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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 75-2275152
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6400 NW 6TH WAY 33309
FORT LAUDERDALE, FLORIDA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 10, 2000 (based on the last reported sale price on The
Nasdaq National Market as of such date) was $19,792,872,803. As of March 10,
2000 there were 184,119,747 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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ITEM 1. BUSINESS
GENERAL
Citrix Systems, Inc. ("Citrix" or the "Company") is a leading supplier of
application server software and services that enable the effective and efficient
enterprise-wide deployment and management of applications, including those
designed for Microsoft Corporation ("Microsoft") Windows(R) operating systems.
The Company's products permit organizations to deploy and manage applications
without regard to location, network connection, or type of client hardware
platform. These products utilize the Company's Independent Computing
Architecture ("ICA(R)"), which allows an application's graphical user interface
to be displayed on a client while its logic is executed on a server, thereby
providing a manageable and bandwidth-efficient solution. The Company was
incorporated in April 1989, and shipped its initial products in 1991.
INDUSTRY BACKGROUND
New information technologies and the Internet have enabled enterprises to
provide their employees with broad access to business-critical information,
including sales, technical, human resources, vendor and supplier information.
Because of their many diverse end-user requirements, enterprises have made
significant investments in information systems infrastructure, frequently
incorporating a variety of software operating environments, computing platforms
and communications protocols. Business-critical enterprise applications and
personal productivity tools typically have been supplied by a variety of
vendors, often resulting in incompatible systems and applications within and
among company locations. As a result of this proliferation of technology, demand
has increased for systems that offer users a standard interface, transparent
communications and the ability to deliver enterprise and personal productivity
applications to local and remote enterprise users. Organizations seeking to
broadly deploy applications are faced with a diverse set of challenges,
including:
- Internet and eBusiness Initiatives. Although there has been global
adoption of the Internet by enterprises and application service providers
("ASPs"), these organizations lack the ability to rapidly integrate
32-bit Windows applications into standard Web browsers.
- Platform Diversity. In addition to Microsoft Windows operating systems,
the preferred environment for enterprise applications, desktop-computing
systems within an enterprise may include DOS systems, UNIX(R)
workstations, X-Terminals, Macintosh systems and OS/2 workstations. These
systems typically do not support 32-bit Windows applications.
- Client Diversity. Certain organizations require simpler, relatively
low-cost devices, such as personal digital assistants ("PDAs"),
information kiosks and fixed function terminals for certain enterprise
applications, but these devices currently cannot be effectively utilized
because full Windows support is generally not available.
- Remote Users. The diversity of network connection types, protocols and
transmission speeds limit the ability of organizations to deploy Windows,
Java(TM) and web-based applications on a cost-effective and efficient
basis among remote users such as mobile workers, telecommuters and branch
office personnel.
- Extended Enterprise. The extension of enterprise information systems to
suppliers, distributors, customers and prospects creates Windows
application deployment issues that are outside the control of information
systems managers, such as the quality and security of the network
connection, the client platform involved and the technical expertise of
the external user.
The Company believes that these challenges have impeded effective
deployment of enterprise applications to many essential user communities.
THE CITRIX SOLUTION
Citrix develops, markets, sells and supports innovative client and
application server software that enables the effective and efficient
enterprise-wide deployment and management of Windows business applications. The
Company's Windows Application Servers and Management Services Products permit
organizations to
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deploy and manage Windows applications without regard to location or type of
client hardware platforms. These products operate by executing the Windows
applications on a multi-user Windows NT server and provide end-users access to
the server from a variety of client platforms through the Company's ICA
protocol. This approach minimizes the memory and processing requirements of the
client system, resulting in a highly scaleable, bandwidth-efficient solution for
deployment and management of enterprise Windows applications across a range of
platforms and network environments.
The Company's products enable the broad deployment of Windows applications
in a variety of environments, including:
- The Internet, accessed through widely-available browser technology;
- Emerging information appliances, such as hand-held wireless devices,
PDAs, information kiosks, Windows-based terminals and network computers;
- Low-bandwidth connections, such as dial-up, wide area networks ("WAN")
and wireless;
- Intel and non-Intel based platforms, such as 486 and Pentium computers
and laptops which are not capable of running the applications locally,
UNIX workstations, Java applications, X-Terminals and Macintosh systems.
To address deployment in these diverse environments, the Company has
developed two key technologies: (i) ICA and (ii) multi-user Windows NT
extensions developed under a source code license from Microsoft.
ICA. The Company's ICA technology enables the separation of an
application's graphical user interface from the application logic, allowing the
user interface to be displayed on a client while the application logic itself is
executed on a server. This distributed architecture allows 16- and 32-bit
Windows, Java or UNIX applications to run remotely over a wide range of
connection speeds, including low-bandwidth connections.
Multi-User Windows NT Extensions. The Company's multi-user Windows NT
extensions allow multiple users to share an application server, with each user
receiving a "virtual" Windows environment through a dedicated ICA session. The
systems management and security extensions are fully integrated with the
standard Windows NT administrative features, allowing for consistent and
integrated multi-user server management facilities. These extensions were
developed under source code license and strategic alliance agreements with
Microsoft and licensed back to Microsoft under the terms of a development
agreement with Microsoft as described in Item 7.
PRODUCTS
The Company's products consist of the following:
Windows Application Servers. The Windows Application Servers product line
consists primarily of MetaFrame(TM) and WinFrame(R) products. MetaFrame software
is an enhancement to Microsoft Windows NT Server 4.0, Terminal Server Edition
("NT Terminal Server") and Windows 2000 server products, which Microsoft
launched in February 2000. MetaFrame is system software that incorporates
Citrix's ICA protocol and extends NT Terminal Server or Windows 2000 with
additional client and server functionality, including support for heterogeneous
computing environments, enterprise-class end-to-end management and the ability
to easily deploy applications via the Internet. The Company's MetaFrame
software, in conjunction with NT Terminal Server and/or Windows 2000, delivers a
comprehensive application server software computing solution for the entire
enterprise. The MetaFrame product line enables organizations to better deploy,
manage and access applications across the extended enterprise to a variety of
client devices, operating platforms or network connections, including low
bandwidth environments. WinFrame is Windows application server software based on
Windows NT 3.51 that allows customers to deploy advanced Windows applications
remotely, provide Windows applications to a broad array of client platforms and
publish enterprise applications on a corporate intranet. The WinFrame product
family consists of a version targeted for the corporate enterprise and a version
targeted at departmental or workgroup environments.
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The Company's products enable the deployment and management of Windows
business applications in large-scale Windows, non-Windows and heterogeneous
environments. MetaFrame and WinFrame software incorporate the Company's ICA
technology, which allows for the deployment in a bandwidth-efficient manner of
enterprise applications with the necessary scalability, performance and
reliability. These deployments often involve complex applications running on
multiple servers and supporting numerous clients. In addition, the Company
offers additional user license packs to increase the number of users who can
access Windows Application Servers software.
MetaFrame and WinFrame first shipped in June 1998 and August 1995,
respectively. Windows Application Servers constituted approximately 74% of the
Company's revenues in 1999, 69% in 1998, and 67% in 1997. Sales of MetaFrame
product line accounted for approximately 46% of the Company's revenues in 1999
and 22% in 1998. Sales of WinFrame product line accounted for approximately 4%,
29% and 49% of the Company's revenues in 1999, 1998 and 1997, respectively.
Management Services Products. Management Services Products consist of
enhancements to the Windows Application Servers product line, which incorporates
sophisticated management tools into the MetaFrame and WinFrame product lines.
The management tools include application publishing services, help desk support
features, support for desktop peripherals and other features which permit the
centralized management and support of server-based applications. The Company
markets the following Management Services Products:
- Load Balancing Services. The Company's Load Balancing system provides
true application-based load balancing and enterprise scalability.
- Resource Management Services. The Company's Resource Management system
provides the means to monitor and manage critical system resources.
- Installation Management Services. The Company's Installation Management
Services provides the means to easily package applications for
installation on MetaFrame servers across the enterprise.
- UNIX Integration Services. The Company's UNIX Integration Services
provides X11 connectivity to Citrix MetaFrame and WinFrame Servers for
UNIX-based desktops and terminals.
- Secure ICA. The Company's Secure ICA system option provides 40-, 56- and
128-bit encryption for client access to MetaFrame and WinFrame
installations.
Collectively, these products accounted for approximately 10% of the
Company's revenues in 1999, 5% in 1998 and 2% in 1997.
Computing Appliances Products. The Company licenses Windows Application
Servers clients and servers to manufacturers of computing appliances who add
value to these products, and in some cases, remarket these products under their
own brand names. Computing Appliances Products accounted for approximately 2% of
the Company's revenues in 1999, 9% in 1998 and 19% in 1997.
The Citrix Solution can be applied in numerous computing situations, such
as:
Remote Computing. The Company's products are used to deploy applications
across the enterprise whose scale, performance, reliability and security
requirements are more demanding than those associated with simple remote access.
The remote computing market includes dial-in remote access for large field
workforces and branch office locations and deployment of applications over an
enterprise WAN. Without the use of MetaFrame/NT Terminal Server or WinFrame
software, remote deployment of these applications can be slow and expensive
because LAN applications typically require a substantial amount of memory and
fast processors on the desktop and relatively high-speed communication
bandwidth.
Web Computing. As use of the Internet and corporate intranets continues to
increase, companies often need to integrate web technologies and Windows
applications. The Company's MetaFrame or WinFrame application server software,
when used in conjunction with a web server, provides Internet and intranet
access to standard and custom developed Windows applications. For example, using
the Company's products, an
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organization could add secure interactive access to an application directly from
a web page without developing any new programs or changing the existing
application program or database.
Terminals. Citrix has licensed its ICA technology to companies such as
IBM, Acer, Sun, QNX, Wyse Technology and Boundless Technologies to enable the
development of low-cost terminals. In addition, the Company intends to continue
to develop strategic relationships and work with key strategic partners to
deploy Windows applications on point of sale terminals and information kiosks.
The Company believes that its line of application server products, when coupled
with these new devices, will provide an effective alternative to character-based
implementations and will capitalize on existing Windows applications, tools and
development facilities.
Hand-held PCs, PDAs and Information Appliances. Many device manufacturers,
including Motorola, Sharp, Fujitsu, Hitachi, Hewlett Packard, and Symbol
Technologies, are shipping low cost portable devices that offer features such as
extended battery life and wireless connectivity to remote servers. However, the
latest generation of Windows applications and Windows development tools require
substantial RAM, processing power and communications bandwidth for adequate
performance, which may limit the functionality of these wireless devices. The
Company believes that incorporating the Company's technology into these devices
will enable them to more effectively utilize the latest generation of Windows
applications. To date, Citrix has licensed technology to Motorola, IBM, Sharp,
Symbol Technologies, Telxon Corporation, Psion Software PLC and others for this
purpose.
UNIX, X-Terminal, DOS and Macintosh Support for Windows. Windows 95 and 98
caused major changes in the Windows application software market at the time they
were introduced. As independent software vendors moved to develop applications
that capitalized on the new features of the Windows 95 and 98 operating systems
organizations upgraded client systems in order to run these applications.
However, many organizations employed a heterogeneous mix of computing platforms,
including DOS systems, Windows 3.x systems, UNIX workstations, Java devices,
X-Terminals and Macintosh computers, each of which is incapable of running such
applications without additional hardware or software. Citrix's family of
products can deliver Windows 32-bit applications, running on the server, to most
types of network-attached client systems, including DOS, Windows 3.x, Windows
for Workgroups, Windows 95 and 98, Windows NT, Windows CE, OS/2, UNIX, Java and
Macintosh systems.
TARGET MARKETS
Corporate Customers. The Company's primary market for its products and
services is large and medium-sized enterprises that require the ability to
deploy, manage, and access business applications across the extended enterprise.
The Company's products and technology extend the functionality of the operating
system by providing enterprise application management for increased scalability,
deployment and simplified application support, Web-enablement of applications,
and universal application access to users.
Application Service Providers. The rising cost of licensing and the
complexity of systems administration have given rise to ASPs. ASPs function as
virtual "computing utility companies" whereby businesses or consumers can access
applications from a central location. The ability of ASPs to rapidly deliver
such applications over the Internet and other networks, wired to wireless, is
limited by bandwidth requirements, user device capabilities, and a system that
is scalable, reliable and secure. The Company's products and technologies allow
ASPs to deliver the largest number of applications to the broadest array of
computing devices with minimum bandwidth requirements. The advanced
manageability and security features of the Company's products and technologies
enable ASPs to meet the demands for scalability, reliability and security.
STRATEGIC RELATIONSHIPS
The Company has entered into a number of strategic relationships to develop
its existing and future product lines, develop markets for the application of
its technology and broaden deployment and acceptance of ICA as an emerging
industry standard technology for distributed Windows applications.
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Microsoft. Since inception, the Company has had a number of license
agreements with Microsoft, including licenses relating to Microsoft OS/2,
Windows 3.x, Windows for Workgroups, Windows NT, Windows CE and Internet
Explorer. These agreements have provided access to certain Microsoft source and
object code, technical support and other materials. In addition, the Company is
permitted to license and distribute Microsoft Windows NT 3.51 server software as
a part of its WinFrame line of products, pursuant to which the Company pays
royalties to Microsoft. The license agreements had an initial term that expired
in September 1994 and was subsequently extended until September 2001. In July
1996, the Company entered into a license, development and marketing agreement
with Microsoft relating to the inclusion of ICA as an embedded component in
future versions of Windows 95, Windows 98, Windows NT, Windows 2000 and Internet
Explorer for Windows. Pursuant to this agreement, the Company licenses its ICA
technology to Microsoft, royalty-free, for inclusion in the above Microsoft
Windows family of products.
In May 1997, the Company entered into a five year joint license,
development and marketing agreement with Microsoft, as amended (the "Development
Agreement"), pursuant to which the Company licensed its multi-user Windows NT
extensions to Microsoft for inclusion in future versions of Windows NT server
software. Pursuant to the Development Agreement, the Company's multi-user
Windows NT extensions technology was incorporated into Microsoft's NT Terminal
Server, which was released in July 1998. Additionally, Microsoft's obligation to
endorse only the Company's ICA protocol as the preferred way to provide
multi-user Windows access for devices other than Windows client devices expired
in November 1999. Microsoft may now market or endorse other methods to provide
multi-user Windows access to non-Windows client devices. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
Additional Strategic Relationships. During 1999, the Company entered into
its 100th ICA license agreement. Currently, more than 200 different devices
incorporate Citrix ICA, ranging from Linux terminals to information appliances,
such as wireless phones and handheld devices. ICA licensees include IBM, Compaq,
Hewlett Packard, Motorola, Samsung, Hitachi and Sharp, among others.
RESEARCH AND DEVELOPMENT
The Company focuses its research and development efforts on developing new
products and core technologies for its markets and further enhancing the
functionality, reliability, performance and flexibility of existing products.
The Company solicits extensive input concerning product development from users,
both directly and indirectly through its channel distributors.
The Company believes that its software development team and core
technologies represent a significant competitive advantage for the Company. The
software development team includes a number of key members from the engineering
team that developed the original version of OS/2 at IBM. This team has been
involved in the development of system software products utilizing Windows NT
technology and UNIX.
During 1999, 1998 and 1997, the Company incurred research and development
expenses of approximately $37.4 million, $22.9 million and $6.9 million,
respectively. The Company also recorded charges of approximately $2.3 million,
$18.4 million and $4.0 million during the years 1999, 1998 and 1997,
respectively, for acquired in-process research and development that had not yet
reached technological feasibility and had no alternative future use.
SALES, MARKETING AND SUPPORT
Citrix markets its products through multiple indirect channels worldwide,
including distributors, value-added resellers, system integrators and OEM
licensees, as well as through a direct sales force. Citrix provides training and
certification to integrators, value-added resellers and consultants for a
full-range of MetaFrame-and WinFrame-based application deployment solutions and
services through its Citrix Solutions Network(TM) ("CSN") program.
As of December 31, 1999, the Company had sales and marketing relationships
with approximately 7,200 organizations around the world. The Company had
relationships with seven national (domestic) distributors,
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approximately 50 CSN Authorized Platinum Solutions Providers, 1,000 CSN
Authorized Gold Solutions Providers and 2,800 CSN Authorized Silver Solutions
Providers. Internationally, the Company had relationships with approximately 80
distributors and 3,260 CSN Providers. A number of the Company's strategic
partners and OEM licensees provide additional indirect sales channels for Citrix
products under either a Citrix brand or private brand name.
In September 1998, Citrix officially launched the Citrix Business
Alliance(TM) ("CBA"), a coalition of industry-leading companies from across the
technology spectrum who work closely with Citrix to design and market
complementary solutions for Citrix and CBA customers. By the end of 1999, CBA
membership included over 430 members including Apple Computer, Inc., BMC
Software, Inc., Compaq Computer Corporation, Data General (a division of EMC
Corporation), Hewlett Packard Company, IBM Corporation, JD Edwards, Lotus
Development Corporation, National Semiconductor Corporation, Novell, Inc.,
PeopleSoft, Inc., Progress Software and SAP AG.
In September 1999, Citrix launched the Citrix Developer Network ("CDN"), a
development community focused on Citrix application server software technology
to promote an open exchange of technical knowledge and information. This program
emphasizes the commitment that Citrix has to delivering tools that empower
technical relationships and integration with Citrix technology. By the end of
1999, CDN membership had grown to over 7,700 members. CDN membership consists
primarily of independent software vendors, system integrators, corporate IT
departments, resellers and consultants.
During 1999, Citrix established a strategic Global Consulting Partnering
program to develop alliances with several of the "Big 5" accounting and
consulting firms and other global and regional consulting firms. Partnering with
Citrix gives these consulting firms new opportunities to extend their reach to
existing and new Citrix customers. Citrix works closely with these consulting
companies to provide customers with tangible business improvements through
application server software and services.
Citrix's sales and marketing organization actively supports its
distributors and resellers. The Company's marketing department provides
training, sales event support, sales collateral, advertising, direct mail and
public relations coverage to its indirect channels to aid in market development
and in attracting new customers. The Company's sales organization consists of
field-based systems sales engineers and corporate sales professionals.
Additional sales personnel based in Fort Lauderdale, Florida; Toronto, Canada;
London, England; Munich, Germany; Schaffhausen, Switzerland; Paris, France;
Amsterdam, Netherlands; Copenhagen, Denmark; Milan, Italy; Madrid, Spain;
Sydney, Australia; Melbourne, Australia; Singapore; Tokyo, Japan; Hong Kong;
Bangalore, India; Sao Paolo, Brazil and Mexico City, Mexico support these field
personnel. These additional sales personnel recruit prospective customers,
provide technical advice with respect to Citrix products and work closely with
key distributors and resellers of the Company's products. The Company plans to
hire additional direct sales personnel to market its products to large corporate
enterprise accounts.
Citrix provides most of its distributors and resellers with product return
rights for stock balancing or limited product evaluation. Stock balancing rights
permit distributors to return products to Citrix for credit, within specified
limits and subject to ordering an equal dollar amount of other Citrix products.
Although the Company believes that it has adequate reserves to cover product
returns, there can be no assurance that Citrix will not experience significant
returns in the future or that such reserves will be adequate. The Company also
provides most of its distributors and resellers with price protection rights.
Price protection rights require that Citrix grant retroactive price adjustments
for inventories of Citrix products held by distributors or resellers if Citrix
lowers its prices for such products. In the event that the Company determines to
reduce its prices, it will establish a reserve to cover exposure to distributor
inventory.
The majority of Citrix's services and support activities are related to
software and network integration issues. Using Citrix's own "Shadowing"
technology, support representatives are able to troubleshoot user issues
remotely from Citrix call centers located in the United States, Ireland and
Australia. Citrix also provides technical advice to channel and strategic
partners, who are utilized as first line support for their customers.
Additionally, users can choose from a comprehensive fee-based support program
ranging from one-time incident charges to an annual support agreement covering
multiple sites and servers. Training for resellers
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is provided at the Company's Citrix Authorized Learning Centers ("CALCs"), which
include a number of the world's leading IT training organizations. CALCs are
staffed with Citrix Certified Instructors, who teach Citrix-developed
courseware. In addition, Citrix provides technical advice through its on-line
services, quarterly Solution Search CD-ROM and fax services.
OPERATIONS
The Company controls all purchasing, inventory, scheduling, order
processing and accounting functions related to its operations. Production,
warehousing and fulfillment is performed by independent contractors on a
purchase order basis in the United States and in Ireland. Shipping is primarily
performed at the locations of the independent contractors, although limited
shipments are made from the Company's facilities. Master software diskettes,
development of user manuals, packaging designs, initial product quality control
and testing are performed at the Company's facilities. The independent
contractors duplicate diskettes and CD-ROMs, print documentation, and package
and assemble product to the Company's specifications. To date, the Company has
not experienced any material difficulties or delays in the manufacture and
assembly of its products.
The Company has identified and evaluated alternative manufacturing vendors
and believes that such alternative vendors are capable of producing the
requisite quality and volumes at competitive prices. However, if difficulties
and delays were to be encountered, and transition to an alternate manufacturer
was not completed promptly, the Company's business, results of operations, and
financial condition could be materially adversely affected.
The Company generally ships products upon receipt of an order. As a result,
the Company has relatively little backlog at any given time, and does not
consider backlog to be a significant indicator of future performance.
COMPETITION
The Company believes that companies, including Microsoft, have entered or
will enter the market with solutions that involve a similar approach to Citrix's
multi-user application server. In particular, GraphOn and SCO market products
that claim to have functions similar to those found in MetaFrame. See
"-- Strategic Relationships" and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations-Certain Factors Which May Affect
Future Results." Additionally, the announcement of the release, and the actual
release, of products competitive to the Company's existing and future product
lines, could cause existing and potential customers of the Company to postpone
or cancel plans to license certain of the Company's existing and future product
offerings, which would adversely impact the Company's business, results of
operations, and financial condition.
In addition, alternative products exist for Internet commerce that directly
or indirectly compete with the Company's products. Existing or new products that
extend website software to provide database access or interactive computing can
materially impact the Company's ability to sell its products in this market.
Competitors in this market include Microsoft, AOL, and other makers of web
server and browser software. As markets for the Company's products continue to
develop, additional companies, including companies with significant market
presence in the computer hardware, software and networking industries, may enter
the markets in which the Company competes and further intensify competition.
These competitors and potential competitors may have significantly greater
financial, technical, sales, marketing, support and other resources than the
Company. There can be no assurance that the Company will be able to establish
and maintain a market position in the face of increased competition. Although
the Company believes that price has historically been a less significant
competitive factor than product performance, reliability and functionality, the
Company believes that price competition may become more significant in the
future. The Company may not be able to maintain its historic prices, and an
inability to do so could adversely affect the Company's business, results of
operations and financial condition.
