction of products or product enhancements by us or our
competitors;
. customer order deferrals in anticipation of upgrades and new products;
. market acceptance of new products and technologies offered by us;
. changes in operating expenses, including for the addition of personnel;
. foreign currency exchange rates; and
. general economic conditions.
21
We continually re-evaluates itsre-evaluate our programs, including specific license terms and
conditions, to market its variousour current and future products and services. The CompanyWe may
implement new programs, which may include, among other things,including offering specified and unspecified
enhancements to itsour current and future product lines. RevenuesWe may recognize 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 asand other 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 Statement of Position
(SOP) 97-2 will impact the timing of the Company'sour recognition of revenues and
related expenses associated with itsour products, related enhancements and
services. BecauseAs a result 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
Companythese factors, we currently cannot currently quantify the impact
of suchthe re-evaluation of our programs on itsour 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 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 the Company
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 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 and
22
political 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 the current year may not
approach the levels attained in 1997 and 1996, which were high, due primarily to
the increased market acceptance of WinFrame software during that period.
However, to the extent the Company's revenue growth continues, the Company
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 the current year.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have in the past varied and may in the future vary
significantly depending on factors such as the success of the Company's WinFrame
or MetaFrame products, the size, timing and recognition of revenue from
significant orders, increased competition, the proportion of revenues derived
from distributors, OEMs and other channels, changes in the Company's pricing
policies or those of its competitors, the financial stability of major
customers, problems caused by year 2000 complications, new product introductions
or enhancements by competitors and partners, delays in the introduction of
products or product enhancements by the Company or by competitors and partners,
customer order deferrals in anticipation of upgrades and new products, market
acceptance of new products, or new versions of existing products, the timing and
nature of sales and marketing expenses (such as trade shows and other
promotions), other changes in operating expenses, changes in the allocation of
amounts paid for purchases of businesses and licensing of technology to in-
process research and development, personnel changes (including the addition of
personnel), foreign currency exchange rates and general economic conditions.
The Company operatesWe operate with little order backlog because itsour software products typically
are shipped shortly after orders are received. In addition, like many systems
level software companies, the Company has often recognizedwe recognize a substantial portion of itsour revenues in
the last month of a quarter, with these revenues frequently concentrated in the
last weeks or days of the quarter. As a result,
the product revenues in any quarter
are substantially dependent on orders booked and shipped in that quarter, and
revenues for any future quarter are not predictable with any degree of
certainty. Any significant deferral of purchases
of the Company's products could have a material adverse effect on the Company's
business, results of operations and financial condition in any particular
quarter, and to the extent significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected. Royalty
and license revenues are impacted by fluctuations in OEM licensing activity and
certain end user licensing and deployment activity from quarter to quarter
because initial license fees generally are recognized upon customer acceptance
and continuing royalty and subsequent ongoing license revenues are recognized
when the amount of such licensing activity can be reasonably determined. The
Company's expense levels are based, in part, on its expectations as to future
orders and sales, and the Company may be unable to adjust spending in a timely
manner to compensate for any sales shortfall. If sales are below expectations,
operating results are likely to be adversely affected. Net income may be
disproportionately affected by a reduction in sales because a significant
portion of the Company's expenses do not vary with revenues. The CompanyWe may also choose to reduce prices or increase spending in response
to competition or to pursue new market opportunities. In particular, if newNew competitors,
technological advances by existing competitors or other competitive factors could result in lower revenues and may
require us to incur additional expenses, which, in turn, would materially
adversely affect our operating margins in the future.
Insufficient reserves for product returns and price reductions could adversely
affect us
We provide certain of our distributors with product return rights for stock
balancing or limited product evaluation. We also provide certain of our
distributors with price protection rights. To cover these product returns and
price protection rights, we have established reserves based on our evaluation of
historical trends and current circumstances. These reserves may not prove to be
sufficient in the future, in which case our business, operating results and
financial condition could be adversely affected.
Our success depends on our ability to expand and manage our international
operations
Our continued growth and profitability will require further expansion of our
international operations. To successfully expand international sales, we must
establish additional foreign operations, hire additional personnel and recruit
additional international resellers. Such international operations are subject
to certain risks, such as:
. difficulties in staffing and managing foreign operations;
. fluctuations in foreign currency exchange rates;
. compliance with foreign regulatory and market requirements;
. variability of foreign economic and political conditions;
. changing restrictions imposed by regulatory requirements, tariffs or other
trade barriers or by United States export laws;
. costs of localizing products and marketing such products in foreign countries;
. longer accounts receivable payment cycles;
. potentially adverse tax consequences, including restrictions on repatriation
of earnings;
. difficulties in protecting intellectual property; and
. burdens of complying with a wide variety of foreign laws.