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PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon proprietary technology. The
Company has filed patent applications in the United States and foreign
countries. A number of patents have been issued domestically and in foreign
countries, while other patent applications are currently pending. The Company
also takes steps to protect its technology under copyright laws. However, patent
protection and existing copyright laws afford only limited protection for the
Company's software. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. Accordingly, the Company also relies on trade secret
protection and confidentiality and proprietary information agreements to protect
its proprietary technology. The loss of any material trade secret, trademark,
trade name or copyright could have a material adverse effect on the Company.
There can be no assurance that the Company's efforts to protect its proprietary
technology rights will be successful. Despite the Company's precautions, it may
be possible for unauthorized third parties to copy certain portions of the
Company's products or to obtain and use information that the Company regards as
proprietary. A significant portion of the Company's sales is derived from the
licensing of Company products under "shrink wrap" license agreements that are
not signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. Although the Company does not believe that its products
infringe on the rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company in the future or
that any such assertion will not result in costly litigation or require the
Company to obtain a license to proprietary technology rights of such parties. In
addition, there can be no assurance that such licenses will be available on
reasonable terms or at all.
While the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that because of the
rapid pace of technological change in the industry, factors such as the
technical expertise, knowledge and innovative skill of the Company's management
and technical personnel, its strategic relationships, name recognition, the
timeliness and quality of support services provided by the Company and its
ability to rapidly develop, enhance and market software products may be more
significant in maintaining the Company's competitive position.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,080 employees.
Twenty-one of the Company's employees are represented by a statutory collective
bargaining agreement in France. The Company believes its relations with
employees are good.
ITEM 2. PROPERTIES
The Company's corporate offices are located in Fort Lauderdale, Florida.
The corporate offices consist of leased and subleased office space in various
buildings totaling approximately 254,000 square feet. In addition, the Company
leases approximately 51,000 square feet of office space in other locations in
the United States.
The Company leases and subleases a total of approximately 109,000 square
feet of office space in various other facilities in Europe, Latin America and
the Asia Pacific region.
ITEM 3. LEGAL PROCEEDINGS
On or about March 15, 2000, the Company learned that GraphOn Corporation
("GraphOn") filed an action in the Santa Clara County Superior Court in
California against the Company and Insignia Solutions plc ("Insignia'), certain
of whose assets the Company acquired in February 1998. GraphOn's claims allege
that the Company and Insignia misappropriated GraphOn's trade secrets and
engaged in unfair competition. GraphOn's claims are for unspecified damages. The
Company intends to vigorously defend against this claim but is unable to predict
the ultimate outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is currently traded on The Nasdaq National
Market under the symbol "CTXS." The following table sets forth the high and low
closing prices for the Company's Common Stock as reported on The Nasdaq National
Market for the periods indicated, as adjusted to the nearest 1/16 to reflect the
three-for-two stock split in the form of a stock dividend paid on February 20,
1998 to holders of record of the Company's Common Stock on February 12, 1998,
the two-for-one stock split in the form of a stock dividend declared on March 1,
1999 and paid on March 25, 1999 to holders of record of the Company's Common
Stock on March 17, 1999 and the two-for-one stock split in the form of a stock
dividend declared on January 19, 2000 and paid on February 16, 2000 to holders
of record of the Company's Common Stock on January 31, 2000. Such information
reflects inter-dealer prices, without retail markup, markdown or commission and
may not represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 2000:
First quarter (through March 10, 2000).................... $118 9/16 $ 52 1/2
YEAR ENDED DECEMBER 31, 1999:
Fourth quarter............................................ $ 64 5/8 $ 29 9/16
Third quarter............................................. $ 34 5/8 $ 22 3/4
Second quarter............................................ $ 28 11/16 $ 14 11/16
First quarter............................................. $ 25 5/8 $ 17
YEAR ENDED DECEMBER 31, 1998:
Fourth quarter............................................ $ 24 1/4 $ 12 11/16
Third quarter............................................. $ 18 13/16 $ 14 7/16
Second quarter............................................ $ 17 3/16 $ 12 1/8
First quarter............................................. $ 13 9/16 $ 9 3/8
</TABLE>
On March 10, 2000, the last reported sale price of the Common Stock on The
Nasdaq National Market was $107.50 per share. As of March 10, 2000, there were
approximately 710 holders of record of the Common Stock.
The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends on its capital stock
in the foreseeable future.
10
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net revenues................................. $ 403,285 $248,636 $123,933 $44,527 $14,568
Cost of revenues (excluding amortization
presented separately below)................ 14,579 16,682 12,304 5,099 1,956
---------- -------- -------- ------- -------
Gross margin................................. 388,706 231,954 111,629 39,428 12,612
Operating expenses:
Research and development................... 37,363 22,858 6,948 3,843 2,343
Sales, marketing and support............... 121,302 74,855 35,352 13,741 6,670
General and administrative................. 37,757 20,131 10,651 4,126 1,784
Amortization of intangible assets.......... 18,480 10,190 -- -- --
In-process research and development........ 2,300 18,416 3,950 -- --
---------- -------- -------- ------- -------
Total operating expenses........... 217,202 146,450 56,901 21,710 10,797
---------- -------- -------- ------- -------
Income from operations....................... 171,504 85,504 54,728 17,718 1,815
Interest and other income.................... 23,843 10,043 9,903 4,545 173
Interest expense............................. (12,622) (75) (9) -- --
---------- -------- -------- ------- -------
Income before income taxes................... 182,725 95,472 64,622 22,263 1,988
Income taxes................................. 65,781 34,370 23,264 3,562 93
---------- -------- -------- ------- -------
Net income................................... $ 116,944 $ 61,102 $ 41,358 $18,701 $ 1,895
========== ======== ======== ======= =======
Diluted earnings per share(a)................ $ 0.61 $ 0.33 $ 0.24 $ 0.11 $ 0.02
========== ======== ======== ======= =======
Diluted weighted-average shares outstanding
(a)........................................ 192,566 182,594 174,524 163,620 121,480
========== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
---------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................. $ 433,249 $158,900 $222,916 $139,778 $42,688
Total assets................................ 1,037,857 431,380 282,668 149,580 46,715
Long term debt and capital lease
obligations............................... 313,940 48 8 8 88
Stockholders' equity........................ 533,070 297,454 196,848 141,851 42,962
</TABLE>
- ---------------
(a) Adjusted to reflect the stock splits discussed in Item 5.
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports innovative client and
server-based computing software that enables effective and efficient deployment
and management of enterprise applications that are designed for Microsoft
Windows(R) operating systems. The Company's Windows Application Servers
primarily consist of the WinFrame(R) and MetaFrame(TM) product lines, which
began shipping in the third quarter of 1995 and second quarter of 1998,
respectively, together with their related options, comprise the largest source
of the Company's revenue.
On May 9, 1997, the Company and Microsoft entered into a License,
Development and Marketing Agreement, as amended (the "Development Agreement"),
which provides for the licensing to Microsoft of certain of the Company's
multi-user software enhancements to Microsoft's Windows NT Server and for the
cooperation between the parties for the development of certain future multi-user
versions of Microsoft Windows NT Server, Terminal Server Edition ("NT Terminal
Server"). The Development Agreement also provides for each party to develop its
own enhancements to the jointly developed products which may provide access to
NT Terminal Server base platforms from a wide variety of computing devices. In
June 1998, the Company released its MetaFrame product, a Company-developed
enhancement that implements the Independent Computing Architecture (ICA(R)) on
NT Terminal Server. Pursuant to the terms of the Development Agreement, in May
1997, the Company received an aggregate of $75 million as a non-refundable
royalty payment for engineering and support services to be rendered by the
Company. Under the terms of the Development Agreement, as amended, the Company
received additional payments totaling $100 million on a quarterly basis. No
additional payments are due pursuant to the Development Agreement. In addition,
Microsoft and the Company have agreed to engage in certain joint marketing
efforts to promote use of Windows NT Server-based multi-user software and the
Company's ICA protocol. Subject to the terms of the Development Agreement, the
Company shall be entitled to license its WinFrame technology based on Windows NT
3.51 until at least September 30, 2001.
As a result of the Development Agreement, the Company continues to support
the Microsoft Windows NT platform, but the MetaFrame products and later releases
no longer directly incorporate Windows NT technology. The Company plans to
continue developing enhancements to its MetaFrame product line and expects that
this product and associated options will constitute a majority of its revenues
for the foreseeable future.
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2 (as amended by SOP 98-4 and SOP
98-9) and related interpretations, "Software Revenue Recognition" for 1999 and
1998 and SOP 91-1, "Software Revenue Recognition" for 1997. Product revenues are
recognized upon shipment of the software product only if no significant Company
obligations remain, the fee is fixed or determinable, and collection of the
resulting receivable is deemed probable. The initial fee of $75 million relating
to the Development Agreement is being recognized ratably over the five year term
of the contract, which began in May 1997. The additional $100 million received
pursuant to the Development Agreement, as amended, is being recognized ratably
over the remaining term of the contract, effective April 1998. In the case of
non-cancelable product licensing arrangements under which certain Original
Equipment Manufacturers ("OEMs") have software reproduction rights, initial
recognition of revenue also requires delivery and customer acceptance of the
product master or first copy. Subsequent recognition of revenues is based upon
reported royalties from the OEMs as well as estimates of royalties due through
the Company's reporting date. Revenue from packaged product sales to
distributors and resellers is recorded when related products are shipped. In
software arrangements that include rights to multiple software products,
post-contract customer support ("PCS"), and/or other services, the Company
allocates the total arrangement fee among each deliverable based on the relative
fair value of each of the deliverables determined based on vendor-specific
objective evidence ("VSOE"). The Company sells software and PCS separately and
VSOE is determined by the price charged when each element is sold separately.
Product returns and sales allowances, including stock
12
<PAGE> 13
rotations, are estimated and provided for at the time of sale. Non-recurring
engineering fees are recognized ratably as the work is performed. Revenues from
training and consulting are recognized when the services are performed. Service
and subscription revenues from customer maintenance fees for ongoing customer
support and product updates and upgrades are based on the price charged or
derived value of the undelivered elements and are recognized ratably over the
term of the contract, which is typically twelve months. Service revenues, which
are immaterial when compared to net revenues, are included in net revenues on
the face of the statement of income.
The Company has acquired and licensed technology related to its strategic
objectives. In January 1998, the Company licensed certain software technology
from EPiCON, Inc., for approximately $8.0 million payable in cash. In February
1998, the Company completed its acquisition of certain of the assets, technology
and operations of Insignia Solutions, plc for approximately $17.5 million in
cash. In June 1998, the Company acquired all of the outstanding securities of
APM Limited, the parent company of Digitivity Inc., for approximately $40.4
million in cash. In July 1998, the Company completed its acquisition of certain
technologies of VDOnet Corporation Ltd. for approximately $7.9 million in net
cash. In July 1999, the Company completed its acquisition of certain software
technologies and assets of ViewSoft, Inc. for approximately $33.5 million in
cash and liabilities assumed.
In December 1999, the Company amended its license agreement with EPiCON to
allow the Company access to additional software technology and to extend the
exclusive license term for an additional $4.0 million, of which $1.3 million was
paid in cash at the amendment date.
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex") for approximately $47.8 million in cash, of
which $28.7 million was paid at the closing date and the balance is payable, in
equal installments, 18 and 24 months after the closing date, contingent upon
future events, as defined in the acquisition agreement.
These acquisitions and licensing arrangement were accounted for under the
purchase method of accounting and in accordance with Accounting Principles Board
Opinion No. 16, "Accounting for Business Combinations." The Company allocated
the cost of the acquisitions to the assets acquired and the liabilities assumed
based on their estimated fair values. Except for Innovex, the acquired
intangible assets included in-process technology projects, among other assets,
which were related to research and development that had not reached
technological feasibility and for which there was no alternative future use.
13
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of the Company
expressed as a percentage of net revenues and as a percentage of change from
period-to-period for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998
----------------------- COMPARED COMPARED
1999 1998 1997 TO 1998 TO 1997
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues...................................... 100.0% 100.0% 100.0% 62.2% 100.6%
Cost of revenues (excluding amortization presented
separately below)............................... 3.6 6.7 9.9 (12.6) 35.6
----- ----- -----
Gross margin...................................... 96.4 93.3 90.1 67.6 107.8
Operating expenses:
Research and development........................ 9.3 9.2 5.6 63.5 229.0
Sales, marketing and support.................... 30.1 30.1 28.5 62.0 111.7
General and administrative...................... 9.4 8.1 8.6 87.6 89.0
Amortization of intangible assets............... 4.6 4.1 -- 81.4 *
In-process research and development............. 0.5 7.4 3.2 * *
----- ----- -----
Total operating expenses................ 53.9 58.9 45.9 48.3 157.4
----- ----- -----
Income from operations............................ 42.5 34.4 44.2 100.6 56.2
Interest and other income......................... 5.9 4.0 8.0 138.9 0.7
Interest expense.................................. (3.1) -- -- * --
----- ----- -----
Income before income taxes........................ 45.3 38.4 52.2 91.4 47.7
Income taxes...................................... 16.3 13.8 18.8 91.4 47.7
----- ----- -----
Net income........................................ 29.0% 24.6% 33.4% 91.4 47.7
===== ===== =====
</TABLE>
- ---------------
* not meaningful.
Net Revenues. Net revenues are presented below in five categories: Windows
Application Servers, Computing Appliances Products, Management Services
Products, Microsoft Royalties and Other Revenue. Windows Application Servers
revenue represents fees related to the licensing of the Company's MetaFrame and
WinFrame products, subscriptions and additional user licenses. Computing
Appliances Products revenue consists of license fees and royalties from OEMs who
are granted a license to incorporate and/or market the Company's multi-user
technologies in their own product offerings. Management Services Products
consist of system option products such as Load Balancing Services, Resource
Management Services and other options, which are applicable to both the
MetaFrame and WinFrame product lines. Microsoft royalties represent fees
recognized in connection with the Development Agreement.
The increase in net revenues in 1999 was primarily attributable to
increases in the volume of shipments of the Company's MetaFrame product line and
associated additional user licenses, which began shipping in June 1998, while
sales of the WinFrame product line and associated additional user licenses
decreased. The Company expects that revenue from MetaFrame-based products will
constitute an increasing percentage of net revenue and that revenue from
WinFrame-based products will decrease as a percentage of net revenues. To a
lesser extent, the increase in net revenues in 1999 was due to an increase in
revenue related to the Development Agreement with Microsoft and increases in the
volume of shipments of Management Services Products, primarily due to higher
sales levels of the Load Balancing Services product as end users continue to
implement larger scale MetaFrame solutions. The Company anticipates the revenue
from the Development Agreement with Microsoft will account for a decreasing
percentage of net revenues. Net revenues of Computing Appliances Products
declined in 1999 due to decreased volume of licensing to OEMs.
The increase in net revenues in 1998 was primarily attributable to an
increase in unit sales of the Company's MetaFrame product and additional user
licenses, which were first shipped in June 1998, and increases in unit sales of
Management Services Products. To a lesser extent, the increase in net revenues
in
14
<PAGE> 15
1998 was attributable to an increase in unit sales of WinFrame and an increase
in revenue related to the Development Agreement with Microsoft.
An analysis of the Company's net revenues is detailed in the table below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, REVENUE REVENUE
----------------------- GROWTH GROWTH
1999 1998 1997 1998 TO 1999 1997 TO 1998
----- ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Windows Application Servers................... 74.2% 69.4% 66.5% 73.5% 109.6%
Computing Appliances Products................. 2.4 8.8 19.4 (55.2) (9.6)
Management Services Products.................. 9.5 4.8 2.3 222.6 316.3
Microsoft royalties........................... 9.9 12.8 7.8 25.5 229.7
Other revenue................................. 4.0 4.2 4.0 49.3 111.2
----- ----- -----
Net revenues.................................. 100.0% 100.0% 100.0% 62.2 100.6
===== ===== =====
</TABLE>
International and Segment Revenues. International revenues (sales outside
of the United States) accounted for approximately 37.1%, 31.6% and 20.6% of net
revenues for the years ended December 31, 1999, 1998 and 1997, respectively. See
Note 12 to the Company's Consolidated Financial Statements appearing in Item 8
of this Annual Report. The increase in international revenues as a percentage of
net revenues was primarily due to the Company's increased sales and marketing
efforts in Europe and Asia. The Company anticipates that international revenues
will account for an increasing percentage of net revenues in the future.
An analysis of geographic segment net revenue is detailed in the table
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, REVENUE REVENUE
----------------------- GROWTH GROWTH
1999 1998 1997 1998 TO 1999 1997 TO 1998
----- ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Americas...................................... 50.9% 48.0% 54.1% 71.9% 78.1%
EMEA.......................................... 31.8 25.8 16.1 100.0 220.4
Asia Pacific.................................. 5.0 4.3 2.2 87.6 297.6
Other......................................... 12.3 21.9 27.6 (8.8) 59.1
----- ----- -----
Consolidated net revenues..................... 100.0% 100.0% 100.0% 62.2 100.6
===== ===== =====
</TABLE>
The increase in net revenues in 1999 was primarily attributable to
continued demand for Citrix products in the Americas and Europe, Middle East &
Africa ("EMEA") regions and larger scale MetaFrame implementations in these
regions. The EMEA revenue increase is also due to greater sales and marketing
efforts in Europe and the opening and expansion of additional sales offices in
that region. The decrease in other revenue, which primarily consists of revenue
related to the Development Agreement with Microsoft and revenue from OEMs,
decreased due to a lower volume of licensing to OEMs.
The increase in net revenues in 1998 was primarily attributable to higher
sales volumes in the Americas and EMEA regions due to the release of the
Company's MetaFrame product, which was first shipped in June 1998. EMEA revenue
also increased due to a greater sales and marketing presence in Europe via the
addition and expansion of offices in various European countries. To a lesser
extent, the increase in net revenues in 1998 was attributable to an increase in
other revenue due to an increase related to the Development Agreement with
Microsoft.
The Company will continue investing in international markets and expanding
its international operations by establishing additional foreign operations,
hiring personnel, expanding its international sales force and adding third party
channel partners. International revenues may fluctuate in future periods as a
result of difficulties in staffing, dependence on an independent distribution
channel, competition, variability of foreign economic and political conditions
and changing restrictions imposed by regulatory requirements, localized product
release timing and marketing such products in foreign countries.
Cost of Revenues. Cost of revenues consisted primarily of the cost of
royalties, product media and duplication, manuals, packaging materials and
shipping expense. Cost of OEM revenues included in cost of revenues primarily
consisted of cost of royalties, except where the OEM elected to purchase
shrink-wrapped
15
<PAGE> 16
products, in which case such costs were as described in the previous sentence.
All development costs incurred in connection with the Development Agreement are
expensed as incurred as a separate component of cost of revenues. The Company's
cost of revenues exclude the amortization of core technology.
Gross Margin. The increase in gross margin as a percent of net revenues
from 1998 to 1999 was primarily due to increases in sales of the MetaFrame
product and related user licenses. The MetaFrame product line has a relatively
high gross margin contribution as the MetaFrame product line bears no royalties.
Additionally, the increase in gross margin contribution is partly due to an
adjustment to royalties payable associated with higher than expected additional
user licenses deployed with MetaFrame products. Gross margin related to the
Development Agreement increased from 1998 to 1999 due primarily to an increase
in revenue related to the Development Agreement as well as a decrease in related
engineering and support expenses which decreased due to the maturity level of
the MetaFrame product. The overall increase in gross margin as a percentage of
net revenues for 1999 was partially offset by an increase in inventory reserves.
The Company anticipates gross margin as a percentage of net revenues will
decrease as the Company increases its consulting services offering which has a
lower gross profit margin as a percentage of net revenues.
The increase in gross margin as a percent of net revenues from 1997 to 1998
was primarily attributable to the introduction of the MetaFrame product line
which has a relatively high gross margin contribution, as it bears no royalty,
compared to the WinFrame product line. In the third quarter of 1997, the Company
began shipping WinFrame version 1.7, which had a higher gross margin than the
previous WinFrame version, due to lower royalty fees and fewer components. The
overall increase in 1998 gross margin was partially offset by gross margin
contribution related to the Development Agreement revenue, which has a lower
gross margin as a percentage of net revenues.
Research and Development Expenses. Research and development expenses
consisted primarily of personnel-related costs. To date, all internal software
development costs have been expensed as incurred. Increases in research and
development expenses in 1999 and 1998 resulted primarily from additional
staffing, associated salaries and related expenses required to expand and
enhance the Company's product lines. Additionally, in 1998, research and
development expenses increased as a result of third-party expenses associated
with the translation and localization of the MetaFrame and WinFrame products.
These costs were partially offset by the allocation of certain research and
development expenses to cost of revenues for the portion of these expenses
associated with the Development Agreement revenues. All development costs
included in the research and development of software products and enhancements
to existing products have been expensed as incurred except for certain
intangible assets related to the acquisitions and licensing described herein.
Sales, Marketing and Support Expenses. The increase in sales, marketing
and support expenses in 1999 resulted, in part, from increased sales staff and
associated salaries, commissions and expenses related to expansion of the
Company's sales force. The increase was also due to higher levels of promotional
activities and marketing programs directed at customer and business partner
acquisition and retention, increased marketing staff and associated salaries,
and additional advertising activities related to specific product lines and
corporate branding. Promotional activities include various demand generation
programs and other promotional activities such as direct mail campaigns,
programs directed at resellers and trade shows.
Increases in sales, marketing and support expenses in 1998 resulted
primarily from increases in promotional and advertising activities to expand
product-specific marketing programs, such as the MetaFrame launch in 1998. The
increase was also due to increased sales and marketing staff and associated
salaries, commissions and related expenses.
General and Administrative Expenses. Increases in general and
administrative expenses in 1999 and 1998 resulted primarily from increased
staff, associated salaries and related expenses necessary to support overall
increases in the scope of the Company's operations and in 1999, for additional
expenditures related to improvements to its information systems.
Amortization of Intangible Assets. The increase in amortization of
goodwill and identifiable intangible assets in 1999 and 1998 is primarily due to
the acquisition of Insignia Solutions, plc in February 1998, APM
16
<PAGE> 17
Ltd. in June 1998, VDOnet Corporation Ltd. in July 1998, and the EPiCON
licensing arrangement in January 1998. These acquisitions resulted in additional
goodwill and identifiable intangible assets of approximately $14.4 million,
$30.5 million, $5.6 million and $5.4 million, respectively, at their respective
date of acquisition or licensing. Additionally, for 1999, the increase was due
to the acquisition of ViewSoft, Inc. in July 1999 which resulted in additional
goodwill and identifiable intangible assets of approximately $31.1 million. As
of December 31, 1999, the Company had net goodwill and identifiable intangible
assets of $63.4 million, associated with these transactions, remaining to be
amortized over four years following the acquisitions. The Company anticipates
that amortization of goodwill and identifiable intangible assets will increase
due to the continuation of the Company's acquisition efforts.
In-Process Research and Development. In 1999, the Company completed the
acquisition of certain in-process software technologies from ViewSoft, in which
it allocated $2.3 million of the purchase price to IPR&D. During 1998, the
Company completed acquisitions and a licensing of certain in-process software
technologies in which it allocated a portion of the purchase price to IPR&D. The
Company allocated $2.7 million, $10.7 million and $2.4 million for IPR&D related
to the Insignia, APM and VDOnet acquisitions, respectively, and $2.6 million for
IPR&D related to the licensing agreement with EPiCON.
Since the respective dates of acquisition and licensing, the Company has
used the acquired in-process technology to develop new product offerings and
enhancements, which have or will become part of the Company's suite of products
when completed. Functionality included in products using the acquired in-
process technology have been introduced at various times following the
respective transaction dates of the acquired assets and licensing, and the
Company currently expects to complete the development of the remaining projects
at various dates in 2000. Upon completion, the Company has offered and intends
to offer the related products to its customers.
The nature of the efforts required to develop and integrate the acquired
in-process technology into commercially viable products or features and
functionalities within the Citrix suite of existing products principally relate
to the completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet design
requirements, including functions, features and technical performance
requirements. The Company currently expects that products utilizing the acquired
in-process technology will be successfully developed, but there can be no
assurance that commercial viability of any of these products will be achieved.
Furthermore, future developments in the software industry, particularly the
server-based computing environment, changes in technology, changes in other
products and offerings or other developments may cause the Company to alter or
abandon product plans.
Failure to complete the development of these projects in their entirety, or
in a timely manner, could have a material adverse impact on the Company's
financial condition and results of operations. No assurance can be given that
actual revenues and operating profit attributable to acquired in-process
research and development will not deviate from the projections used to value
such technology in connection with each of the respective acquisitions. Ongoing
operations and financial results for acquired assets and licensed technology,
and the Company as a whole, are subject to a variety of factors which may not
have been known or estimable at the date of such transactions, and the estimates
discussed below should not be considered the Company's current projections for
operating results for the acquired assets or licensed technology or the Company
as a whole.
The fair value of the in-process technology in each acquisition was based
on analyses of the markets, projected cash flows and risks associated with
achieving such projected cash flows. In developing these cash flow projections,
revenues were estimated based on relevant factors, including aggregate revenue
growth rates for the business as a whole, individual service offering revenues,
characteristics of the potential market for the service offerings and the
anticipated life of the underlying technology. Operating expenses and resulting
profit margins were estimated based on the characteristics and cash flow
generating potential of the acquired in-process research and development, and
included assumptions that certain expenses would decline over time, although
there are no acquirer-specific synergies identified in the assumption model. The
Company assumed material net cash inflows would commence in 1999 for the EPiCON
licensing agreement and Insignia acquisition and in 2000 for the APM, VDOnet and
ViewSoft acquisitions. Appropriate adjustments were made to operating income to
derive net cash flow, and the estimated net cash flows of the in-process
17
<PAGE> 18
technologies in each acquisition were then discounted to present value using
rates of return that the Company believes reflect the specific risk/return
characteristics of these research and development projects. The selection of
discount rates for application in each acquisition were based on the
consideration of: (i) the weighted average cost of capital, which measures a
company's cost of debt and equity financing weighted by the percentage of debt
and percentage of equity in its target capital structure; (ii) the corresponding
weighted average return on assets which measures the after-tax return required
on the assets employed in the business weighted by each asset group's percentage
of the total asset portfolio; and (iii) venture capital required rates of return
which typically relate to equity financing for relatively high-risk business
projects. The risk adjusted discount rates were 35%, 40%, 50%, 50% and 30% for
the EPiCON licensing agreement, Insignia, APM, VDOnet and ViewSoft acquisitions,
respectively.
Revenues attributable to the acquired in-process technology were assumed to
increase, depending on the product, between the first two to five years of six
to seven year projection periods at annual rates ranging from 20% to 904% before
decreasing over the remaining years at rates ranging from 7% to 68% as other
products are released in the marketplace. Projected annual revenue attributable
to the products ranged from approximately $0.6 million to $74.6 million over the
term of the projections. These projections were based on aggregate revenue
growth rates for the business as a whole, individual product revenues, giving
consideration to transaction volumes and prices, anticipated growth rates for
the client-server market, anticipated product development and product
introduction cycles, and the estimated life of the underlying technology.
Projected revenues from the in-process research and development were assumed to
peak during periods between 1999 and 2002, depending on the product, and decline
from 2000 to 2004 as other new products are expected to enter the market.
Gross profit was assumed to increase in the first two to five years of the
projection period, depending on the product, at annual rates ranging from 20% to
882%, decreasing over the remaining years at rates ranging from 7% to 68%
annually, resulting in annual gross profits ranging from approximately $0.6
million to $69.2 million. Increases and decreases in gross profit are assumed to
move in tandem with increases and decreases in revenue. The gross profit
projections assumed a growth rate approximately the same as the revenue growth
rate. The assumption model's expected gross profit percentage was used
consistently throughout the respective periods.
Operating profit was assumed to increase depending on the product, in the
first two to four years of the projection period at annual rates ranging between
19% and -286% (due to an expected operating loss in the first year of one of the
projects), and decrease over the remaining years at rates between 3% and 75%
annually, resulting in annual operating profits of approximately $0.3 million to
$31.2 million. General and administrative expenses are assumed to move in tandem
with increases and decreases in revenue. Selling and marketing expenses are
expected to decline over time compared to revenues due to general business
trends associated with the life cycle of the product. Operating profit
projections assumed a growth rate approximately the same as the revenue growth
rate.
The Company used discount rates ranging from 30% to 50% for valuing the
in-process research and development acquired in these transactions, which the
Company believes reflected the risk associated with the completion of the
individual research and development projects acquired and the estimated future
economic benefits to be generated subsequent to the completion of the projects.
A description of the in-process research and development and the estimates
made by the Company for each of EPiCON, Insignia, APM, VDOnet and ViewSoft is
summarized below. All of the acquired projects are targeted for the server-based
computing market. After the acquisition or license of each technology, the
Company has continued the development of these in-process projects.
EPiCON
The in-process research and development acquired in the license of EPiCON
technology consisted of one significant research and development project,
Installation Management. This project enables an application to be installed
once on a server and then replicated to all other servers in a server farm
configuration, and is targeted for the server-based computing market. At the
date of licensing, EPiCON was shipping its Windows
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NT 3.51 version of its ALTiS application deployment product and was testing its
Windows NT 4.0 version. Neither the Windows NT 3.51 version nor the Windows NT
4.0 version, which was currently under development, was operating in a Citrix
MetaFrame or WinFrame environment at the date of licensing. However, EPiCON was
in the process of modifying their technology to operate in a WinFrame and
MetaFrame environment. The Company estimated that the project was less than 60%
complete at the date of licensing. After licensing the EPiCON technology, the
Company continued the development of the project to operate in a Windows NT 4.0
environment and the integration of the technology into a MetaFrame and WinFrame
environment. The aggregate value assigned to the in-process research and
development was $2.6 million. See a summary of the projections made in the
valuation of the in-process research and development and an updated status of
completion of each project in the tables that follow.
Insignia
The in-process research and development acquired in the Insignia
acquisition consisted primarily of one significant research and development
project, Keoke, a video display protocol designed to add performance and
bandwidth enhancements to ICA in WinFrame and MetaFrame software. At the date of
the acquisition, Insignia was shipping software that enhanced WinFrame and was
in the process of modifying this product to incorporate changes necessary for it
to interface with MetaFrame. Insignia was also developing Keoke, a video display
protocol designed to add performance and bandwidth enhancements to ICA in
WinFrame and MetaFrame software. Following the acquisition, the Company
continued the process of incorporating changes necessary to interface with
MetaFrame and to add the Keoke functionality to the Company's ICA protocol.
The Company estimated this project was less than 40% complete at the date
of acquisition. The aggregate value assigned to in-process research and
development was $2.7 million. See the summary of projections made in the
valuation of the in-process research and development and an updated status of
completion for each project in the tables that follow.
APM
The in-process research and development acquired in the APM acquisition
consisted primarily of one significant research and development project. The
project is a Windows NT-based application server for Java applications, which is
similar to WinFrame software, but actually runs Java applications. At the date
of the acquisition, APM was shipping a Java application server solution that
allowed an enterprise user to access Java-applets from the Internet and execute
these applets outside the corporate firewall in a server-based computing
configuration in a fashion that was transparent to the enterprise user. APM was
in the process of modifying its software product to incorporate changes
necessary for it to interface with Java 2.0, which was a major new release that
included major rewrites to the Java desktop. Following the acquisition, the
Company planned on continuing the process of incorporating changes necessary to
interface with Java 2.0, and in addition, planned on further developing the
software product into an application server for Java 2.0 that would operate in a
MetaFrame and WinFrame server environment.
The Company estimated this project was less than 45% complete at the date
of acquisition. The aggregate value assigned to the in-process research and
development was $10.7 million. The remaining efforts to complete the project are
primarily the incorporation of changes necessary to interface with Java 2.0 and
the utilization of acquired technology to develop an application server for Java
that would operate in a MetaFrame and a WinFrame server environment. The
research and development risks associated with this project relate primarily to
updating the acquired technology to be compatible with Sun Microsystems' Java
2.0 application, integrating and porting such technology into a variety of
server-based computing architectures. See the summary of projections made in the
valuation of the in-process research and development and an updated status of
completion for each project in the tables that follow.
VDOnet
The in-process research and development acquired in the VDOnet acquisition
consisted primarily of one significant research and development project, ICA
Video Services. This project allows video applications and
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applications containing video to be viewed on an ICA client, and is targeted for
the server-based computing market. At the date of the acquisition, VDOnet was
shipping a client server video streaming product that was not operational in a
Windows NT or in a WinFrame or a MetaFrame environment. VDOnet was in the
process of modifying its software to be operational in a Windows NT environment.
In addition, VDOnet was developing enhancements that would provide for a live
camera feed and multicast, which is intended to direct a video stream to
multiple client devices simultaneously. Following the acquisition, the Company
continued the process of modifying the VDOnet software to be operational in a
Windows NT environment and is continuing the development of enhancements that
would provide for live camera feed and multicast. In addition, the Company plans
on further developing the software to be operational in a WinFrame and a
MetaFrame environment.
The Company estimates this project was less than 65% complete at the date
of acquisition. The aggregate value assigned to the in-process research and
development was $2.4 million. The remaining efforts to complete the project are
primarily the modification of the VDOnet software to be operational in a Windows
NT environment and the continuation of enhancements that provide for live camera
feed and multicast functionality and the utilization of acquired technology to
develop a video server that is operational in a MetaFrame and a WinFrame server
environment. The research and development risks associated with this project
relate primarily to integrating this product into the server-based computing
environment. See the summary of projections made in the valuation of the
in-process research and development and an updated status of completion for each
project in the tables that follow.
ViewSoft
The in-process research and development acquired in the ViewSoft
acquisition consisted primarily of one significant research and development
project, ViewSoft Internet 4.0. This project enables multi-tier, Web-based
application development and deployment. At the date of the valuation, ViewSoft
was in development with this product. The product was intended to operate in the
multi-tier web application market and was not intended to operate in a MetaFrame
or a WinFrame environment.
The Company estimated this project was approximately 85% complete at the
date of acquisition. The aggregate value assigned to in-process research and
development was $2.3 million. The remaining efforts to complete the project
relate primarily to stress testing and, to a lesser extent, bug fixes and
documentation. The research and development risks associated with this project
relate primarily to potential design flaws revealed during testing. See the
summary of projections made in the valuation of the in-process research and
development and an updated status of completion for each project in the tables
that follow.
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Projections made in the valuations of in-process research and development
are summarized for each acquisition in the table that follows:
<TABLE>
<CAPTION>
EPiCON Insignia APM VDOnet ViewSoft
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
PROJECTION PERIOD................ 1998 - 2000 1998 - 2004 1999 - 2004 1999 - 2004 2000 - 2004
REVENUE:
Range of annual increases...... 20% 114% - 264% 113% - 211% 172% 179% - 904%
Range of annual decreases...... 40% 7% - 68% 14% - 64% 21% - 48% 14% - 26%
Year of projected peak......... 1999 2000 2002 2000 2001
GROSS PROFIT:
Range of annual increases...... 20% 114% - 266% 113% - 211% 172% 173% - 882%
Range of annual decreases...... 40% 7% - 68% 14% - 64% 21% - 48% 14% - 26%
OPERATING PROFIT:
Range of annual increases...... 19% 112% - 255% 137% - 200% 181% 153% - (286%)*
Range of annual decreases...... 34% 8% - 75% 3% - 64% 21% - 52% 14% - 26%
GROSS MARGIN:
Range of gross margin
percentages.................. 98% 97% - 98% 93% 98% 88% - 92%
SELLING & MARKETING EXPENSES:
Range of annual increases...... 20% 117% - 287% 58% - 197% 172% **
Range of annual decreases...... 53% 6% - 68% 29% - 64% 21% - 48% **
GENERAL & ADMINISTRATIVE
EXPENSES**:
Range of annual increases...... 20% 118% - 290% 113% - 180% 171% 192% - 857%
Range of annual decreases...... 40% 5% - 68% 14% - 64% 21% - 48% 14% - 26%
DISCOUNT RATE.................... 35% 40% 50% 50% 30%
</TABLE>
- ---------------
* The negative increase in operating profit for the ViewSoft acquisition is due
to an expected operating loss in the first year.
** Selling & marketing expenses appear as part of general & administrative
expenses as such amounts were combined for purposes of valuation for the
ViewSoft acquisition.
The actual and estimated costs to complete and completion dates of the
in-process and core technology acquired or licensed for each acquisition are as
follows:
<TABLE>
<CAPTION>
EPiCON Insignia APM VDOnet ViewSoft
-------------- --------------- --------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Date Acquired/Licensed....... January 1998 February 1998 June 1998 July 1998 July 1999
Cost Incurred to Date........ $ 1,118 $ 1,221 $ 4,024 $ 3,758 $ 1,238
Estimated Cost to Complete... -- -- 950 1,050 2,550
-------------- --------------- --------------- -------------- --------------
Total Estimated Project
Cost....................... $ 1,118 $ 1,221 $ 4,974 $ 4,808 $ 3,788
============== =============== =============== ============== ==============
Estimated Cost to Complete at
Date of Valuation.......... $ 300 $ 1,900 $ 4,000 $ 200 $ 660
============== =============== =============== ============== ==============
Estimated Completion Date at
Date of Valuation.......... First Quarter First Quarter First Quarter Second Quarter Fourth Quarter
of 1998 of 1998 of 1999 of 1999 of 1999
Current Estimated Completion
Date....................... Completed in Completed in Third Quarter Third Quarter Third Quarter
First Quarter Second Quarter of 2000 of 2000 of 2000
of 1999 of 1999
</TABLE>
The estimated completion date of the in-process and core technology related
to the APM acquisition has been extended as certain personnel working on this
project have been allocated to other projects. The completion date of the
in-process and core technology acquired from VDOnet has been delayed from the
originally anticipated completion date due to changes in the development of
these technologies resulting from end user feedback. The estimated completion
date of the ViewSoft project has been delayed from the originally anticipated
completion date due to increases in project scope and a longer testing period.
The Company is currently unable to determine the impact of such delays on its
business, future results of
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operations and financial condition. There can be no assurance that the Company
will not incur additional charges in subsequent periods to reflect costs
associated with completing these projects or that the Company will be successful
in its efforts to integrate and further develop these technologies.
Interest and Other Income. The increase in interest and other income in
1999 was primarily due to interest earned on the invested net proceeds from the
issuance of the zero coupon convertible subordinated debentures in March 1999.
The Company may acquire or make investments in companies it believes are related
to its strategic objectives. Such investments will reduce the Company's cash
and/or investment balances and therefore may reduce interest income.
Interest Expense. Interest expense in 1999 was primarily due to interest
related to the zero coupon convertible subordinated debentures issued in March
1999.
Income Taxes. The Company's effective tax rate amounted to 36% in 1999,
1998 and 1997. In July 1999, the Company changed its organizational structure
whereby it moved certain operational and administrative processes to overseas
subsidiaries. The Company provides current income taxes on foreign earnings as
if those earnings will be repatriated. The Company is in the process of
evaluating what amount, if any, of the foreign earnings that will be permanently
reinvested. Based on the results of the Company's evaluation process, the level
of permanent reinvestment of foreign earnings may change and may significantly
impact results of operations in the period of change.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, cash provided by operating activities was $184.0 million
related primarily to net income of $116.9 million, tax benefits from the
exercise of non-statutory stock options and disqualifying dispositions of
incentive stock options of $50.8 million, depreciation and amortization expenses
of $27.6 million and an increase in accounts payable and other accrued expenses
of $27.5 million due to increased marketing expenses, accrued taxes and royalty
fees and an increase in product returns of $18.0 million primarily due to
product swaps caused by the release of MetaFrame 1.8 and the overall increase in
the Company's revenues. These cash inflows were partially offset by increases in
accounts receivable of $41.1 million due primarily to higher revenue levels and
an increase of prepaid expenses of $32.8 million due primarily to a receivable
from estimated tax payments in excess of the tax liability. Cash used in
investing activities of $457.5 million for 1999 related primarily to the net
purchases of investments of $396.2 million, the acquisition of ViewSoft of $35.0
million and the expenditure of $26.3 million for the purchase of leasehold
improvements and equipment to support the Company's growth and expansion into
new facilities. Cash provided by financing activities of $362.1 million related
primarily to the net proceeds from the issuance of convertible subordinated
debentures and $70.4 million from the issuance of common stock under the
Company's stock option and employee stock purchase plans.
During 1998, cash provided by operating activities was $119.3 million
related primarily to net income of $61.1 million, tax benefits from the exercise
of non-statutory stock options and disqualifying dispositions of incentive stock
options of approximately $24.2 million, the write off of in-process research and
development of approximately $18.4 million related to the acquisition of
Insignia, APM and VDOnet and the licensing of EPiCON, depreciation and
amortization of $15.2 million and an increase in deferred revenue of
approximately $23.3 million related to the Development Agreement. These cash
inflows were partially offset by increases in accounts receivable and deferred
tax assets of $28.9 million and $14.5 million, respectively. Cash used in
investing activities of $147.2 million for 1998 related primarily to the
purchase of investments of $284.8 million and partially offset by cash inflows
from the sale of investments totaling $219.9 million. Cash was also used for
acquisitions and a licensing agreement totaling $70.5 million and the
expenditure of approximately $11.4 million for the purchase of leasehold
improvements and equipment to support the Company's growth and expansion into
new facilities. Cash provided by financing activities of $15.3 million related
primarily to the proceeds from the issuance of common stock under the Company's
stock option and employee stock purchase plans.
During 1997, the Company generated positive operating cash flows primarily
from the receipt of an initial license fee of $75.0 million related to the
Development Agreement. The revenues from this Development
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Agreement are being recognized ratably over the contract period of five years,
which caused a substantial increase in deferred revenue relating to the
Development Agreement. Additionally, during the same period, the Company
increased profitability, which was partially offset by an increase in deferred
tax assets attributable to the taxability of the initial license fee received
under the terms of the Development Agreement. The Company also recognized tax
benefits from the exercise of non-statutory stock options and disqualifying
dispositions of incentive stock options of approximately $10.7 million. The
Company also purchased and sold short-term investments for approximately $126.5
million and $75.6 million, respectively, during 1997. Additionally, the Company
spent approximately $6.1 million in the same period for the purchase of
leasehold improvements and equipment. These capital expenditures were primarily
associated with the Company's relocation and expansion in its new facilities.
At December 31, 1999, the Company had $763.8 million in cash and
investments and $433.2 million of working capital. The Company's cash and cash
equivalents are invested in investment grade, highly liquid securities to
minimize interest rate risk and allow for flexibility in the event of immediate
cash needs. At December 31, 1999, the Company had $55.3 million in accounts
receivable, net of allowances, and $121.7 million of deferred revenues, of which
the Company anticipates $67.8 million will be earned over the next 12 months.
On April 15, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to $200 million of the Company's common
stock. Purchases will be made from time to time in the open market and paid out
of general corporate funds. As of December 31, 1999, none of the Company's
outstanding common stock had been repurchased under this program.
In February 2000, the Company completed its acquisition of all of the
operating assets of Innovex Group, Inc. for approximately $47.8 million, of
which $28.7 million was paid in cash at the closing date and the balance is
payable, in equal installments, 18 and 24 months after the closing date. The
Company's ultimate purchase price is contingent upon future events.
The Company believes existing cash and investments together with cash flow
expected from operations will be sufficient to meet operating and capital
expenditures requirements through 2000. The Company may from time to time seek
to raise additional funds through public or private financings. The Company may
also acquire or make investments in companies it believes are related to its
strategic objectives. Such investments will reduce the Company's available
working capital.
YEAR 2000 READINESS DISCLOSURE
Last year, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its identification
and testing of systems. As a result of those efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company has not incurred any
material expenditure in connection with identifying or evaluating Year 2000
compliance issues. The Company estimates it will not incur any material levels
of expenditure on this issue during 2000 to support its compliance initiatives.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its computer
systems and those of its suppliers and vendors to ensure that any latent Year
2000 matters that may arise are addressed promptly.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. Citrix's
operating results and financial condition have varied in the past and may in the
future vary significantly depending on a number of factors. Except for the
historical information in this report, the matters contained in this report
include forward-looking statements that involve risks and uncertainties. The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report and
presented elsewhere by management from time to time. Such factors, among others,
may have a material adverse effect upon the Company's business, results of
operations and financial condition.
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Reliance Upon Strategic Relationship with Microsoft
Microsoft is the leading provider of desktop operating systems. Citrix
depends upon the license of key technology from Microsoft, including certain
source and object code licenses and technical support. Citrix also depends upon
its strategic alliance agreement with Microsoft pursuant to which the Company
and Microsoft have agreed to cooperate to develop advanced operating systems and
promote Windows application program interfaces. The Company's relationship with
Microsoft is subject to the following risks and uncertainties:
- Competition with Microsoft. NT Terminal Server is, and future product
offerings by Microsoft may be, competitive with Citrix's current WinFrame
and MetaFrame products, and any future product offerings by Citrix.