22
Economic and market conditions may affect demand for our products
The demand for our 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. If capital
spending levels or general economic conditions are affected, our business,
financial condition and results of operations could be materially adversely
affected.
Possible volatility of our common stock price
The market price for our common stock has been volatile and has fluctuated
significantly to date. The trading price of our common stock is likely to
continue to be highly volatile and subject to wide fluctuations in response to
factors such as actual or anticipated variations in operating and financial
results, anticipated revenue or earnings growth, analyst reports or
recommendations and other events or factors, many of which are beyond our
control. In addition, the stock market in general, and The Nasdaq National
Market and the market for software companies and technology companies in
particular, have experienced extreme price and volume fluctuations. These broad
market and industry factors may materially and adversely affect the market price
of the common stock, regardless of our actual operating performance. In the
past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
such companies. Such litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on our business, financial condition and results of
operations.
A re-evaluation of our revenue recognition process could affect our future
results of operations
We continually re-evaluate our programs, including specific license terms and
conditions, to market our current and future products and services. We may
implement new programs, including offering specified and unspecified
enhancements to our current and future product lines. We may recognize revenues
associated with such enhancements after the initial shipment or licensing of the
software product or over the product's life cycle. The timing of the
implementation of such programs, the timing of the release of such enhancements
and other factors will impact the timing of our recognition of revenues and
related expenses associated with our products, related enhancements and
services. As a result of these factors, we currently cannot quantify the impact
of the re-evaluation of our programs on our business, results of operations and
financial condition.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk includes "forward-
looking statements" that involve risks and uncertainties. Actual results could
differ materially from those projected in the forward-looking statements. The
Company does not use derivative financial instruments for speculative or trading
purposes.
The Company maintains a non-trading investment portfolio of investment grade,
highly liquid, debt securities which limits the amount of credit exposure to any
one issue, issuer, or type of instrument. The securities in the Company's
investment portfolio are not leveraged and are generally classified as available
for sale and therefore are subject to interest rate risk. The Company does not
currently hedge interest rate exposure. The modeling technique used measures the
change in fair values arising from an immediate hypothetical shift in market
interest rates and assumes ending fair values include principal plus accrued
interest, dividends and reinvestment income. If market interest rates were to
increase by 100 basis points from December 31, 1998 levels, the fair value of
the portfolio would decline by approximately $1.1 million.
24
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 22, 1999, the Company sold $850 million aggregate principal amount at
maturity of its zero coupon convertible subordinated debentures due March 22,
2019 (the "debentures") in a private placement pursuant to Section 4(2) of the
Securities Act of 1933 at a purchase price of $354.71 per $1,000 principal
amount at maturity of the debentures resulting in net proceeds to the Company of
$292.5 million. The initial purchaser, Credit Suisse First Boston Corporation,
purchased the debentures at 97% of the issue price and resold the debentures in
private resale transactions to qualified institutional buyers pursuant to Rule
144A of the Exchange Act of 1934. The debentures are convertible at the option
of the security holder at any time on or before the maturity date at a
conversion rate of 7.0306 shares of the Company's common stock for each
debenture, subject to adjustment in certain events. The Company may redeem the
debentures on or after March 22, 2004. Holders may require the Company to
invest significantly greater resourcesrepurchase the debentures at set redemption prices (issue price plus accrued
original discount) beginning on March 22, 2004 or earlier upon a change in
research and
development efforts, the Company's operating margins in the future may be
adversely affected.
23
Uncertainty as to IPRD Valuation. The Company has recently been made aware
of a letter ("SEC Letter"), dated September 1998, from the Chief Accountant of
the Securities and Exchange Commission ("SEC") to the chairman of the AICPA's
SEC Regulations Committee, suggesting that this committee provide additional
guidance concerning accounting for in-process research and development ("IPRD")
and further offering certain staff views in this area. The Company is also aware
of a response letter from the chairman of the SEC Regulations Committee
indicating that a broader-based working group ("AICPA Working Group"), under the
auspices of the AICPA, will be formed to address the accounting, auditing and
valuation issues raised in the SEC letter.