- Expiration of Microsoft's Endorsement of the ICA Protocol. Microsoft's
obligation to endorse only the Company's ICA protocol as the preferred
method to provide multi-user Windows access for devices other than
Windows clients expired in November 1999. Microsoft may now market or
endorse other methods to provide multi-user Windows access to non-Windows
client devices.
- Dependence on Microsoft for Commercialization. Citrix's ability to
successfully commercialize its MetaFrame product depends on Microsoft's
ability to market NT Terminal Server products. Citrix does not have
control over Microsoft's distributors and resellers and, to the Company's
knowledge, Microsoft's distributors and resellers are not obligated to
purchase products from Microsoft.
- Product Release Delays. There may be delays in the release and shipment
of future versions of NT Terminal Server.
Dependence Upon Broad-Based Acceptance of ICA Protocol
Citrix believes that its success in the markets in which it competes will
depend upon its ability to make ICA protocol a widely accepted standard for
supporting Windows applications. If another standard emerges or if the Company
otherwise fails to achieve wide acceptance of the ICA protocol as a standard for
supporting Windows applications, the Company's business, operating results and
financial condition could be materially adversely affected. Microsoft includes
as a component of NT Terminal Server its Remote Desktop Protocol (RDP) which has
certain of the capabilities of the Company's ICA protocol, and may offer
customers a competitive solution. The Company believes that its success is
dependent on its ability to enhance and differentiate its ICA protocol, and
foster broad acceptance of the ICA protocol based on its performance,
scalability, reliability and enhanced features. In addition, the Company's
ability to win broad market acceptance of its ICA protocol will depend upon the
degree of success achieved by its strategic partners in marketing their
respective platforms, product pricing and customers' assessment of its
technical, managerial service and support expertise. If another standard emerges
or if the Company fails to achieve wide acceptance of the ICA protocol as a
standard for supporting Windows applications, the Company's business, operating
results and financial condition could be materially adversely affected.
Dependence Upon Strategic Relationships
In addition to its relationship with Microsoft, the Company has strategic
relationships with IBM, Compaq, Hewlett Packard and others. The Company depends
upon its strategic partners to successfully incorporate the Company's technology
into their products and to market and sell such products. If the Company is
unable to maintain its current strategic relationships or develop additional
strategic relationships, or if any of its key strategic partners are
unsuccessful at incorporating its technology into their products or marketing or
selling such products, the Company's business, operating results and financial
condition could be materially adversely affected.
Competition
The markets in which Citrix competes are intensely competitive. Most of its
competitors and potential competitors, including Microsoft, have significantly
greater financial, technical, sales and marketing and other resources than the
Company. The announcement of the release and the actual release of products
competitive
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with the Company's existing and future product lines, such as NT Terminal Server
and related enhancements, could cause existing and potential customers of the
Company to postpone or cancel plans to license the Company's product lines. This
would adversely impact the Company's business, operating results and financial
condition. Further, the Company's ability to market ICA, MetaFrame and other
future product offerings may be affected by Microsoft's licensing and pricing
scheme for client devices implementing the Company's product offerings which
attach to NT Terminal Server.
In addition, alternative products exist for Internet commerce that directly
or indirectly compete with the Company's products. Existing or new products that
extend website software to provide database access or interactive computing can
materially impact the Company's ability to sell its products in this market. As
markets for the Company's products continue to develop, additional companies,
including companies with significant market presence in the computer hardware,
software and networking industries, may enter the markets in which the Company
competes and further intensify competition. Finally, although the Company
believes that price has historically been a less significant competitive factor
than product performance, reliability and functionality, the Company believes
that price competition may become more significant in the future. The Company
may not be able to maintain its historic prices, and any inability to do so
could adversely affect its business, results of operations and financial
condition.
Dependence on Proprietary Technology
Citrix relies primarily on a combination of copyright, trademark and trade
secret laws, as well as confidentiality procedures and contractual provisions,
to protect its proprietary rights. The Company's efforts to protect its
proprietary technology rights may not be successful. The loss of any material
trade secret, trademark, tradename, or copyright could have a material adverse
effect on the Company. Despite the Company's precautions, it may be possible for
unauthorized third parties to copy certain portions of the Company's products or
to obtain and use information regarded as proprietary. A significant portion of
the Company's sales are derived from the licensing of its products under a
"shrink wrap" license agreement that is not signed by licensees and, therefore,
may be unenforceable under the laws of certain jurisdictions. In addition, the
Company's ability to protect its proprietary rights may be affected by the
following:
- Differences in International Law. The laws of some foreign countries do
not protect the Company's intellectual property to the same extent as do
the laws of the United States and Canada.
- Third Party Infringement Claims. Third parties may assert infringement
claims against the Company in the future. This may result in costly
litigation or require the Company to obtain a license to intellectual
property rights of such third parties. Such licenses may not be available
on reasonable terms or at all.
Product Concentration
The Company anticipates that its MetaFrame product line and related
enhancements will constitute the majority of its revenue for the foreseeable
future. The Company's ability to generate revenue from its MetaFrame product
will depend upon market acceptance of NT Terminal Server products. The Company
expects that revenue from MetaFrame-based products will constitute an increasing
percentage of total revenue in the near future and that revenue from
WinFrame-based products will continue to decrease over time as a percentage of
total revenue. Declines in demand for products based on MetaFrame technology may
occur as a result of new competitive product releases, price competition, lack
of success of its strategic partners, technological change or other factors.
Dependence on Key Personnel
The Company's success will depend, in large part, upon the services of a
number of key employees. The Company does not have long-term employment
agreements with any of its key personnel. Any officer or employee can terminate
his or her relationship at any time.
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The effective management of the Company's anticipated growth will depend,
in a large part, upon the Company's ability to (i) retain its highly skilled
technical, managerial and marketing personnel; and (ii) to attract and maintain
replacements for and additions to such personnel in the future. Competition for
such personnel is intense and may affect the Company's ability to successfully
attract, assimilate or retain sufficiently qualified personnel.
New Products and Technological Change
The markets for the Company's products are relatively new and are
characterized by:
- rapid technological change;
- evolving industry standards;
- changes in end-user requirements; and
- frequent new product introductions and enhancements, including
enhancements to certain key technology licensed from Microsoft.
These market characteristics will require the Company to continually
enhance its current products and develop and introduce new products to keep pace
with technological developments and respond to evolving end-user requirements.
Additionally, the Company and others may announce new product enhancements or
technologies that could replace or shorten the life cycle of the Company's
existing product offerings.
The Company believes it will incur additional costs and royalties
associated with the development, licensing or acquisition of new technologies or
enhancements to existing products. This will increase the Company's cost of
revenues and operating expenses. The Company cannot currently quantify such
increase with respect to transactions that have not occurred. The Company may
use a substantial portion of its cash and investments to fund these additional
costs.
The Company may need to hire additional personnel to develop new products,
product enhancements and technologies and to fulfill the Company's
responsibilities under the terms of the Development Agreement. If the Company is
unable to add additional staff and resources, future enhancement and additional
features to its existing or future products may be delayed, which may have a
material adverse effect on the Company's business, results of operations and
financial condition.
Potential for Undetected Errors
Despite significant testing by the Company and by current and potential
customers, new products may contain errors after commencement of commercial
shipments. Additionally, the Company's products depend upon certain third party
products which may contain defects and could reduce the performance of the
Company's products or render them useless. Since the Company's products are
often used in mission-critical applications, errors in the Company's products or
the products of third parties upon which the Company's products rely could give
rise to warranty or other claims by the Company's customers.
Reliance Upon Indirect Distribution Channels and Major Distributors
The Company relies significantly on independent distributors and resellers
for the marketing and distribution of its products. The Company does not control
its distributors and resellers. Additionally, the Company's distributors and
resellers are not obligated to purchase products from the Company and may also
represent other lines of products.
Need to Expand Channels of Distribution
The Company intends to leverage its relationships with hardware and
software vendors and systems integrators to encourage them to recommend or
distribute the Company's products. In addition, an integral part of the
Company's strategy is to expand its direct sales force and add third-party
distributors both
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domestically and internationally. The Company is currently investing, and
intends to continue to invest, significant resources to develop these channels,
which could reduce the Company's profits.
Need to Attract Large Enterprise Customers
The Company intends to attract and service large enterprise customers by
expanding its direct sales force and offering consulting services. The Company's
inability to attract large enterprise customers could have a material adverse
effect on its business, operating results and financial condition. Additionally,
large enterprise customers usually request special pricing and generally have
longer sales cycles which could negatively impact our revenues. Further, as the
Company attempts to attract large enterprise customers, we may need to increase
corporate branding activities which will increase our operating expenses, but
may not proportionally increase our operating revenues.
Maintenance of Growth Rate
The Company's revenue growth rate in 2000 may not approach the levels
attained in 1999, 1998 and 1997. The Company's growth during those three years
is largely attributable to the introduction of MetaFrame in mid-1998 and
WinFrame in late 1995. To the extent revenue growth continues, the Company
believes that its cost of revenues and certain operating expenses will also
increase. Due to the fixed nature of a significant portion of such expenses,
together with the possibility of slower revenue growth, its income from
operations and cash flows from operating and investing activities may decrease
as a percentage of revenues in 2000.
In-Process Research and Development Valuation
The Company has in the past re-evaluated the amounts charged to in-process
research and development in connection with certain acquisitions and licensing
arrangements. The amount and rate of amortization of such amounts are subject to
a number of risks and uncertainties, including, without limitation, the effects
of any changes in accounting standards or guidance adopted by the staff of the
Securities and Exchange Commission or the accounting profession. Any changes in
accounting standards or guidance adopted by the staff of the Securities and
Exchange Commission, may materially adversely affect future results of
operations through increased amortization expense.
Revenue Recognition Process
The Company continually re-evaluates its programs, including specific
license terms and conditions, to market its current and future products and
services. The Company may implement new programs, including offering specified
and unspecified enhancements to its current and future product lines. The
Company may recognize revenues associated with such enhancements after the
initial shipment or licensing of the software product or over the product's life
cycle. The Company modified its licensing fees with certain customers to a per
usage basis. The Company may implement a different licensing model, in certain
circumstances, which would result in the recognition of licensing fees over a
longer period which may result in decreasing revenue. The timing of the
implementation of such programs, the timing of the release of such enhancements
and other factors will impact the timing of the Company's recognition of
revenues and related expenses associated with its products, related enhancements
and services. As a result of these factors, the Company currently cannot
quantify the impact of the re-evaluation of its programs on its business,
results of operations and financial condition.
Product Returns and Price Reductions
The Company provides certain of its distributors with product return rights
for stock balancing or limited product evaluation. The Company also provides
certain of its distributors with price protection rights. To cover these product
returns and price protections, the Company has established reserves based on its
evaluation of historical trends and current circumstances. These reserves may
not be sufficient to cover product returns and price protections in the future,
in which case the Company's operating results may be adversely affected.
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International Operations
The Company's continued growth and profitability will require further
expansion of its international operations. To successfully expand international
sales, the Company must establish additional foreign operations, hire additional
personnel and recruit additional international resellers. Such international
operations are subject to certain risks, such as:
- difficulties in staffing and managing foreign operations;
- dependence on independent distributors and resellers;
- fluctuations in foreign currency exchange rates;
- compliance with foreign regulatory and market requirements;
- variability of foreign economic and political conditions;
- changing restrictions imposed by regulatory requirements, tariffs or
other trade barriers or by United States export laws;
- costs of localizing products and marketing such products in foreign
countries;
- longer accounts receivable payment cycles;
- potentially adverse tax consequences, including restrictions on
repatriation of earnings;
- difficulties in protecting intellectual property; and
- burdens of complying with a wide variety of foreign laws.
Volatility of Stock Price
The market price for the Company's Common Stock has been volatile and has
fluctuated significantly to date. The trading price of the Common Stock is
likely to continue to be highly volatile and subject to wide fluctuations in
response to factors such as actual or anticipated variations in operating and
financial results, anticipated revenue or earnings growth, analyst reports or
recommendations and other events or factors, many of which are beyond the
Company's control. In addition, the stock market in general, and The Nasdaq
National Market and the market for software companies and technology companies
in particular, have experienced extreme price and volume fluctuations. These
broad market and industry factors may materially and adversely affect the market
price of the Common Stock, regardless of the Company's actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class-action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
Fluctuations in Economic and Market Conditions
The demand for the Company's products depends in part upon the general
demand for computer hardware and software, which fluctuates based on numerous
factors, including capital spending levels and general economic conditions.
Fluctuations in the demand for the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Management of Growth and Higher Operating Expenses
The Company has recently experienced rapid growth in the scope of its
operations, the number of its employees and the geographic area of its
operations. In addition, the Company has completed certain domestic and
international acquisitions since October 1997. Such growth and assimilation of
acquired operations and personnel of such acquired companies has placed and may
continue to place a significant strain on the Company's managerial, operational
and financial resources. To manage its growth effectively, the Company must
continue to implement and improve additional management and financial systems
and
28
<PAGE> 29
controls. The Company believes that it has made adequate allowances for the
costs and risks associated with these expansions. However, its systems,
procedures or controls may not be adequate to support its current or future
operations. In addition, the Company may not be able to effectively manage this
expansion and still achieve the rapid execution necessary to fully exploit the
market opportunity for its products and services in a timely and cost-effective
manner. The Company's future operating results will also depend on its ability
to manage its expanding product line, expand its sales and marketing
organizations and expand its support organization commensurate with the
increasing base of its installed product.
The Company plans to increase its professional staff during 2000 as it
implements sales, marketing and support and product development efforts, as well
as associated administrative systems, to support planned growth. As a result of
this planned growth in the size of its staff, the Company believes that it will
require additional facilities during 2000. Although the Company believes that
the cost of such additional facilities will not significantly impact its
financial position or results of operations, the Company anticipates that
operating expenses will increase during 2000 as a result of its planned growth
in staff. Such an increase in operating expenses may reduce its income from
operations and cash flows from operating activities in 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
The Company does not use derivative financial instruments for speculative
or trading purposes. The Company maintains a non-trading investment portfolio of
investment grade, highly liquid, debt securities which limits the amount of
credit exposure to any one issue, issuer, or type of instrument. The securities
in the Company's investment portfolio are not leveraged and are generally
classified as available-for-sale and therefore are subject to interest rate
risk. The Company does not currently hedge interest rate exposure. The modeling
technique used measures the change in fair values arising from an immediate
hypothetical shift in market interest rates and assumes ending fair values
include principal plus accrued interest, dividends and reinvestment income. If
market interest rates were to increase by 100 basis points from December 31,
1999 and 1998 levels, the fair value of the portfolio would decline by
approximately $4.5 million and $1.1 million, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Company's Financial Statements and related financial statement
schedule, together with the report of independent certified public accountants,
appear at pages F-1 through F-27, respectively, of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most recent
fiscal years.
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<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the director nominees to be elected at the
Meeting, the directors and the executive officers of the Company, their ages,
and the positions currently held by each such person with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mark B. Templeton.......................... 47 President, Chief Executive Officer and
Director
Edward E. Iacobucci........................ 46 Chairman of the Board, Senior Vice
President, Strategy & Technology, and Chief
Technical Officer
John P. Cunningham......................... 62 Chief Financial Officer, Treasurer, Senior
Vice President, Finance and Administration,
and Assistant Secretary
Bruce C. Chittenden........................ 51 Senior Vice President, Software Product
David A.G. Jones........................... 45 Senior Vice President, Worldwide Sales
Douglas A. Wheeler......................... 37 Senior Vice President, Marketing
John C. Burris............................. 45 Vice President, Worldwide Customer Services
Leslie A. Pendergrast...................... 38 Vice President, Human Resources
David D. Urbani............................ 54 Vice President, Controller
Kevin R. Compton(1)(2)..................... 41 Director
Stephen M. Dow(1).......................... 44 Director
Robert N. Goldman(2)....................... 50 Director
Michael W. Brown........................... 53 Director
John W. White.............................. 61 Director
Tyrone F. Pike............................. 45 Director
Roger W. Roberts........................... 55 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Mark B. Templeton has served as President of the Company since January 1998
and as its Chief Executive Officer since January 1999. He was elected to the
Board of Directors in May 1998. Prior to January 1998, he served as Vice
President, Marketing since joining the Company in June 1995. From April 1994 to
June 1995, Mr. Templeton served as Group Director, Corporate Marketing for UB
Networks, Inc. (formerly Ungermann-Bass, Inc.), a computer network hardware
manufacturer. From November 1993 to April 1994, he served as Executive Vice
President for Softblox, Inc., a software company. From July 1991 to November
1993, Mr. Templeton served as Vice President, Marketing for Keyfile Corporation,
a group collaboration software company. Mr. Templeton also serves on the Board
of Directors of Active Word Systems, Inc.
Edward E. Iacobucci, co-founder of the Company, has served as a director
since the Company's inception in 1989 and as Chairman of the Board since
September 1991. From the Company's inception until April 1999, Mr. Iacobucci
served as Chief Technical Officer and Vice President, Strategy & Technology. Mr.
Iacobucci is the author of the well-known OS/2 Programmer's Guide. In April
1999, Mr. Iacobucci was promoted to Senior Vice President, Strategy &
Technology. Prior to forming the Company in 1989, Mr. Iacobucci was employed for
eleven years by IBM, where he was most recently responsible for the design and
architecture of IBM PC operating systems and led the joint IBM/Microsoft design
team that conceived the original OS/2 product. Earlier at IBM, Mr. Iacobucci had
overall responsibility for the design and architecture of the IBM network
management product, NetView. Mr. Iacobucci also serves on the Board of Directors
of Caldera Systems, Inc.
John P. Cunningham joined the Company as its Chief Financial Officer,
Senior Vice President, Finance and Administration, Treasurer and Assistant
Secretary in November 1999. Prior to joining the Company,
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<PAGE> 31
Mr. Cunningham served as Executive Vice-President and Chief Financial Officer of
Getronics NV (formerly Wang Global), a computer services firm, from 1998 to
1999. Prior to that, he served as Chief Financial Officer at Whirlpool
Corporation, a diversified manufacturer, from 1996 to 1998 and Maytag
Corporation, a diversified manufacturer, from 1994 to 1996. Mr. Cunningham has
also served as Corporate Controller and held other general management at
International Business Machines Corporation.
Bruce C. Chittenden joined the Company in 1993 as Vice President,
Engineering. In April 1999, Mr. Chittenden was promoted to Senior Vice
President, Software Products. Prior to joining the Company, he served as Vice
President, Engineering and Manufacturing of Uniquest, Inc., a network software
manufacturer, from March to November 1993. From July 1991 to March 1993, Mr.
Chittenden served as Executive Vice President of Computone Corporation, a
computer peripherals manufacturer, and from April 1984 to July 1991 he served as
Vice President, Engineering of The Santa Cruz Operation, Inc., a systems
software manufacturer.
David A.G. Jones joined the Company in October 1998 as Vice President,
International. In April 1999, Mr. Jones was promoted to Senior Vice President,
Worldwide Sales. Prior to joining the Company, he served as President of The
Vision Factory, Inc., a developer of e-commerce software tools, from 1997 to
1998. From 1996 to 1997, he served as Vice President -- International of
mFactory Inc., a developer of multimedia development software. From 1993 to
1996, Mr. Jones served as Senior Director for Apple Computer, Inc., a computer
company.
Douglas A. Wheeler joined the Company in October 1999 as Senior Vice
President, Marketing. Prior to joining the Company, he served as Vice President,
Corporate Marketing for Compaq Computer Corporation, a computer manufacturer
from 1997 to 1999. From 1996 to 1997, he served as Vice President, Corporate
Marketing for Tandem Computers, a computer manufacturer. From 1993 to 1995, he
served as Vice President, Corporate Marketing for UB Networks, a computer
network hardware manufacturer.
John C. Burris joined the Company in July 1999 as Vice President, Worldwide
Customer Services. Prior to joining the Company, Mr. Burris was employed by
Lucent Technologies, from 1996 to 1999 as Vice President and General Manager of
the Gulf States region. Prior to 1996, Mr. Burris was employed in various
customer service capacities for AT&T Corporation including a term as managing
director for AT&T's Asia/Pacific region.
Leslie A. Pendergrast joined the Company in July 1996 as Director, Human
Resources. In April 1999, Ms. Pendergrast was promoted to Vice President, Human
Resources. Prior to joining the Company, Ms. Pendergrast served as Manager,
Human Resources for Certified Vacations, a travel services company, from 1995 to
1996.
David D. Urbani joined the Company in March 2000 as Vice President,
Controller. Prior to joining the Company, Mr. Urbani served as Vice President,
Treasurer for Maytag Corporation, a diversified manufacturer, from 1995 to 2000.
Kevin R. Compton has served as a director of the Company since March 1991.
Since 1990, Mr. Compton has served as a general partner of Kleiner Perkins
Caufield & Byers, a venture capital investment firm. From May 1985 to December
1990, Mr. Compton was the vice president and general manager of the network
systems team at Businessland, Inc., a computer retailer, and at AmeriSource
Corporation prior to its acquisition by Businessland. Mr. Compton serves on the
Board of Directors of OneWorld Systems, Digital Generations Systems, Corsair
Communications and VeriSign and is also a director of several privately-held
companies.
Stephen M. Dow has served as a director of the Company since 1989. Since
1983, Mr. Dow has served as a general partner of Sevin Rosen Funds, a venture
capital investment firm. Mr. Dow serves on the Board of Directors of ArQule,
Inc. and Corsair Communications and is also a director of several privately-held
companies.
Robert N. Goldman has served as a director of the Company since June 1995.
In November 1995, Mr. Goldman was named President and Chief Executive Officer of
eXcelon Corporation, formerly know as Object Design, Inc., a developer of object
data management software. From 1986 to August 1995,
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<PAGE> 32
Mr. Goldman served as Chairman of the Board of Trinzic, Inc. and its predecessor
software companies that were engaged in the development and marketing of
client/server middleware software products. Trinzic was formed by the merger of
AICorp and AION Corporation in 1992. Mr. Goldman served as AICorp President and
Chief Executive Officer from 1986 to 1992. From 1983 to 1986, Mr. Goldman served
as President and Chief Operating Officer of Cullinet Software, Inc., a software
developer. Mr. Goldman serves on the Board of Directors of SystemSoft
Corporation, Parametric Technology Corporation and several privately-held
companies.
Michael W. Brown has served as a director of the Company since July 1997.
Mr. Brown served in various positions at Microsoft Corporation from 1989 through
January 1998, including as Chief Financial Officer until July 1997. Mr. Brown is
a member of the Board of Governors of the National Association of Security
Dealers and Chairman of the Board of Directors of The Nasdaq National Market.
Mr. Brown also serves on the Board of Directors of Wang Laboratories Inc. and
Adminstaff, Inc.
John W. White has served as a director of the Company since 1998. From
March 1994 to August 1998, Mr. White served as Vice President and Chief
Information Officer at Compaq Computer Corporation, a computer company and
supplier of computer systems. Prior to joining Compaq, Mr. White spent more than
28 years at Texas Instruments, a diversified electronics company, most recently
as President of the Information Technology Group. Prior to his tenure at Texas
Instruments, Mr. White worked at Electronic Data Systems Corporation, a
technology based professional services firm. Mr. White serves on the Board of
Directors of Metasolv and Fast Software.
Tyrone F. Pike has served as a director of the Company since 1993. Mr. Pike
is CEO, President and Chairman of VPNX.com, Inc., formerly known as SwitchSoft
Systems, Inc., a network management software company, which he founded in August
1996. From January 1994 to August 1996, Mr. Pike served in various positions at
UB Networks, Inc., a computer network hardware manufacturer, including Senior
Vice President and Chief Technical Officer from April 1995 to August 1996,
Senior Vice President and General Manager Network Products Division from August
1994 to April 1995, and Senior Vice President and General Manager Network
Services Division from January to August 1994. Prior to joining UB Networks, Mr.
Pike served as a partner of Pike Associates, a consulting firm, from September
1992 to January 1994. From March to September 1992, Mr. Pike served as President
and CEO of Global Village Communications, Inc., a Macintosh software and
hardware supplier. From May 1991 to June 1992, he served as Manager, Strategic
Planning & Business Development of Intel Corporation, a manufacturer of computer
chips. From April 1983 to May 1991, Mr. Pike served as Founder, Chairman and
President of LANSystems, Inc., a local area network company and a network
management software provider, of which he served as a director until February
1994. Mr. Pike serves on the Board of Directors for Kaspia Systems, Inc. and
Puma Technology.
Roger W. Roberts has served as a director since joining the Company in June
1990. He also served as Chief Executive Officer of the Company from June 1990
until December 1998 and served as President of the Company from June 1990 until
January 1998. Prior to joining the Company, Mr. Roberts was employed for over
twenty years by Texas Instruments, a diversified electronics company, where he
held technical, marketing and general management positions. Most recently at
Texas Instruments, Mr. Roberts was Director of Marketing for the Peripheral
Products Division, responsible for the MicroLaser printers and TravelMate
notebooks.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors have been duly elected and
qualified.
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<PAGE> 33
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION SUMMARY
The following table sets forth summary information concerning the
compensation paid or earned for services rendered to the Corporation in all
capacities during the fiscal years ended December 31, 1999, 1998 and 1997 to (i)
the Company's Chief Executive Officer during 1999 and (ii) each of the other
four most highly compensated executive officers of the Company who received
total annual salary and bonus in excess of $100,000 in fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS(3)
-------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($)(2) OPTIONS(#) COMPENSATION($)
--------------------------- ---- --------- ----------- ------------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mark B. Templeton................... 1999 307,500 176,396 4,859 1,200,000 --
President, Chief Executive 1998 205,000 137,128 -- 600,000 --
Officer and Director 1997 160,000 90,000 -- 225,000 --
Edward E. Iacobucci................. 1999 232,500 83,298 6,868 200,000 --
Chairman of the Board, 1998 200,000 101,000 -- 300,000 66,259(4)
Senior Vice President, Strategy 1997 175,000 85,000 -- 450,000 --
& Technology and Chief Technical
Officer
David A.G. Jones.................... 1999 190,000 112,697 -- 220,000 1,512(5)
Senior Vice President, 1998 42,500 20,000 -- 300,000 129,663(5)
Worldwide Sales 1997 -- -- -- -- --
Bruce C. Chittenden................. 1999 190,000 78,398 1,401 180,000 --
Senior Vice President, 1998 170,000 94,770 -- 160,000 --
Software Products 1997 150,000 75,000 -- 225,000 --
James J. Felcyn, Jr.(6)............. 1999 185,000 68,598 9,332 80,000 --
Former Chief Financial 1998 170,000 76,128 -- 160,000 --
Officer, Treasurer, Vice 1997 150,000 55,000 -- 225,000 --
President, Finance, Administration
and Assistant Secretary
Marc-Andre Boisseau(7).............. 1999 127,500 26,350 -- 120,000 --
Former Vice President, 1998 106,792 -- -- 56,400 --
Controller and Principal 1997 76,000 -- -- 116,850 --
Accounting Officer
</TABLE>
- ---------------
(1) Bonuses are reported in the year earned, even if actually paid in a
subsequent year.
(2) Consists of amounts paid in lieu of such officer's inability to defer
certain matching 401(k) contributions due to the terms of the Company's
401(k) Plan.
(3) The Company did not grant any restricted stock awards or stock appreciation
rights or make any long term incentive plan payouts during the fiscal years
ended December 31, 1999, December 31, 1998 and December 31, 1997. On
February 20, 1998, the Company effected a 3-for-2 stock split in the form of
a 50% stock dividend to the stockholders of record of the Company's Common
Stock on February 12, 1998. On March 25, 1999, the Company effected a
2-for-1 stock split in the form of a 100% stock dividend to the stockholders
of record of the Company's Common Stock on March 17, 1999. On February 16,
2000, the Company effected a 2-for-1 stock split in the form of a 100% stock
dividend to the stockholders of record of the Company's Common Stock on
January 31, 2000. All share numbers in this table and elsewhere in this
proxy statement reflect such stock splits.
(4) Consists on non-reimbursed business expenses.
(5) Consists of relocation expenses.
(6) Mr. Felcyn resigned from his officerships in the Company effective November
30, 1999 and currently serves as a consultant/advisor to the Company.
(7) Mr. Boisseau resigned from the Company effective January 3, 2000.
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<PAGE> 34
Option Grants in Last Fiscal Year
The following table sets forth each grant of stock options made during the
year ended December 31, 1999 pursuant to the Company's 1995 Stock Plan to each
of the executive officers named in the Summary Compensation Table (the "Named
Executive Officers"). The Company did not grant any stock options pursuant to
the Company's 1989 Stock Option Plan or any stock appreciation rights to the
Named Executive Officers during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------
NUMBER % OF TOTAL POTENTIAL REALIZABLE VALUE AT
OF OPTIONS ASSUMED ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE TERM(2)
OPTIONS IN FISCAL PRICE(1) EXPIRATION ------------------------------
NAME GRANTED(#) YEAR ($/SHARE) DATE 5%($) 10%($)
---- ---------- ---------- --------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Mark B. Templeton........................ 400,000 1.91 19.66 2/28/09 4,944,684 12,530,800
400,000 1.91 22.60 2/28/09 3,765,304 11,351,420
400,000 1.91 25.55 2/28/09 2,585,924 10,172,040
Edward E. Iacobucci...................... 200,000 0.95 24.38 5/31/09 3,065,861 7,769,494
David A.G. Jones......................... 120,000 0.57 24.38 5/31/09 1,839,517 4,661,696
100,000 0.48 25.44 8/1/09 1,599,751 4,054,082
Bruce C. Chittenden...................... 80,000 0.38 24.38 5/31/09 1,226,345 3,107,797
100,000 0.48 25.44 8/1/09 1,559,751 4,054,082
James J. Felcyn, Jr...................... 80,000 0.38 24.38 5/31/09 1,226,345 3,107,797
Marc-Andre Boisseau...................... 60,000 0.29 24.38 5/31/09 919,759 2,330,848
60,000 0.29 25.44 8/1/09 959,850 2,432,449
</TABLE>
- ---------------
(1) The exercise price per share of each option was determined by the
Compensation Committee to be equal to the fair market value per share of
Common Stock on the date of grant. The fair market value per share of Common
Stock as of March 10, 2000 was $107.50.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation of the
Company's Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and Common Stock
holdings are dependent on the timing of such exercises and the future
performance of the Company's Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.
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<PAGE> 35
AGGREGATE OPTION EXERCISES AND YEAR-END VALUES
The following table sets forth, for each of the Named Executive Officers,
information with respect to the exercise of stock options during the year ended
December 31, 1999 and the year-end value of unexercised options.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBERS OF UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE($)(2)
---- ----------- --------------- ---------------------------- -------------------------------
<S> <C> <C> <C> <C>
Mark B. Templeton............ 304,846 6,975,128 397,858/1,682,820 19,847,837/70,334,407
Edward E. Iacobucci.......... 525,928 9,261,423 678,442/640,632 36,104,334/30,069,650
David A.G. Jones............. 87,494 1,530,498 2/432,504 90/17,580,739
Bruce C. Chittenden.......... 206,304 3,475,926 28,544/419,488 1,505,238/18,709,692
James J. Felcyn, Jr.......... 222,914 4,964,690 10,940/309,488 598,836/14,732,118
Marc-Andre Boisseau.......... 73,018 1,653,631 2,437/197,547 137,535/8,364,958
</TABLE>
- ---------------
(1) Amounts disclosed in this column were calculated based on the difference
between the fair market value of the Company's Common Stock on the date of
exercise and the exercise price of the options in accordance with
regulations promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and do not reflect amounts actually received
by the named officers.
(2) Value is based on the difference between the option exercise price and the
fair market value at December 31, 1999, the fiscal year-end ($62.50 per
share), multiplied by the number of shares underlying the option.
STOCK PLANS
The Company currently has three employee stock ownership plans: the 1989
Stock Option Plan, the 1995 Stock Plan and the 1995 Employee Stock Purchase
Plan. The 1989 Stock Option Plan, the 1995 Stock Plan and the 1995 Employee
Stock Purchase Plan are all administered by the Compensation Committee of the
Board of Directors. The 1989 Stock Option Plan has expired and no further
options may be granted pursuant to such plan. As of March 10, 2000, options to
purchase an aggregate of 824,332 shares of Common Stock were issued and
outstanding under the 1989 Stock Option Plan, all of which were then
exercisable.
Under the terms of the Company's 1995 Stock Plan, the Company is authorized
to make stock awards, provide eligible individuals with the opportunity to
purchase stock, grant incentive stock options and grant non-statutory stock
options to employees, consultants, directors and officers of the Company. The
1995 Stock Plan originally provided for the issuance of up to 36,000,000 shares
(adjusted for stock splits), plus, effective on January 1, 1997, on January 1 of
each year, a number of shares of Common Stock equal to five percent (5%) of the
total number of shares of Common Stock issued and outstanding as of December 31
of the preceding year. Notwithstanding the foregoing, no more than 60,000,000
shares (adjusted for stock splits) of Common Stock may be issued pursuant to the
exercise of incentive stock options granted under the 1995 Stock Plan. The terms
of such Stock Rights, including number of shares subject to each Stock Right,
when the Stock Right becomes exercisable, the exercise or purchase price of the
Stock Right, the duration of the Stock Right and the time, manner and form of
payment upon exercise of a Stock Right, are generally determined by the
Compensation Committee. As of March 10, 2000, options to purchase an aggregate
of 40,735,457 shares of Common Stock were issued and outstanding under the 1995
Stock Plan, of which options for approximately 4,676,735 shares were then
exercisable. The Company proposes to amend and restate the 1995 Stock Plan at
the upcoming Annual Meeting of Stockholders to be held on May 18, 2000.
The 1995 Employee Stock Purchase Plan provides for the issuance of a
maximum of 9,000,000 shares of Common Stock (adjusted for stock splits) pursuant
to the exercise of nontransferable options granted to participating employees.
Under the 1995 Employee Stock Purchase Plan, eligible employees of the Company
may participate in semi-annual plan offerings in which payroll deductions may be
used to purchase shares of Common Stock. The purchase price of such shares is
the lower of 85% of the fair market value of the Common Stock on the day the
offering commences or 85% of the fair market value of the Common Stock on
35
<PAGE> 36
the day the offering terminates. As of March 10, 2000, 227,572 shares of Common
Stock had been purchased under the 1995 Employee Stock Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Committee are Messrs. Compton and Dow. No member of the
Committee was at any time during the past year an officer or employee of the
Company or any of its subsidiaries, was formerly an officer of the Company or
any of its subsidiaries, or had any relationship with the Company requiring
disclosure herein.
During the last year, no executive officer of the Company served as (i) a
member of the compensation committee (or other committee of the Board of
Directors performing equivalent functions or, in the absence of any such
committee, the entire Board of Directors) of another entity, one of whose
executive officers served on the Compensation Committee of the Company; (ii) a
director of another entity, one of whose executive officers served on the
Compensation Committee of the Company; or (iii) a member of the Compensation
Committee (or other committee of the Board of Directors performing equivalent
functions or, in the absence of any such committee, the entire Board of
Directors) of another entity, one of whose executive officers served as a
director of the Company.
COMPENSATION OF DIRECTORS
Employee Directors do not receive cash compensation for their service as
members of the Board of Directors. Non-employee Directors receive a fee of
$1,500 for each meeting of the Board of Directors that they attend, $200 for
each meeting of the Board of Directors that they participate in via telephone,
and $500 for each committee meeting that they attend. Non-employee Directors are
reimbursed for their reasonable out-of-pocket expenses incurred in attending
such meetings.
Non-employee directors are also eligible for participation in the 1995
Non-Employee Director Stock Option Plan. The 1995 Non-Employee Director Stock
Option Plan provides for the grant of options to purchase a maximum of 3,600,000
shares (adjusted for stock splits) of Common Stock to non-employee directors of
the Company. The 1995 Non-Employee Director Stock Option Plan authorizes the
grant to each director who is not an employee of the Company and who is first
elected as a director after the date of the Company's initial public offering,
an option to purchase 180,000 shares of Common Stock (adjusted for stock
splits). Each non-employee director will also receive, on each three-year
anniversary of such director's first election to the Board of Directors, an
option to purchase 180,000 shares of Common Stock (adjusted for stock splits),
provided that such director has continuously served on the Board of Directors
during such three-year period. The exercise price per share for all options
granted under the 1995 Non-Employee Director Stock Option Plan will be equal to
100% of the fair market value per share of the Common Stock as of the date of
grant. As of March 10, 2000, 1,106,475 options had been granted under the 1995
Non-Employee Director Stock Option Plan, of which options for approximately
520,051 shares were then exercisable.
36
<PAGE> 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the Record Date: (i) by each
person who is known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock; (ii) by each director or nominee of the
Company; (iii) by each present or former executive officer of the Company named
in the Summary Compensation Table and (iv) by all directors, executive officers
and nominees of the Company as a group. On February 16, 2000, the Company
effected a 2-for-1 stock split in the form of a 100% stock dividend to
stockholders of record of the Company's Common Stock on January 31, 2000. All
share numbers in this table and elsewhere in this proxy statement reflect such
stock split.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER OWNED(1) BENEFICIALLY OWNED(1)
- ------------------------ ------------------- ----------------------
<S> <C> <C>
Morgan Stanley Dean Witter & Co. (2)...................... 10,091,952 5.5%
1585 Broadway
New York, NY 10036
FMR Corp.(3).............................................. 14,253,346 7.7%
83 Devonshire Street
Boston, MA 02109
AMVESCAP PLC(4)........................................... 13,683,702 7.4%
11 Devonshire Square
United Kingdom ECZM 4YR
Roger W. Roberts (5)...................................... 1,667,495 *
Edward E. Iacobucci (6)................................... 1,556,909 *
Mark B. Templeton (7)..................................... 854,167 *
Michael W. Brown (8)...................................... 165,000 *
Kevin R. Compton (9)...................................... 271,422 *
Stephen M. Dow (10)....................................... 180,516 *
Robert N. Goldman (11).................................... 55,000 *
Tyrone F. Pike (12)....................................... 207,748 *
Bruce C. Chittenden (13).................................. 46,143 *
David A.G. Jones (14)..................................... 12,501 *
John W. White (15)........................................ 10,875 *
James J. Felcyn, Jr.(16).................................. 47,808 *
Marc-Andre Boisseau....................................... 0 *
All executive officers, directors and nominees as a group
(17).................................................... 5,087,786 2.8%
</TABLE>
- ---------------
* Represents less than 1% of the outstanding Common Stock
(1) Applicable percentage of ownership as of March 10, 2000 is based upon
184,119,747 shares of Common Stock outstanding. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission (the "Commission"), and includes voting and investment power
with respect to shares. Unless otherwise indicated below, to the knowledge
of the Company, all persons listed below have sole voting and investment
power with respect to their shares of Common Stock, except to the extent
authority is shared by spouses under applicable law. Pursuant to the rules
of the Commission, the number of shares of Common Stock deemed outstanding
includes shares issuable pursuant to options held by the respective person
or group which may be exercised within 60 days of March 10, 2000
("presently exercisable stock options").
(2) With respect to information relating to Morgan Stanley Dean Witter & Co.,
the Company has relied on information supplied by such entity in its
Schedule 13G filing with the Commission on February 1, 2000. Morgan Stanley
Dean Witter & Co. shares voting power with certain account holders with
respect
37
<PAGE> 38
to 10,000,578 shares and shares investment power with certain account
holders with respect to 10,091,952 shares.
(3) With respect to information relating to FMR Corp., the Company has relied
on information supplied by such entity in its Schedule 13G filing with the
Commission on February 11, 2000.
(4) With respect to information relating to AMVESCAP PLC, the Company has
relied on information supplied by such entity in its Schedule 13G filing
with the Commission on February 4, 2000. AMVESCAP PLC shares voting power
and investment power with certain affiliated entities with respect to
13,683,702 shares.
(5) Includes 1,271,875 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(6) Includes 290,949 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(7) Includes 754,893 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(8) Consists of 165,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(9) Includes 180,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(10) Includes 90,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(11) Consists of 55,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(12) Includes 91,816 shares of Common Stock issuable pursuant to presently
exercisable stock options. Also includes 2,400 shares of Common Stock held
in trust for the benefit of Mr. Pike's children.
(13) Consists of 46,143 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(14) Consists of 12,501 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(15) Includes 10,075 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(16) Consists of 47,808 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(17) Includes presently exercisable stock options to purchase an aggregate of
3,024,762 shares of Common Stock. See footnotes (5), (6), (7), (8), (9),
(10), (11), (12), (13), (14), (15) and (16).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted a policy that all transactions between the Company
and its officers, directors, principal shareholders and their affiliates shall
be on terms no less favorable to the Company than could be obtained by the
Company from unrelated third parties, and shall be approved by a majority of the
outside independent and disinterested directors.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)1. CONSOLIDATED FINANCIAL STATEMENTS.
For a list of the consolidated financial information included herein, see
Index on Page F-1.
2. FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statement schedule is included in Item
8:
Valuation and Qualifying Accounts
38
<PAGE> 39
3. LIST OF EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
2.1(1) -- Agreement and Undertaking by and among the Non-Executive
Directors of APM Limited, the Executive Directors of APM
Limited, and Citrix Systems, Inc.
2.2(1) -- Recommended Offers by Citrix Systems, Inc. for APM Limited
2.3 -- Asset Purchase Agreement dated February 15, 2000 by and
among the Company, Innovex Group, Inc. and certain
stockholders of Innovex
3.1(2) -- Amended and Restated Certificate of Incorporation of the
Company
3.2(2) -- Amended and Restated By-laws of the Company
3.3(3) -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation
4.1(2) -- Specimen certificate representing the Common Stock
4.2(4) -- Indenture by and between the Company and State Street Bank
and Trust Company as Trustee dated as of March 22, 1999,
including the form of Debenture.
4.3(4) -- Form of Debenture (included in Exhibit 4.1).
4.3(4) -- Registration Rights Agreement by and between the Company and
Credit Suisse First Boston Corporation dated as of March 22,
1999.
10.1(2)* -- 1989 Stock Option Plan
10.2(2)* -- 1995 Stock Plan
10.3(2)* -- 1995 Non-Employee Director Stock Option Plan
10.4(2)* -- 1995 Employee Stock Purchase Plan
10.5(2) -- Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.6(2) -- Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.7(2) -- License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15, 1990
10.8(2) -- Amendment No. 1 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated May 6, 1991
10.9(2) -- Amendment No. 2 to License Agreement between the Company and
Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x,
dated October 1, 1992
10.10(2) -- Amendment No. 3 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated January 1, 1994
10.11(2) -- Amendment No. 4 to the License Agreement between the Company
and Microsoft dated August 15, 1990, dated January 31, 1995
10.12(2) -- Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.13(2) -- Form of Indemnification Agreement
10.14(5) -- Lease Agreement between Halmos Trading and Investment
Company and the Company dated June 6, 1996
10.15(6) -- License, Development and Marketing Agreement dated July 9,
1996 between the Company and Microsoft Corporation
10.16(7) -- License, Development and Marketing Agreement dated May 9,
1997 between the Company and Microsoft Corporation
10.17(8) -- Amendment No. 1 to License, Development and Marketing
Agreement dated May 9, 1997 between the Company and
Microsoft Corporation
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
10.18(9) -- Employment Agreement dated as of January 1, 1999 by and
between the Company and Roger W. Roberts.
21.1 -- List of Subsidiaries
23.1 -- Consent of Ernst & Young LLP
24.1 -- Power of Attorney (Included in signature page)
27 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated herein by reference to the exhibits of the Company's Current
Report on Form 8-K dated as of June 30, 1998.
(2) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(3) Incorporated herein by reference to Exhibits 3 and 4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(4) Incorporated herein by reference to exhibits of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(5) Incorporated herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(6) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(7) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
(8) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(9) Incorporated herein by reference to Exhibit 10.18 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 1999.
(c) EXHIBITS.
The Company hereby files as part of this Form 10-K the exhibits listed in
Item 14(a)(3) above. Exhibits which are incorporated herein by reference can be
inspected and copied at the public reference facilities maintained by the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C., and at the
Commission's regional offices at CitiCorp Center, 500 West Madison Street, Suite
1400, Chicago, IL 60661-2511 and Seven World Trade Center, Suite 1300, New York,
NY 10048. Copies of such material can also be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 29549, at
prescribed rates.
(d) FINANCIAL STATEMENT SCHEDULE.
The Company hereby files as part of this Form 10-K the consolidated
financial statement schedule listed in Item 14(a)(2) above, which is attached
hereto.
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Fort Lauderdale,
Florida on the 23rd day of March, 2000.
CITRIX SYSTEMS, INC.