The Company completed the purchase of business combinations and technology
acquisitions involving Datapac, EPiCON, Insignia, APM/Digitivity and VDOnet,
in which a portion of the purchase price was allocated to IPRD, prior to the
date of the SEC letter. The Company believes the preliminary purchase price
allocations recorded in connection with these acquisitions, and related
amortization charges, are in accordance with widely recognized appraisal
practices and generally accepted accounting principles. To date neither the
AICPA Working Group nor the SEC has issued any final or transitional guidance.
However, the Company is currently reviewing the potential effects of applying
the SEC staff's views on the allocation of purchase price to in-process research
and development. Although the impact resulting from the ultimate resolution of
this matter is currently not determinable, there is a risk that there may be a
material reduction in the amount of related non-cash charges reflected in the
Company's financial results for the nine months ended September 30, 1998 and the
year ended December 31, 1997, which in turn may materially affect future results
of operations through increased amortization expense.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Due to all of
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
24
PART II: OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
On December 8, 1995, the Company's registration statement on Form S-1
(File No. 33-98542) became effective. The net proceeds from the
offering were $38,892,728. The Company utilized the remaining proceeds
in July 1998 as part of the consideration to acquire APM Limited on the
terms disclosed in more detail above. None of the parties receiving
such payments were officers, directors, 10% or greater stockholders of
the Company, or persons affiliated with the Company or with the
officers, directors, or 10% or greater stockholderscontrol of the Company. Item 5. Other Information
Proposals of stockholders intendedThe Company will use the net proceeds for inclusion in the proxy statement
to be furnished to all stockholders entitled to vote at the next annual
meeting of stockholders of the Company must be received at the
Company's principal executive offices not later than December 4, 1998.
The deadline for providing timely notice to the Company of matters that
stockholders otherwise desire to introduce at the next annual meeting
of stockholders of the Company is February 17, 1999.
Itemworking
capital and other general corporate purposes.
ITEM 6. Exhibits and Reports on FormEXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits, which are filed with thethis report as set forth on the Exhibit
Index appearing on page 27 of this report, and are incorporated herein by this
reference.
(b) 1. A report on Form 8-K was filed with the Securities and Exchange
Commission on July 15, 1998March 24, 1999 with respect to:
Item 25 -- Acquisition or Disposition of Assets.Other Events. To disclose the consummationprivate placement of $850 million
aggregate amount at maturity of zero coupon convertible subordinated
debentures due March 22, 2019 pursuant to Section 4(2) of the acquisitionSecurities
Act of all1933.
2. A report on Form 8-K was filed with the Securities and Exchange
Commission on March 26, 1999 with respect to:
Item 5 -- Other Events. To disclose the two-for one stock split in the
form of a one-for-one stock dividend on March 25, 1999 paid to stockholders
of record on March 17, 1999.
3. A report on Form 8-K was filed with the Securities and Exchange
Commission on April 23, 1999 with respect to:
Item 5 -- Other Events. To disclose the authorization of a stock
repurchase program to repurchase up to $200 million of the outstanding
securities of APM Limited on June 30, 1998.Company's common
stock.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on this 16th14th day of November 1998.May 1999.
CITRIX SYSTEMS, INC.
By: /s/ ROGER W. ROBERTS
--------------------
Roger W. RobertsMark B. Templeton
--------------------------------------
Mark B. Templeton
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ JAMESJames J. FELCYN, JR.
-------------------------Felcyn, Jr.
--------------------------------------
James J. Felcyn, Jr.
Vice-President, of Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
By: /s/ MARC-ANDRE BOISSEAU
--------------------------
Marc-Andre Boisseau
--------------------------------------
Marc-Andre Boisseau
Vice-President, Controller
(Principal Accounting Officer)
26
EXHIBIT INDEX
Page Number
-----------
3 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Citrix Systems, Inc. 28
4 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Citrix Systems, Inc. (filed as part of
Exhibit 3) 28
27.1 Financial Data Schedule 30
27.2 Financial Data Schedule 31
Exhibit Index
1.1 Purchase Agreement by and between the Company and Credit Suisse
First Boston Corporation dated as of March 16, 1999.
4.1, 10.1 Indenture by and between the Company and State Street Bank and
Trust Company as Trustee dated as of March 22, 1999, including
the form of Debenture.
4.2 Form of Debenture (included in Exhibit 4.1)
4.3, 10.2 Registration Rights Agreement by and between the Company and
Credit Suisse First Boston Corporation dated as of March 22,
1999.
27.1 Financial Data Schedule
27