By: /s/ MARK B. TEMPLETON
------------------------------------
Mark B. Templeton
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Citrix Systems, Inc., hereby
severally constitute and appoint Roger W. Roberts and Edward E. Iacobucci, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly, to sign for us in our names in the capacities indicated
below, all amendments to this report, and generally to do all things in our
names and on our behalf in such capacities to enable Citrix Systems, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below on the 23rd day of March, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<C> <S>
/s/ EDWARD E. IACOBUCCI Chairman of the Board of Director
- -----------------------------------------------------
Edward E. Iacobucci
/s/ MARK B. TEMPLETON President, Chief Executive Officer and
- ----------------------------------------------------- Director (Principal Executive Officer)
Mark B. Templeton
/s/ JOHN P. CUNNINGHAM Chief Financial Officer and Senior Vice
- ----------------------------------------------------- President of Finance and Administration
John P. Cunningham (Principal Financial Officer)
/s/ DAVID URBANI Vice President, Corporate Controller
- ----------------------------------------------------- (Principal Accounting Officer)
David Urbani
/s/ KEVIN R. COMPTON Director
- -----------------------------------------------------
Kevin R. Compton
/s/ STEPHEN M. DOW Director
- -----------------------------------------------------
Stephen M. Dow
/s/ ROBERT N. GOLDMAN Director
- -----------------------------------------------------
Robert N. Goldman
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<C> <S>
/s/ MICHAEL W. BROWN Director
- -----------------------------------------------------
Michael W. Brown
/s/ TYRONE F. PIKE Director
- -----------------------------------------------------
Tyrone F. Pike
/s/ JOHN W. WHITE Director
- -----------------------------------------------------
John W. White
/s/ ROGER W. ROBERTS Director
- -----------------------------------------------------
Roger W. Roberts
</TABLE>
42
<PAGE> 43
CITRIX SYSTEMS, INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Citrix Systems, Inc. are
included in Item 8:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets -- December 31, 1999 and 1998... F-3
Consolidated Statements of Income -- Years ended December
31, 1999, 1998 and 1997................................... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1999, 1998 and 1997.................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements -- December 31,
1999...................................................... F-8
The following consolidated financial statement schedule
of Citrix Systems, Inc. is included in Item 14(a):
Schedule II Valuation and Qualifying Accounts..... F-27
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
</TABLE>
F-1
<PAGE> 44
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Citrix Systems, Inc.
We have audited the accompanying consolidated balance sheets of Citrix
Systems, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Citrix Systems,
Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
West Palm Beach, Florida
January 14, 2000, except for the seventh paragraph
of Note 7, as to which the date is January 19, 2000
F-2
<PAGE> 45
CITRIX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
1999 1998
-------------- ------------
(IN THOUSANDS, EXCEPT PAR VALUE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 216,116 $127,546
Short-term investments.................................... 221,978 56,934
Accounts receivable, net of allowances of $8,242 and
$6,234 at 1999 and 1998, respectively.................. 55,327 32,798
Inventories............................................... 7,731 4,071
Prepaid expenses.......................................... 35,364 6,745
Other current assets...................................... 7,184 3,037
Current portion of deferred tax assets.................... 26,544 12,885
---------- --------
Total current assets.............................. 570,244 244,016
Long-term investments....................................... 325,755 97,108
Property and equipment, net................................. 31,530 14,183
Intangible assets, net...................................... 63,396 46,799
Long-term portion of deferred tax assets.................... 30,197 29,183
Other assets, net........................................... 16,735 91
---------- --------
$1,037,857 $431,380
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses............... $ 59,561 $ 29,735
Accrued royalties and other accounts payable to
stockholder............................................ 427 2,891
Deferred revenues......................................... 27,907 10,107
Current portion of deferred revenues on contract with
stockholder............................................ 39,898 39,830
Income taxes payable...................................... 9,202 2,553
---------- --------
Total current liabilities......................... 136,995 85,116
Deferred revenues on contract with stockholder.............. 53,912 48,810
Convertible subordinated debentures......................... 313,880 --
Commitments
Stockholders' equity:
Preferred stock at $.01 par value: 5,000 shares
authorized, none issued and outstanding................ -- --
Common stock at $.001 par value: 400,000 shares
authorized; 181,093 and 171,846 issued and outstanding
at 1999 and 1998, respectively......................... 181 172
Additional paid-in capital................................ 309,321 188,121
Retained earnings......................................... 226,105 109,161
Accumulated other comprehensive loss...................... (2,537) --
---------- --------
Total stockholders' equity........................ 533,070 297,454
---------- --------
$1,037,857 $431,380
========== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 46
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C>
Revenues:
Net revenues............................................. $363,455 $216,901 $114,308
Net revenues -- related party............................ 39,830 31,735 9,625
-------- -------- --------
Net revenues.......................................... 403,285 248,636 123,933
-------- -------- --------
Cost of revenues:
Cost of revenues (excluding amortization presented
separately below)..................................... 13,745 13,422 11,265
Cost of revenues -- related party........................ 834 3,260 1,039
-------- -------- --------
Total cost of revenues........................... 14,579 16,682 12,304
-------- -------- --------
Gross margin............................................... 388,706 231,954 111,629
Operating expenses:
Research and development................................. 37,363 22,858 6,948
Sales, marketing and support............................. 121,302 74,855 35,352
General and administrative............................... 37,757 20,131 10,651
Amortization of intangible assets........................ 18,480 10,190 --
In-process research and development...................... 2,300 18,416 3,950
-------- -------- --------
Total operating expenses......................... 217,202 146,450 56,901
-------- -------- --------
Income from operations..................................... 171,504 85,504 54,728
Interest and other income.................................. 23,843 10,043 9,903
Interest expense........................................... (12,622) (75) (9)
-------- -------- --------
Income before income taxes................................. 182,725 95,472 64,622
Income taxes............................................... 65,781 34,370 23,264
-------- -------- --------
Net income................................................. $116,944 $ 61,102 $ 41,358
======== ======== ========
Earnings per common share:
Basic earnings per share................................. $ 0.66 $ 0.36 $ 0.25
======== ======== ========
Weighted average shares outstanding...................... 176,260 168,473 163,444
======== ======== ========
Earnings per common share -- assuming dilution:
Diluted earnings per share............................... $ 0.61 $ 0.33 $ 0.24
======== ======== ========
Weighted average shares outstanding...................... 192,566 182,594 174,524
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 47
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL LOSS EARNINGS EQUITY
------- ------ ---------- ------------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... 160,082 $160 $134,990 $ -- $ 6,701 $141,851
Exercise of stock options........ 5,776 6 2,716 -- -- 2,722
Repurchase and cancellation of
common stock previously
issued......................... (6) -- (1) -- -- (1)
Common stock issued under
employee stock purchase plan... 40 -- 242 -- -- 242
Tax benefit from employer stock
plans.......................... -- -- 10,676 -- -- 10,676
Net income....................... -- -- -- -- 41,358 41,358
------- ---- -------- ------- -------- --------
Balance at December 31, 1997..... 165,892 166 148,623 -- 48,059 196,848
Exercise of stock options........ 5,924 6 14,951 -- -- 14,957
Cash in lieu of fractional
shares......................... -- -- (3) -- -- (3)
Common stock issued under
employee stock purchase plan... 30 -- 376 -- -- 376
Tax benefit from employer stock
plans.......................... -- -- 24,174 -- -- 24,174
Net income....................... -- -- -- -- 61,102 61,102
------- ---- -------- ------- -------- --------
Balance at December 31, 1998..... 171,846 172 188,121 -- 109,161 297,454
Exercise of stock options........ 9,220 9 69,753 -- -- 69,762
Common stock issued under
employee stock purchase plan... 27 -- 604 -- -- 604
Tax benefit from employer stock
plans.......................... -- -- 50,843 -- -- 50,843
Net income....................... -- -- -- -- 116,944 116,944
Unrealized loss on
available-for-sale securities,
net of related taxes........... -- -- -- (2,537) -- (2,537)
------- ---- -------- ------- -------- --------
Balance at December 31, 1999..... 181,093 $181 $309,321 $(2,537) $226,105 $533,070
======= ==== ======== ======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 48
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $116,944 $ 61,102 $ 41,358
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 27,563 15,173 1,712
Tax benefit related to the exercise of non-statutory
stock options and disqualified dispositions of
incentive stock options.............................. 50,843 24,174 10,675
In-process research and development.................... 2,300 18,416 3,950
Provision for doubtful accounts........................ 584 620 1,399
Provision for product returns.......................... 17,996 8,580 5,809
Provision for inventory obsolescence................... 1,982 417 --
Accretion of original issue discount and amortization
of financing cost.................................... 12,592 -- --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable.................................. (41,110) (28,924) (15,249)
Inventories.......................................... (5,641) (2,216) (1,550)
Prepaid expenses..................................... (32,762) (5,352) (2,733)
Other assets......................................... (7,277) (91) --
Deferred tax assets.................................. (14,674) (14,536) (24,362)
Accounts payable and other accrued expenses.......... 27,526 9,492 8,472
Accrued royalties and other accounts payable to
stockholder....................................... (2,464) (153) 1,520
Deferred revenues.................................... 17,800 6,960 1,073
Deferred revenues on contract with stockholder....... 5,170 23,265 65,375
Income taxes payable................................. 6,649 2,391 236
-------- --------- ---------
Net cash provided by operating activities................... 184,021 119,318 97,685
INVESTING ACTIVITIES
Purchases of investments.................................... (547,510) (284,793) (126,536)
Proceeds from sale of investments........................... 151,284 219,861 75,632
Cash paid for acquisitions, net of cash acquired............ (35,006) (63,549) (2,611)
Cash paid for licensing agreement........................... -- (7,000) --
Purchases of property and equipment......................... (26,313) (11,420) (6,104)
Purchase of trademark....................................... -- (250) --
-------- --------- ---------
Net cash used in investing activities....................... (457,545) (147,151) (59,619)
</TABLE>
F-6
<PAGE> 49
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from issuance of common stock.................. 70,366 15,329 2,964
Net proceeds from issuance of convertible subordinated
debentures................................................ 291,920 -- --
Other....................................................... (192) (31) (84)
-------- --------- ---------
Net cash provided by financing activities................... 362,094 15,298 2,880
-------- --------- ---------
Change in cash and cash equivalents......................... 88,570 (12,535) 40,946
Cash and cash equivalents at beginning of year.............. 127,546 140,081 99,135
-------- --------- ---------
Cash and cash equivalents at end of year.................... $216,116 $ 127,546 $ 140,081
======== ========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of approximately $40,894, $20,481 and $37,976
in 1999, 1998 and 1997, respectively. Additionally, the Company paid interest of
approximately $7, $98 and $9 during the years ended December 31, 1999, 1998 and
1997, respectively.
See accompanying notes.
F-7
<PAGE> 50
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
Citrix Systems, Inc. ("Citrix" or the "Company"), a Delaware corporation
founded on April 17, 1989, is a leading supplier of application server products
and technologies that enable the effective and efficient enterprise-wide
deployment and management of applications designed for Microsoft Windows(R)
operating systems. The Company's MetaFrame(TM) and WinFrame(R) product lines,
developed under license and strategic alliance agreements with Microsoft
Corporation ("Microsoft"), permit organizations to deploy Windows applications
without regard to location, network connection, or type of client hardware
platforms. The Company markets its products through multiple indirect channels
such as distributors, value-added resellers and original equipment
manufacturers, primarily in the United States, Europe and Asia-Pacific.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements of the Company include the accounts
of its wholly-owned subsidiaries, primarily in Europe and Asia-Pacific. All
significant transactions and balances between the Company and its subsidiaries
have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated statements of cash flows, cash and
cash equivalents include marketable securities which are primarily commercial
paper, money market funds, government securities, and corporate securities with
contractual maturities of three months or less. The Company minimizes its credit
risk associated with cash and cash equivalents by investing in high quality,
investment grade instruments and periodically evaluating the credit quality of
its primary financial institutions.
INVESTMENTS
Short-term investments at December 31, 1999 primarily consist of government
securities, corporate securities, and commercial paper. Long-term investments at
December 31, 1999 primarily consist of government securities and corporate
securities. The Company minimizes its credit risk associated with investments by
investing in high quality investment grade securities. Investments are
classified as available-for-sale and are stated at fair value with unrealized
gains and losses, net of taxes, reported in other comprehensive income. The
Company's short-term investments have a contractual maturity of 12 months or
less and have an average contractual maturity of less than eight months. The
Company's long-term investments have a contractual maturity of one to three
years and have an average contractual maturity of approximately one year and ten
months.
ACCOUNTS RECEIVABLE
Substantially all of the Company's accounts receivable are due from
distributors and value-added resellers of microcomputer software. Collateral is
not required. Credit losses and expected product returns are provided for in the
consolidated financial statements and have been within management's
expectations. No significant customer or group of customers within a certain
geographical region represent a significant concentration of credit risks.
INVENTORIES
Inventories, consisting primarily of raw materials, are stated at the lower
of cost (determined by the first-in, first-out method) or market.
F-8
<PAGE> 51
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which is
approximately three years for computer equipment, software, office equipment and
furniture, and the lesser of the lease term or five years for leasehold
improvements. Assets under capital lease are amortized over the shorter of the
asset life or the remaining lease term, which on average is approximately 30
months. Amortization of assets under capital leases is included in depreciation
expense. Accumulated amortization of equipment under capital leases approximated
$504,700 and $425,700 at December 31, 1999 and 1998, respectively.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1999 1998
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Equipment under capital leases............................ $ 630 $ 555
Computer equipment and software........................... 29,163 11,667
Property, equipment and furniture......................... 5,679 2,900
Leasehold improvements.................................... 11,981 6,112
-------- -------
47,453 21,234
Less accumulated depreciation and amortization............ (15,923) (7,051)
-------- -------
$ 31,530 $14,183
======== =======
</TABLE>
INTANGIBLE ASSETS
Intangible assets are being amortized using the straight-line method over
periods ranging from three to four years. The Company periodically reviews core
technology, goodwill and other intangible assets to determine if any impairment
exists based upon projected, undiscounted net cash flows of the related
technology. As of December 31, 1999, in the opinion of management, there has
been no such impairment.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Core technology............................................. $46,730 $40,934
Goodwill and other intangibles.............................. 45,454 15,939
------- -------
92,184 56,873
Less accumulated amortization............................... (28,788) (10,074)
------- -------
$63,396 $46,799
======= =======
</TABLE>
REVENUE RECOGNITION
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") 91-1, "Software Revenue Recognition"
for 1997 and SOP 97-2 (as amended by SOP 98-4) "Software Revenue Recognition"
for 1998 and 1999. Product revenues are recognized upon shipment of the software
product only if no significant Company obligations remain, the fee is fixed or
determinable, and collection of the resulting receivable is deemed probable. In
the case of non-cancelable product licensing arrangements under which certain
Original Equipment Manufacturers ("OEMs") have software reproduction rights,
initial recognition of revenue also requires delivery and customer acceptance of
the product master or first copy. Subsequent
F-9
<PAGE> 52
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognition of revenues is based upon reported royalties from the OEMs as well
as estimates of royalties due through the Company's reporting date. Revenue from
packaged product sales to distributors and resellers is recorded when related
products are shipped. In software arrangements that include rights to multiple
software products, post-contract customer support ("PCS"), and/or other
services, the Company allocates the total arrangement fee among each deliverable
based on the relative fair value of each of the deliverables determined based on
vendor-specific objective evidence ("VSOE"). The Company sells software and PCS
separately and VSOE is determined by the price charged when each element is sold
separately. Product returns and sales allowances, including stock rotations, are
estimated and provided for at the time of sale. Non-recurring engineering fees
are recognized ratably as the work is performed. Revenues from training and
consulting are recognized when the services are performed. Service and
subscription revenues from customer maintenance fees for ongoing customer
support and product updates and upgrades are based on the price charged or
derived value of the undelivered elements and are recognized ratably over the
term of the contract, which is typically twelve months. Service revenues, which
are immaterial when compared to net revenues, are included in net revenues on
the face of the statement of income.
The Company provides most of its distributors with product return rights
for stock balancing and price protection rights. Stock balancing rights permit
distributors to return products to the Company for credit within specified
limits and subject to ordering an equal amount of the Company's products. Price
protection rights require that the Company grant retroactive price adjustments
for inventories of the Company's products held by distributors if the Company
lowers its prices for such products. Allowances for product returns amounted to
approximately $6,697,000 and $4,641,000 at December 31, 1999 and 1998,
respectively. The Company has not and has no plan to reduce its prices for
inventory currently held by distributors or resellers; accordingly, there are no
reserves for price protection at December 31, 1999 and 1998.
During 1997, the Company entered into a License, Development and Marketing
Agreement, as amended (the "Development Agreement") with a stockholder.
According to the Development Agreement, all intellectual property rights which
each party owned at the effective date of the agreement (May 1997) remained as
the sole and exclusive property of such party. As to the technology and
enhancements developed under this agreement, the Company retains ownership of
any Citrix plug-in software, any component or implementation of ICA developed by
Citrix, and other Citrix value added software not encompassed by the scope of
the agreement. Pursuant to the terms of the Development Agreement, the Company
received an aggregate of $75 million as a non-refundable royalty payment for
engineering and support services to be rendered by the Company. This initial fee
is being recognized ratably over the five year term of the contract, which began
in May 1997. Under the terms of the Development Agreement, as amended, the
Company received additional payments totaling $100 million on a quarterly basis.
No additional payments are due pursuant to the Development Agreement. There was
no risk of financial loss as the related products had already been released and
achieved acceptance in the marketplace. Contractually, the Company is not
obligated to repay any of the proceeds received, as the royalty fees are
non-refundable.
Revenue from software maintenance, service, and support arrangements and
training programs and materials, which totaled $15,750,000, $10,531,799 and
$4,289,705 for the years ended December 31, 1999, 1998 and 1997, respectively,
is recognized when the services are provided. Such items are included in net
revenues. The costs of providing training and services are included in sales,
marketing and support expenses.
FOREIGN CURRENCY TRANSLATION
The functional currency of each of the Company's wholly-owned foreign
subsidiaries is the U.S. dollar however, some of the subsidiaries' books and
records are maintained in local currency. Assets and liabilities of the
subsidiaries are remeasured into U.S. dollars at year-end exchange rates, and
revenues and expenses are remeasured at average rates prevailing during the
year. Translation adjustments and foreign currency
F-10
<PAGE> 53
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transaction gains (losses) of approximately $(745,000), $19,000, and $49,000 for
the years ended December 31, 1999, 1998 and 1997, respectively are included in
interest and other income.
COST OF REVENUES
All development costs incurred in connection with the Development Agreement
are expensed as incurred as a separate component of cost of revenues. Cost of
revenues exclude amortization of core technology.
ROYALTY EXPENSE
The Company is a party to licensing agreements with various entities which
require no minimum payment commitment and give the Company the right to use
certain software object code in the development of its products in exchange for
the payment of certain amounts based upon the sales of the related products. The
licensing agreements have terms ranging from one to five years, and include
renewal options. Royalty expense related to these agreements is included in cost
of revenues.
ADVERTISING EXPENSE
The Company expenses advertising costs as incurred. The Company has
cooperative advertising agreements with certain distributors and resellers
whereby the Company will reimburse distributors and resellers for qualified
advertising of Citrix products. Reimbursement is made once the distributor or
reseller provides substantiation of qualified expenditures. The Company
estimates the impact of this program and records it at the time of product sale.
The Company recognized advertising expenses of approximately $12,569,000,
$9,453,000 and $4,551,000 during the years ended December 31, 1999, 1998 and
1997, respectively. These amounts are included in sales, marketing and support
expenses.
INCOME TAXES
Deferred income tax assets and liabilities are determined based upon
differences between the financial statement and income tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. In July 1999, the Company changed its
organizational structure whereby it moved certain operational and administrative
processes to overseas subsidiaries. The Company provides current income taxes on
foreign earnings as if those earnings will be repatriated. The Company is in the
process of evaluating what amount, if any, of the foreign earnings that will be
permanently reinvested. Based on the results of the Company's evaluation
process, the level of permanent reinvestment of foreign earnings may change and
may significantly impact results of operations in the period of change.
SOFTWARE DEVELOPMENT COSTS
SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" requires software development costs to be
capitalized upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management with
respect to certain external factors such as anticipated future revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalizable software development costs have not been significant and have been
expensed as incurred.
F-11
<PAGE> 54
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BUSINESS AND OTHER RISKS
The Company's operating results and financial condition have varied and may
in the future vary significantly depending on a number of factors. The following
factors may have a material adverse effect upon the Company's business, results
of operations and financial conditions:
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
While the Company believes that such estimates are fair when considered in
conjunction with the consolidated financial position and results of
operations taken as a whole, the actual amount of such estimates when known
may vary from these estimates.
Reliance Upon Strategic Relationship. A stockholder is the leading
provider of desktop operating systems. The Company is dependent upon the
license of certain key technology from this stockholder including certain
source and object code licenses, technical support and other materials. The
Company is also dependent on its strategic alliance agreement with this
stockholder which provides for cooperation in the development of
technologies for advanced operating systems, and the promotion of advanced
application program interfaces. Additionally, this stockholder has
significantly greater financial, technical, sales and marketing and other
resources than the Company.
Product Concentration. The Company anticipates that one of its
product technologies and future derivative products and product lines based
upon this technology, if any, will constitute a majority of its revenue for
the foreseeable future. The Company may experience declines in demand for
products based on this technology, whether as a result of new competitive
product releases, price competition, lack of success of its strategic
partners, technological change or other factors.
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value method of accounting for issuance of stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period, which is usually the vesting period. Pursuant to SFAS No. 123,
companies are encouraged, but are not required, to adopt the fair value method
of accounting for employee stock-based transactions. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," (APB Opinion 25) but
are required to disclose in a note to the consolidated financial statements pro
forma net income and per share amounts as if the Company had applied methods
prescribed by SFAS No. 123.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans and has complied with the disclosure requirements of
SFAS No. 123.
EARNINGS PER SHARE
Dilutive common stock equivalents consist of stock options (calculated
using the treasury stock method). All common share and per share data, except
par value per share, have been retroactively adjusted to reflect the
three-for-two stock split of the Company's Common Stock effective February 20,
1998, the two-for-one stock split of the Company's Common Stock effective March
25, 1999 and the two-for-one stock split of the Company's Common Stock effective
February 16, 2000, which are further discussed in Note 7. The convertible
subordinated debentures are common stock equivalents but have been excluded from
the diluted earnings per share calculation as their effect is anti-dilutive.
F-12
<PAGE> 55
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
In 1999, the Company adopted Accounting Standards Executive Committee
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP requires the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. These costs
generally include external direct costs of materials and services consumed in
the project and internal costs such as payroll and benefits of those employees
directly associated with the development of the software. The amount of costs
capitalized in 1999 and 1998 relating to internal use software were $5.4 million
and $100,000, respectively, consisting principally of software purchased and
services provided from external vendors. These costs are being amortized over
the estimated useful life of the software developed, which is generally three
years, and are included in property and equipment, net, in the accompanying
consolidated balance sheets.
COMPREHENSIVE INCOME
In the second quarter of 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components and requires the classification of
changes in the balances of items that are reported directly in a separate
component of stockholders' equity on the consolidated balance sheets. The
adoption of SFAS 130 had no impact on the Company's consolidated financial
position, results of operations or cash flows.
SEGMENT INFORMATION
During 1999, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments and related disclosures about
products, geographic information and major customers. This information is
required to be reported based on how management internally evaluates operating
performance and allocates resources. The adoption of SFAS 131 had no impact on
the Company's consolidated financial position, results of operations or cash
flows.
RECLASSIFICATIONS
Certain reclassifications of the prior years' financial statements have
been made to conform to the current year's presentation.
3. ACQUISITIONS AND LICENSED TECHNOLOGY
In February 1998, the Company completed its acquisition of certain
in-process software technologies and assets of Insignia Solutions, plc
("Insignia") approximately $17.5 million in cash. A portion of the purchase
price was allocated to in-process research and development, which had not
reached technological feasibility and had no alternative future use. The
allocation resulted in a pre-tax charge of approximately $2.7 million to the
Company's operations in the first quarter of 1998.
In June 1998, the Company completed its acquisition of APM Ltd. ("APM") for
approximately $40.4 million in cash. A portion of the purchase price was
allocated to in-process research and development which had not reached
technological feasibility and had no alternative future use. The allocation
resulted in a pre-tax charge of approximately $10.7 million to the Company's
operations in the second quarter of 1998.
In July 1998, the Company completed its acquisition of VDOnet Corporation
Ltd. ("VDOnet") for approximately $8 million in cash. This transaction was
accounted for using the purchase method of accounting with the purchase price
being principally allocated to purchased technologies and intangible assets. A
portion of the total purchase price was allocated to in-process research and
development which had not reached
F-13
<PAGE> 56
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
technological feasibility and had no alternative future use. The allocation
resulted in a pre-tax charge of approximately $2.4 million to the Company's
operations in the third quarter of 1998.
In July 1999, the Company completed its acquisition of certain in-process
software technologies and assets of ViewSoft, Inc. ("ViewSoft") for
approximately $33.5 million in cash and liabilities assumed. A portion of the
purchase price was allocated to in-process research and development, which had
not reached technological feasibility and had no alternative future use. The
allocation resulted in a pre-tax charge of approximately $2.3 million to the
Company's operations in the third quarter of 1999.
In January 1998, the Company licensed certain in-process software
technology from EPiCON, Inc., ("EPiCON") for approximately $8.0 million payable
in cash under a three year licensing agreement. A portion of the licensing fee
was allocated to in-process research and development which had no alternative
future use. The allocation resulted in a pre-tax charge of approximately $2.6
million to the Company's operations in the first quarter of 1998. In December
1999, the Company amended its license agreement with EPiCON to allow the Company
access to additional software technology and to extend the exclusive license
term for an additional $4.0 million, of which $1.3 million was paid in cash at
the amendment date.
Each of the transactions was accounted for under the purchase method of
accounting, applying the provisions of APB Opinion No. 16. The consolidated
financial statements reflect the operations of the acquired businesses for the
periods after their respective dates of acquisition.
As of the date of each of the transactions, the Company concluded that the
in-process technology had no alternative future use after taking into
consideration the potential use of the technology in different products, the
stage of development and life cycle of each project, resale of the software, and
internal use. The value of the purchased IPR&D was expensed at the time of each
of the transactions.
The purchase consideration was allocated to the acquired assets and
liabilities based on fair values as follows:
<TABLE>
<CAPTION>
Insignia EPiCON APM VDOnet ViewSoft
-------- ------ ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net assets acquired (net liabilities
assumed).............................. $ 400 $ -- $ (800) $ (100) $ 128
Purchased intangibles.................... 12,550 5,416 26,900 5,568 2,200
Purchased in-process research and
development........................... 2,700 2,584 10,700 2,432 2,300
Goodwill................................. 1,850 -- 3,600 -- 28,904
------- ------ ------- ------ -------
Total purchase consideration..... $17,500 $8,000 $40,400 $7,900 $33,532
======= ====== ======= ====== =======
</TABLE>
The amounts allocated to purchased intangibles and goodwill are being
amortized on a straight-line basis over three to four years from the date of
each acquisition.
F-14
<PAGE> 57
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. CASH AND INVESTMENTS
The summary of cash and cash equivalents and investments consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents:
Cash...................................................... $ 36,049 $ 29,794
Commercial paper.......................................... 2,106 7,264
Money market funds........................................ 33,139 14,488
Government securities..................................... 86,196 52,712
Corporate securities...................................... 58,626 23,288
-------- --------
Cash and cash equivalents.............................. $216,116 $127,546
======== ========
Short-term investments:
Commercial paper.......................................... $ 12,236 $ --
Corporate securities...................................... 49,989 2,004
Government securities..................................... 159,753 54,930
-------- --------
Short-term investments................................. $221,978 $ 56,934
======== ========
Long-term investments:
Corporate securities...................................... $ 27,801 $ --
Government securities..................................... 292,704 97,108
Other..................................................... 5,250 --
-------- --------
Long-term investments.................................. $325,755 $ 97,108
======== ========
</TABLE>
The unrealized gain (loss) associated with each individual category of cash
and investments is not significant.
5. ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accounts payable.......................................... $ 6,518 $ 1,609
Accrued compensation and employee benefits................ 6,686 4,546
Accrued royalties......................................... 4,996 47
Acquisition-related liabilities........................... 2,667 1,000
Accrued cooperative advertising and marketing programs.... 16,521 9,085
Accrued taxes............................................. 15,232 7,145
Other..................................................... 6,941 6,303
------- -------
$59,561 $29,735
======= =======
</TABLE>
6. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS
STOCK COMPENSATION PLANS
As of December 31, 1999, the Company has four stock-based compensation
plans, which are described below. The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. As mentioned in Note 2, the Company applies APB
F-15
<PAGE> 58
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Opinion 25 and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its fixed stock plans and its stock
purchase plan. Had compensation cost for the Company's four stock-based
compensation plans been determined based on the fair value at the grant dates
for grants under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C> <C>
Net income................................. As reported $116,944 $61,102 $41,358
======== ======= =======
Pro forma $ 64,069 $39,286 $33,016
======== ======= =======
Basic earnings per share................... As reported $ 0.66 $ 0.36 $ 0.25
======== ======= =======
Pro forma $ 0.36 $ 0.23 $ 0.20
======== ======= =======
Diluted earnings per share................. As reported $ 0.61 $ 0.33 $ 0.24
======== ======= =======
Pro forma $ 0.33 $ 0.22 $ 0.19
======== ======= =======
</TABLE>
For purposes of the proforma calculations, the fair value of each option is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following assumptions used:
<TABLE>
<CAPTION>
1999 GRANTS 1998 GRANTS 1997 GRANTS
----------- ----------- -----------
<S> <C> <C> <C>
Dividend yield.............................................. none none none
Expected volatility factor.................................. 0.6 0.6 0.7
Approximate risk free interest rate......................... 5.5% 5.5% 5.5%
Expected lives.............................................. 4.50 years 4.89 years 4.80 years
</TABLE>
The determination of the fair value of all options is based on the
assumptions described in the preceding paragraph, and because additional option
grants are expected to be made each year, the above pro forma disclosures are
not representative of pro forma effects on reported net income or loss for
future years.
FIXED STOCK OPTION PLANS
The Company's 1995 Stock Plan (the 1995 Plan) was adopted by the Board on
September 28, 1995 and approved by the Company's stockholders in October 1995.
Under the terms of the 1995 Plan, the Company is authorized to grant incentive
stock options (ISOs) and nonqualified stock options (NSOs), make stock awards
and provide the opportunity to purchase stock to employees, directors and
officers and consultants of the Company. The 1995 Plan originally provided for
the issuance of a maximum of 36,000,000 (as adjusted for stock splits) shares of
Common Stock, plus, effective January 1, 1997 and each year thereafter, a number
of shares of Common Stock equal to 5% of the total number of shares of Common
Stock issued and outstanding as of December 31 of the preceding year. Under the
1995 Plan, a maximum of 60,000,000 ISOs may be granted and ISOs must be granted
at exercise prices no less than market value at the date of grant, except for
ISOs granted to employees who own more than 10% of the Company's combined voting
power, for which the exercise prices will be no less than 110% of the market
value at the date of grant. NSOs, stock awards or stock purchases may be granted
or authorized, as applicable, at prices no less than the minimum legal
consideration required. ISOs and NSOs expire ten years from the date of grant.
All options are exercisable upon vesting. The options typically vest at a rate
of 25.00% of the shares underlying the option one year from the date of grant
and at a rate of 2.08% monthly thereafter. The 1995 Non-Employee Director Stock
Option Plan (the Director Option Plan) was adopted by the Board of Directors on
September 28, 1995 and approved by the Company's stockholders in October 1995.
The Director Option Plan provides for the grant of options to
F-16
<PAGE> 59
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase a maximum of 3,600,000 shares of Common Stock of the Company to
nonemployee directors of the Company.
In April 1997, certain options previously granted during 1996 under the
1995 Option Plan were amended by reducing the exercise prices under the options
to $2.49 (which was the last sale price of the Company's Common Stock on the
Nasdaq on the date of the repricing). The options before amendment provided the
right to acquire up to 5,850,600 shares of Common Stock at exercise prices
ranging from $2.67 to $7.17 per share. In addition, employees electing to
reprice their options agreed to a change in vesting which provided for a six
month delay in the vesting schedule of each grant which was repriced. The
Compensation Committee offered the option reprice because the Committee felt
that due to changed circumstances, including the reduction in the trading price
of the Company's Common Stock, the options were no longer providing the
incentive they were designed to provide.
Under the Director Option Plan, each director who is not also an employee
of the Company and who is first elected as a director after the date of the
Company's initial public offering will receive, upon the date of his or her
initial election, an option to purchase 180,000 shares of Common Stock. Options
granted under the Director Option Plan will vest at a rate of 33.33% one year
from the date of grant and will vest at a rate of 2.78% monthly thereafter. In
addition, on each three-year anniversary of such director's first election to
the Board of Directors, such director will receive an additional option to
purchase 180,000 shares of Common Stock, vesting in accordance with the
aforementioned schedule, provided that such director continues to serve on the
Board of Directors at the time of grant. All options granted under the Director
Option Plan will have an exercise price equal to the fair market value of the
Common Stock on the date of grant and a term of ten years from the date of
grant. Options are exercisable to the extent vested only while the optionee is
serving as a director of the Company or within 90 days after the optionee ceases
to serve as a director of the Company.
On July 11, 1989, the Company adopted its 1989 Stock Option Plan (the 1989
Plan). The 1989 Plan, as amended, permitted the Company to grant ISOs and NSOs
to purchase up to 25,256,544 shares of the Company's Common Stock. Under the
1989 Plan, options may be granted at exercise prices no less than market value
at the date of grant as determined by the Board of Directors and, therefore, no
compensation expense is recognized. All options are fully exercisable from the
date of grant and are subject to a repurchase option in favor of the Company
which lapses as to 25.00% of the shares underlying the option one year from the
date of grant and as to 2.08% monthly thereafter. If the purchaser of stock
pursuant to the 1989 Plan is terminated from employment with the Company, the
Company has the right and option to purchase from the employee, at the price
paid for the shares by the employee, the number of unvested shares at the date
of termination. Effective November 1999 no further options may be granted under
this Plan.
A summary of the status and activity of the Company's stock option plans is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year..... 32,279,324 $ 9.50 22,279,272 $ 4.21 19,380,228 $ 2.83
Granted............................ 21,157,900 26.80 17,213,600 14.02 9,106,952 7.04
Exercised.......................... (9,221,440) 7.57 (5,923,760) 2.53 (5,738,804) 0.49
Forfeited.......................... (1,857,434) 15.99 (1,289,788) 10.28 (469,104) 3.52
---------- ---------- ----------
Outstanding at end of year........... 42,358,350 18.28 32,279,324 9.50 22,279,272 4.21
========== ========== ==========
Options exercisable at end of year... 7,062,760 7.86 6,141,596 3.56 5,736,180 0.97
========== ========== ==========
Weighted-average fair value of
options granted during the year.... $14.37 $ 7.21 $ 4.43
</TABLE>
F-17
<PAGE> 60
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information about fixed stock options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
- ------------------------------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$0.02 to $3.81..................... 4,436,782 6.3 $ 2.04 2,220,629 $ 1.59
$5.35 to $11.95.................... 8,091,971 7.6 $ 8.31 2,907,717 $ 7.73
$12.25 to $17.89................... 8,798,211 8.5 $15.39 1,901,784 $15.16
$18.91 to $27.81................... 16,393,336 9.4 $23.82 32,630 $20.23
$29.31 to $53.03................... 4,638,050 9.8 $37.11 -- $ --
---------- ---------
42,358,350 8.6 $18.28 7,062,760 $ 7.86
========== =========
</TABLE>
STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan (the 1995 Purchase Plan) was adopted
by the Board of Directors on September 28, 1995 and approved by the Company's
stockholders in October 1995. The 1995 Purchase Plan took effect upon completion
of the Company's initial public offering. The 1995 Purchase Plan provides for
the issuance of a maximum of 9,000,000 shares of Common Stock upon the exercise
of nontransferable options granted to participating employees. All U.S.-based
employees of the Company, whose customary employment is 20 hours or more per
week and more than five months in any calendar year and who have completed at
least one year of employment are eligible to participate in the 1995 Purchase
Plan. Employees who would immediately after the grant own 5% or more of the
Company's Common Stock and directors who are not employees of the Company may
not participate in the 1995 Purchase Plan. To participate in the 1995 Purchase
Plan, an employee must authorize the Company to deduct an amount (not less than
1% nor more than 5% of a participant's total cash compensation) from his or her
pay during six-month periods (each a Plan Period).
The maximum number of shares of Common Stock an employee may purchase in
any Plan Period is 6,000 shares subject to certain other limitations. The
exercise price for the option for each Plan Period is 85% of the lesser of the
market price of the Common Stock on the first or last business day of the Plan
Period. If an employee is not a participant on the last day of the Plan Period,
such employee is not entitled to exercise his or her option, and the amount of
his or her accumulated payroll deductions will be refunded. An employee's rights
under the 1995 Purchase Plan terminate upon his or her voluntary withdrawal from
the 1995 Purchase Plan at any time or upon termination of employment. Under the
1995 Purchase Plan, the Company issued 27,004, 30,460 and 40,956 shares in 1999,
1998 and 1997, respectively.
BENEFIT PLAN
The Company maintains a 401(k) benefit plan (the "Plan") allowing eligible
employees to contribute up to 15% of their annual compensation, limited to an
annual maximum amount as set periodically by the Internal Revenue Service. The
Company, at its discretion, may contribute up to $0.50 on each dollar of
employee contribution, limited to a maximum of 6% of the employee's annual
contribution. The Company's matching contributions for 1999 and 1998 were
$605,087 and $327,483, repectively. No matching contributions to the Plan were
made prior to 1998. The Company's contributions vest over a four year period at
25% per year.
F-18
<PAGE> 61
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL STOCK
COMMON STOCK
The Company has reserved for future issuance 49,340,302 shares of Common
Stock for the exercise of stock options outstanding or available for grant and
11,952,000 shares for the conversion of the zero coupon convertible debentures
into common stock.
On May 14, 1998, the stockholders approved an increase of authorized Common
Stock from 60,000,000 shares, $0.001 par value per share to 150,000,000 shares,
$0.001 par value per share.
On May 13, 1999, the stockholders approved an increase of authorized Common
Stock from 150,000,000 shares, $0.001 par value per share to 400,000,000 shares,
$0.001 par value per share.
STOCK REPURCHASE PROGRAM
On April 15, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to $200 million of the Company's common
stock. Purchases, if any, will be made from time to time in the open market and
paid out of general corporate funds. As of December 31, 1999, none of the
Company's outstanding common stock had been repurchased under this program.
STOCK SPLITS
On January 25, 1998, the Board of Directors declared a three-for-two stock
split in the form of a stock dividend paid on February 20, 1998 to stockholders
of record of the Company's Common Stock on February 12, 1998.
On March 1, 1999, the Company announced a two-for-one stock split in the
form of a stock dividend paid on March 25, 1999, to stockholders of record as of
March 17, 1999.
On January 19, 2000, the Company announced a two-for-one stock split in the
form of a stock dividend paid on February 16, 2000, to stockholders of record as
of January 31, 2000.
The number of options issuable and previously granted and their respective
exercise prices under the Company's stock option plans have been proportionately
adjusted to reflect these stock splits.
The accompanying consolidated financial statements have been retroactively
restated to reflect these stock splits.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock,
$0.01 par value per share. The Company has no present plans to issue such
shares.
8. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1999, the Company sold $850 million principal amount at maturity
of its zero coupon convertible subordinated debentures (the "Debentures") due
March 22, 2019 in a private placement. The debentures were priced with a yield
to maturity of 5.25% and resulted in net proceeds to the Company of
approximately $291.9 million, net of original issue discount and net of debt
issuance costs of $9.6 million. Except under limited circumstances, no interest
will be paid on the Debentures prior to maturity. The Debentures are convertible
at the option of the security holder at any time on or before the maturity date
at a conversion rate of 14.0612 shares of the Company's common stock for each
$1,000 principal amount at maturity of Debentures, subject to adjustment in
certain events. The Company may redeem the Debentures on or after March 22,
2004. Holders may require the Company to repurchase the debentures, at set
F-19
<PAGE> 62
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
redemption prices (equal to the issue price plus accrued original issue
discount) beginning on March 22, 2004. Interest expense related to the
Debentures was $12.6 million in 1999.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of the Company's investment in debt securities, by
contractual maturity, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Due in less than 1 year................................... $402,045 $154,686
Due in 1 to 3 years....................................... 320,505 97,108
Due in greater than 3 years............................... 5,250 --
-------- --------
$727,800 $251,794
======== ========
</TABLE>
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their fair value due to the
short maturity of these items. The Company's investments are classified as
available-for-sale securities and are carried at fair value on the accompanying
Consolidated Balance Sheets, based primarily on quoted market prices for such
financial instruments. The carrying amount of the Company's Debentures at
December 31, 1999 was approximately $314 million. The fair value of the
Debentures, based on the quoted market price as of December 31, 1999, was
approximately $434 million.
10. COMMITMENTS
The Company leases certain office space, equipment and software under
various operating leases. Certain of these leases contain stated escalation
clauses while others contain renewal options.
Rental expense for the years ended December 31, 1999, 1998 and 1997 totaled
approximately $4,954,000, $2,787,000 and $715,000, respectively. Lease
commitments under noncancelable operating leases with remaining terms in excess
of one year are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
December 31,
2000................................................... $ 9,414
2001................................................... 9,206
2002................................................... 6,988
2003................................................... 4,711
2004................................................... 2,630
Thereafter............................................. 7,846
-------
$40,795
=======
</TABLE>
11. INCOME TAXES
The United States and foreign components of income from continuing
operations before income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
United States............................................ $122,131 $93,219 $64,094
Foreign.................................................. 60,594 2,253 528
-------- ------- -------
Total.......................................... $182,725 $95,472 $64,622
======== ======= =======
</TABLE>
F-20
<PAGE> 63
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for (benefit from) income taxes are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................. $53,060 $39,026 $39,613
Foreign................................................. 16,782 1,907 565
State................................................... 9,256 7,339 7,448
------- ------- -------
Total current................................... 79,098 48,272 47,626
Deferred.................................................. (13,317) (13,902) (24,362)
------- ------- -------
Total income tax expense........................ $65,781 $34,370 $23,264
======= ======= =======
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Acquired technology....................................... $ 8,827 $ 7,727
Deferred revenue.......................................... 36,752 28,882
Accounts receivable allowances............................ 2,658 2,415
Depreciation and amortization............................. 7,646 298
Tax credits............................................... 8,355 --
Other..................................................... 1,256 2,746
------- -------
Total deferred tax assets......................... 65,494 42,068
Deferred tax liabilities:
Foreign earnings.......................................... (8,753) --
------- -------
Total deferred tax liabilities.................... (8,753) --
------- -------
Total net deferred tax assets..................... $56,741 $42,068
======= =======
</TABLE>
During 1999 and 1998, the Company generated approximately $5,251,000 and
$2,542,000 of research and development tax credits, respectively. Due to the Tax
Relief Extension Act of 1999, use of $2,625,000 of the research credit generated
in 1999 is suspended until October 1, 2000 and, therefore, reflected as a
deferred tax asset. During 1999, the Company generated approximately $5,730,000
of foreign tax credit carryforwards in the United Kingdom that expire in the
year 2004.
During the years ended 1999, 1998 and 1997, the Company realized tax
benefits related to the exercise of employee stock options in the amount of
$50,843,000, $24,174,000, and $10,675,000, respectively. This benefit was
recorded to additional paid-in capital.
F-21
<PAGE> 64
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's income taxes to amounts calculated at the
statutory federal rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal statutory taxes................................... $63,954 $33,415 $22,618
State income taxes, net of federal tax benefit............ 5,378 3,476 2,942
Foreign sales corporation benefits........................ (2,556) (1,226) (957)
Interest income........................................... (4,555) -- --
Intangible assets......................................... 8,260 -- --
Other permanent differences............................... 5,220 109 180
Tax credits............................................... (10,981) (2,542) (1,492)
Other..................................................... 1,061 1,138 (27)
------- ------- -------
$65,781 $34,370 $23,264
======= ======= =======
</TABLE>
12. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
During 1999, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for reporting information about operating segments and related disclosures about
products, geographic information and major customers. This information is
required to be reported based on how management internally evaluates operating
performance and allocates resources.
The Company operates in a single market consisting of the design,
development, marketing and support of client and server-based computing software
for enterprise applications. Design, development, marketing and support
operations outside of the United States are conducted through subsidiaries
located primarily in Europe and the Asia Pacific region.
The Company tracks revenue and gross margin by geography and product
category but does not track operating expenses nor identifiable assets on a
product category basis. The Company does not engage in intercompany transfers
between segments. The Company's management evaluates performance based primarily
on revenues and profit in the geographic locations that the Company operates.
Segment profit for each segment includes sales and marketing expenses directly
attributable to the segment and excludes certain expenses which are managed
outside the reportable segments. Costs excluded from segment profit primarily
consist of cost of revenues, research and development costs, interest, corporate
expenses, including income taxes, as well as non-recurring charges for purchased
in-process technology, and overhead costs, including rent, utilities,
depreciation and amortization. Corporate expenses are comprised primarily of
corporate marketing costs, operations and other general and administrative
expenses which are separately managed. Accounting policies of the segments are
the same as the Company's consolidated accounting policies.
During 1999, wholly-owned subsidiaries were formed in various locations
within Europe, Middle East and Africa ("EMEA") and these subsidiaries are
responsible for sales and distribution of the Company's products. Prior to this
change, sales in this geographic segment were classified as export sales from
the Americas segment (see below). For purposes of the presentation of segment
information, the sales previously reported as Americas export sales have been
reclassified to the geographical segments where the sale was made for each of
the periods presented.
F-22
<PAGE> 65
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net revenues and segment profit, classified by the major geographic area in
which the Company operates, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues:
Americas............................................. $205,267 $119,376 $ 67,038
EMEA................................................. 128,242 64,130 20,014
Asia Pacific......................................... 20,192 10,762 2,707
Other(1)............................................. 49,584 54,368 34,174
-------- -------- --------
Consolidated......................................... $403,285 $248,636 $123,933
======== ======== ========
Segment profit:
Americas............................................. $166,521 $ 82,468 $ 46,094
EMEA................................................. 102,404 46,540 14,476
Asia Pacific......................................... 10,795 6,510 1,422
Other (1)............................................ 49,584 54,368 34,174
Unallocated expenses (2):
Cost of revenues................................ (14,579) (16,682) (12,304)
Overhead costs.................................. (51,721) (28,298) (7,658)
Research and development........................ (37,363) (22,858) (6,948)
In-process research and development............. (2,300) (18,416) (3,950)
Net interest.................................... 11,221 9,968 9,894
Other corporate expenses........................ (51,837) (18,128) (10,578)
-------- -------- --------
Consolidated income before income taxes................ $182,725 $ 95,472 $ 64,622
======== ======== ========
</TABLE>
- ---------------
(1) Represents OEM revenue and royalty fees in connection with the Development
Agreement.
(2) Represents expenses presented to management only on a consolidated basis and
not allocated to the geographic operating segments.
The Americas' identifiable assets accounted for greater than 90% of the
total identifiable assets for all segments as of December 31, 1999, 1998 and
1997.
Export revenue represents shipments of finished goods and services from the
United States to international customers. As of July 1, 1999, the Company began
shipping finished goods to European customers from its warehouse location in
Europe. Shipments from the United States were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
EMEA...................................................... $60,590 $64,130 $19,214
Asia Pacific.............................................. 20,202 10,762 4,022
Other..................................................... 6,289 2,760 2,320
------- ------- -------
$87,081 $77,652 $25,556
======= ======= =======
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, sales to four
customers in the Americas accounted for 42%, 38% and 40% of net revenues,
respectively.
F-23
<PAGE> 66
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additional information regarding revenue by products and services groups is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Windows Application Servers............................... $299,510 $172,663 $ 82,372
Computing Appliances Products............................. 9,754 21,776 24,080
Management Services Products.............................. 38,441 11,916 2,862
Microsoft Royalties....................................... 39,830 31,735 9,625
Other Revenue............................................. 15,750 10,546 4,994
-------- -------- --------
Net Revenues.............................................. $403,285 $248,636 $123,933
======== ======== ========
</TABLE>
13. RELATED PARTY TRANSACTIONS
An entity which held a greater than 5% interest in the Company at December
31, 1999, 1998 and 1997 is a party to one of the licensing agreements discussed
in Note 2. The Company recognized $1.9 million, $8.5 million and $7.8 million of
royalty expense in cost of revenues in the years ended December 31, 1999, 1998
and 1997, respectively, and has accrued royalties and other accounts payable of
$0.4 million and $2.9 million at December 31, 1999 and 1998, respectively, in
connection with this agreement.
The Company and this entity also entered into a License, Development and
Marketing Agreement (the "Development Agreement") which provides for the
licensing to the entity of certain of the Company's technology. Pursuant to the
terms of the Development Agreement, the Company received an aggregate of $75
million as a non-refundable initial fee. Under the terms of the Development
Agreement, as amended, the Company received non-refundable payments of an
additional $100 million, of which $10 million was received on July 2, 1998 and
$15 million was received at the beginning of each quarter through the fourth
quarter of 1999. The Company has recognized revenue of approximately $39.8
million, $31.7 million and $9.6 million in 1999, 1998 and 1997, respectively, in
connection with the Development Agreement, as amended.
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1999 1998 1997
--------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
<S> <C> <C> <C>
Numerator:
Net income............................................. $116,944 $61,102 $41,358
======== ======= =======
Denominator:
Denominator for basic earnings per share -- weighted
average shares...................................... 176,260 168,473 163,444
Effect of dilutive securities:
Employee stock options.............................. 16,306 14,121 11,080
-------- ------- -------
Denominator for diluted earnings per share -- adjusted
weighted-average shares............................. 192,566 182,594 174,524
======== ======= =======
Basic earnings per share................................. $ 0.66 $ 0.36 $ 0.25
======== ======= =======
Diluted earnings per share............................... $ 0.61 $ 0.33 $ 0.24
======== ======= =======
</TABLE>
F-24
<PAGE> 67
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of FASB Statement 133. The Statement defers the effective
date of SFAS 133 to fiscal 2001. Management is evaluating SFAS 133 and does not
believe that adoption of the Statement will have a material impact on its
financial statements.
16. SUBSEQUENT EVENTS
On February 15, 2000, the Company acquired all of the operating assets of
the Innovex Group, Inc., a privately owned e-business consulting services
organization specializing in the design, development and implementation of
Web-based solutions and systems integration, for approximately $47.8 million in
cash of which $28.7 million was paid at the closing date and the balance is
payable, in equal installments, 18 and 24 months after the closing date,
contingent on future events, as defined in the acquisition agreement.
F-25
<PAGE> 68
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL YEAR
------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
1999
Net revenues.................................. $85,039 $94,415 $105,780 $118,051 $403,285
Gross margin.................................. 80,517 91,314 102,477 114,398 388,706
Income from operations........................ 37,154 41,120 43,035 50,195 171,504
Net income.................................... 25,768 27,785 29,346 34,045 116,944
Basic earnings per common share (a)........... 0.15 0.16 0.17 0.19 0.66
Diluted earnings per common share (a)......... 0.14 0.15 0.15 0.17 0.61
1998
Net revenues.................................. $49,302 $56,204 $ 67,621 $ 75,509 $248,636
Gross margin.................................. 44,453 51,523 63,712 72,266 231,954
Income from operations........................ 16,524 12,482 23,979 32,519 85,504
Net income.................................... 12,277 9,620 16,898 22,307 61,102
Basic earnings per common share (a)........... 0.07 0.06 0.10 0.13 0.36
Diluted earnings per common share (a)......... 0.07 0.05 0.09 0.12 0.33
</TABLE>
- ---------------
(a) The above quarterly information has been adjusted to reflect the stock split
as further discussed in Note 7.
F-26
<PAGE> 69
CITRIX SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
--------- ---------- ---------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Deducted from asset accounts:
Allowance for doubtful accounts....... $1,593 $ 584 $ -- $ 632(2) $1,545
Allowance for returns................. 4,641 -- 17,996(1) 15,941 6,696
Provision for inventory............... 402 1,982 -- 1,472 912
------ ------ ------- ------- ------
$6,636 $2,566 $17,996 $18,045 $9,153
====== ====== ======= ======= ======
1998
Deducted from asset accounts:
Allowance for doubtful accounts....... $1,699 $ 620 $ -- $ 726(2) $1,593
Allowance for returns................. 4,599 -- 8,580(1) 8,538 4,641
Provision for inventory............... -- 417 -- 15 402
------ ------ ------- ------- ------
$6,298 $1,037 $ 8,580 $ 9,279 $6,636
====== ====== ======= ======= ======
1997
Deducted from asset accounts:
Allowance for doubtful accounts....... $ 624 $1,399 $ -- $ 324(2) $1,699
Allowance for returns................. 1,928 -- 5,809(1) 3,138 4,599
------ ------ ------- ------- ------
$2,552 $1,399 $ 5,809 $ 3,462 $6,298
====== ====== ======= ======= ======
</TABLE>
- ---------------
(1) Netted against revenues.
(2) Uncollectible accounts written off, net of recoveries.
F-27
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
2.1(1) -- Agreement and Undertaking by and among the Non-Executive
Directors of APM Limited, the Executive Directors of APM
Limited, and Citrix Systems, Inc.
2.2(1) -- Recommended Offers by Citrix Systems, Inc. for APM Limited
2.3 -- Asset Purchase Agreement dated February 15, 2000 by and
among the Company, Innovex Group, Inc. and certain
stockholders of Innovex
3.1(2) -- Amended and Restated Certificate of Incorporation of the
Company
3.2(2) -- Amended and Restated By-laws of the Company
3.3(3) -- Certificate of Amendment of Amended and Restated Certificate
of Incorporation
4.1(2) -- Specimen certificate representing the Common Stock
4.2(4) -- Indenture by and between the Company and State Street Bank
and Trust Company as Trustee dated as of March 22, 1999,
including the form of Debenture.
4.3(4) -- Form of Debenture (included in Exhibit 4.1).
4.3(4) -- Registration Rights Agreement by and between the Company and
Credit Suisse First Boston Corporation dated as of March 22,
1999.
10.1(2)* -- 1989 Stock Option Plan
10.2(2)* -- 1995 Stock Plan
10.3(2)* -- 1995 Non-Employee Director Stock Option Plan
10.4(2)* -- 1995 Employee Stock Purchase Plan
10.5(2) -- Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.6(2) -- Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.7(2) -- License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15, 1990
10.8(2) -- Amendment No. 1 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated May 6, 1991
10.9(2) -- Amendment No. 2 to License Agreement between the Company and
Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x,
dated October 1, 1992
10.10(2) -- Amendment No. 3 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated January 1, 1994
10.11(2) -- Amendment No. 4 to the License Agreement between the Company
and Microsoft dated August 15, 1990, dated January 31, 1995
10.12(2) -- Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.13(2) -- Form of Indemnification Agreement
10.14(5) -- Lease Agreement between Halmos Trading and Investment
Company and the Company dated June 6, 1996
10.15(6) -- License, Development and Marketing Agreement dated July 9,
1996 between the Company and Microsoft Corporation
10.16(7) -- License, Development and Marketing Agreement dated May 9,
1997 between the Company and Microsoft Corporation
10.17(8) -- Amendment No. 1 to License, Development and Marketing
Agreement dated May 9, 1997 between the Company and
Microsoft Corporation
10.18(9) -- Employment Agreement dated as of January 1, 1999 by and
between the Company and Roger W. Roberts.
21.1 -- List of Subsidiaries
23.1 -- Consent of Ernst & Young LLP
</TABLE>
I-1
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
24.1 -- Power of Attorney (Included in signature page)
27 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated herein by reference to the exhibits of the Company's Current
Report on Form 8-K dated as of June 30, 1998.
(2) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(3) Incorporated herein by reference to Exhibits 3 and 4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(4) Incorporated herein by reference to exhibits of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(5) Incorporated herein by reference to Exhibit 10.27 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(6) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(7) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
(8) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(9) Incorporated herein by reference to Exhibit 10.18 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
I-2
<PAGE> 1
Exhibit 2.3
ASSET PURCHASE AGREEMENT
dated as of February 15, 2000
by and among
CITRIX SYSTEMS, INC.,
INNOVEX GROUP, INC.
and
THE SHAREHOLDERS LISTED ON THE SIGNATURE PAGES HERETO
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
ARTICLE I - DEFINITIONS...........................................................................................1
1.01. Certain Definitions.....................................................................................1
ARTICLE II - PURCHASE AND SALE....................................................................................5
2.01. Purchase and Sale.......................................................................................5
2.02. Excluded Assets.........................................................................................6
2.03. Assumption of Liabilities...............................................................................7
2.04. Excluded Liabilities....................................................................................7
2.05. Instruments of Transfer and Conveyance..................................................................8
2.06. Closing.................................................................................................8
2.07. Deliveries at the Closing...............................................................................8
ARTICLE III - PURCHASE PRICE.....................................................................................10
3.01. Purchase Price; Payments at Closing....................................................................10
3.02. Earnout Payments.......................................................................................10
3.03. Payment to Equityholders...............................................................................11
3.04. Method of Payment......................................................................................12
3.05. Allocation of Purchase Price...........................................................................12
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS.......................................12
4.01. Corporate Existence and Power..........................................................................12
4.02. Authorization..........................................................................................12
4.03. Governmental Authorization.............................................................................13
4.04. Non-Contravention......................................................................................13
4.05. Required Consents......................................................................................13
4.06. Financial Statements...................................................................................13
4.07. Absence of Certain Changes.............................................................................14
4.08. Properties.............................................................................................15
4.09. Sufficiency of Purchased Assets........................................................................16
4.10. Title to Purchased Assets..............................................................................16
4.11. Subsidiaries...........................................................................................16
4.12. Litigation.............................................................................................16
4.13. Contracts..............................................................................................17
4.14. Permits................................................................................................18
4.15. Insurance..............................................................................................18
4.16. Compliance with Laws...................................................................................18
4.17. Intellectual Property..................................................................................18
4.18. Software...............................................................................................19
4.19. Employees..............................................................................................20
4.20. Warranty or Other Claims...............................................................................20
4.21. Brokers'Fees...........................................................................................20
4.22. Environmental Compliance...............................................................................20
4.23. Compliance with Certificate of incorporation and By-Laws...............................................21
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
4.24. Absence of Conflicts...................................................................................21
4.25. Buyer..................................................................................................21
4.25. Representations and Warranties.........................................................................21
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF BUYER..............................................................21
5.01. Organization and Existence.............................................................................21
5.02. Corporate Authorization................................................................................22
5.03. Governmental Authorization.............................................................................22
5.04. Non-Contravention......................................................................................22
5.05. Finders'Fees...........................................................................................22
5.06. Litigation.............................................................................................22
5.07. Representations and Warranties.........................................................................22
ARTICLE VI - COVENANTS FOLLOWING THE CLOSING.....................................................................22
6.01. Covenants of the Seller and the Shareholders...........................................................22
6.03. Covenants of All Parties...............................................................................24
6.03. Covenants of Buyers....................................................................................24
ARTICLE VII - EMPLOYEE BENEFITS..................................................................................24
7.01. Employee Benefits Definitions..........................................................................24
7.02. ERISA Representations..................................................................................25
7.03. Employees and Offers of Employment.....................................................................26
7.04. Seller's Employee Benefit Plans........................................................................26
7.05. No Third Party Beneficiaries...........................................................................27
ARTICLE VIII -TAX MATTERS........................................................................................28
8.01. Tax Definitions........................................................................................28
8.02. Tax Matters............................................................................................28
8.03. Tax Cooperation; Allocation of Taxes...................................................................29
ARTICLE IX - SURVIVAL; INDEMNIFICATION...........................................................................30
9.01. Survival...............................................................................................30
9.02. Indemnification by the Seller and the Shareholders.....................................................30
9.03. Procedures.............................................................................................31
9.04. Consent to Jurisdiction................................................................................32
9.05. Buyer's Right of Offset................................................................................32
9.06. Threshold..............................................................................................33
9.07 Interest...............................................................................................33
ARTICLE X - MISCELLANEOUS........................................................................................33
10.01. Notices...............................................................................................33
10.02. Amendments; No Waivers................................................................................34
10.03. Expenses..............................................................................................34
10.04. Successors and Assigns................................................................................35
10.05. Governing Law.........................................................................................35
10.06. Counterparts; Effectiveness...........................................................................35
10.07. Entire Agreement......................................................................................35
10.08. Captions..............................................................................................35
10.09. Several Obligations...................................................................................35
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
10.10. Including.............................................................................................35
10.11. Severability..........................................................................................35
10.12. Arbitration...........................................................................................35
10.13. Remedies..............................................................................................36
10.14 Press Releases and Announcements......................................................................36
10.15 Power of Attorney.....................................................................................36
</TABLE>
(iii)
<PAGE> 5
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of February 15, 2000 by and among
Citrix Systems, Inc., a Delaware corporation ("BUYER"); Innovex Group, Inc., a
Florida corporation ("SELLER"); and the shareholders of Seller listed on the
signature pages hereto (individually and collectively, the "SHAREHOLDERS").
W I T N E S S E T H :
WHEREAS, Seller conducts a business that consists of internet
consulting services, specializing in the design and development of e-commerce,
web-based and client/server solutions (the "BUSINESS"); and
WHEREAS, Buyer desires to purchase all of the assets of Seller and
assume certain specified liabilities of Seller, and Seller desires to sell all
of its assets to Buyer, upon the terms and subject to the conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01. CERTAIN DEFINITIONS. (a) The following terms, as used herein,
have the following meanings:
"AFFILIATE" means, with respect to any Person, any Person
directly or indirectly controlling, controlled by, or under common control with
such Person.
"ANCILLARY AGREEMENTS" means the Bill of Sale, the Assignment
and Assumption Agreement, the Assignment of Trademarks and Service Marks and the
Option Exchange Agreement.
"APPLICABLE INTEREST RATE" means 6.2% per year compounded
annually.
"ASSIGNMENT AND ASSUMPTION AGREEMENT" means the assignment and
assumption agreement in the form of EXHIBIT A hereto, whereby Seller assigns the
Purchased Assets to Buyer, and Buyer assumes the Assumed Liabilities.
"ASSIGNMENT OF TRADEMARKS AND SERVICE MARKS" means the
assignment document in the form of EXHIBIT B hereto, whereby Seller assigns
certain trademarks and service marks to Buyer.
"BALANCE SHEET DATE" means December 31, 1999.
"BILL OF SALE" means the document in the form of EXHIBIT C
hereto, whereby the Seller sells, conveys, transfers, assigns and delivers to
Buyer all of its rights, title and interest in and to the Purchased Assets, free
and clear of all Liens (subject to SCHEDULE 2.01).
<PAGE> 6
Asset Purchase Agreement -- 2
"CLOSING DATE" means the date of this Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPUTER PROGRAMS" means (i) any and all computer programs
(including, without limitation, sets of statements or instructions to be used
directly or indirectly in a computer in order to bring about a certain result),
and (ii) all associated data and compilations of data, regardless of their form
or embodiment. The term "COMPUTER PROGRAMS" shall include, without limitation,
all versions of any and all such computer programs, all screen displays and
designs thereof, all component modules of source code, object code and natural
language code therefor, all descriptions, flow-charts and other work product
used to design, plan, organize and develop any of the foregoing, and all
documentation, including without limitation user manuals and training materials,
relating to any of the foregoing.
"DISABILITY" means "permanent and total disability" as defined
in Section 22(e)(3) of the Code.
"HIRED EMPLOYEE" means the employees or independent
contractors listed on SCHEDULE 1.01(A)(I) who become an employee of Buyer on and
after the Closing Date.
"INTELLECTUAL PROPERTY RIGHTS" means all (A) patents, patent
applications, patent disclosures and all related continuation,
continuation-in-part, divisional, reissue, re-examination, utility, model,
certificate of invention and design patents, patent applications, registrations
and applications for registrations of any of the foregoing, (B) trademarks,
service marks, trade dress, logos, tradenames, service names and corporate names
and registrations and applications for registration of any of the foregoing, (C)
copyrights and registrations and applications for registration thereof, (D) mask
works and registrations and applications for registration of any of the
foregoing, (E) Computer Programs, (F) trade secrets and confidential business
information, whether patentable or nonpatentable and whether or not reduced to
practice, know-how, manufacturing and product processes and techniques, research
and development information, copyrightable works, financial, marketing and
business data, pricing and cost information, business and marketing plans and
customer and supplier lists and information, including addresses, principal
contacts and related information, (G) all other proprietary rights of every
nature and description whether relating to any of the foregoing or otherwise
(including without limitation associated goodwill and remedies against
infringements thereof and rights of protection of an interest therein under the
laws of all jurisdictions) and (H) copies and tangible embodiments of any of the
foregoing.
"LIABILITY" or "LIABILITIES" means any liabilities or
obligations of any nature (whether fixed, contingent, potential or otherwise,
and whether due or to become due, known or unknown, accrued or unaccrued), and
whether presently existing, or arising or asserted after the Closing.
"LIEN" means, with respect to any asset, any mortgage, lien,
pledge, charge, reservation, restriction, restrictive covenant, limitation,
condition of record, right of first refusal, option to purchase, lease, security
interest, defect in title, deed in trust, easement, restriction or encumbrance
of any kind in respect of such asset.
"MATERIAL ADVERSE CHANGE" means a material adverse change in
the business, assets, condition (financial or otherwise), results of operations
or prospects of Seller.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on
the business, assets,
<PAGE> 7
Asset Purchase Agreement -- 3
condition (financial or otherwise), results of operations or prospects of
Seller.
"OPTION EXCHANGE AGREEMENT" means the agreement in the form of
EXHIBIT D hereto, whereby the holders of options to acquire Seller Common Stock
are exchanged as provided therein.
"PERSON" means an individual, corporation, partnership,
association, limited liability company, trust or other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"SHAREHOLDERS AGENT" means Randall P. Bast.
"SOFTWARE" means all elements of the Computer Programs on
SCHEDULE 2.01(I).
"SUBSIDIARY" means any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by Seller.
"TERMINATION WITHOUT CAUSE" shall mean termination of a
Person's employment other than as a result of conduct involving one or more of
the following: (i) the substantial and continuing failure of such Person, after
written notice thereof, to render services to Buyer in accordance with the terms
or requirements of his or her employment; (ii) disloyalty, gross negligence,
willful misconduct, dishonesty, fraud or breach of fiduciary duty to the Buyer;
(iii) deliberate disregard of the rules or policies of the Buyer, or breach of
an employment or other agreement with the Buyer, which results in direct or
indirect loss, damage or injury to the Buyer; (iv) the unauthorized disclosure
of any trade secret or confidential information of the Buyer; (v) the commission
of an act which constitutes unfair competition with the Buyer or which induces
any customer or supplier to breach a contract with the Buyer; or (vi) the Person
failing to execute and deliver to Buyer by 5:00 p.m. Eastern Standard Time on
February 22, 2000, the Buyer's standard Non-Disclosure Agreement and the
standard Proprietary Information, Inventions, Non-Competition and
Non-Solicitation Agreement attached as EXHIBIT E and EXHIBIT F, respectively.
(b) Each of the following additional terms is defined in the
Section set forth opposite such term:
Term Section
---- -------
Accounts Receivable 2.01(vi)
Agreed Amount 9.03(c)
Allocation Statement 3.05
Apportioned Obligations 8.03(b)
Assigned Contracts 2.01(ii)
Assumed Liabilities 2.03
Balance Sheet 4.06
Benefit Arrangement 7.01
Bill of Sale 2.07(a)(i)
Business Preamble
Business Records 2.01(v)
Buyer Preamble
Claims 2.01(viii)
<PAGE> 8
Asset Purchase Agreement -- 4
Class A Holders 3.02(a)
Class B Earnout Payment Deduction 3.02(a)
Class B Holders 3.02(a)
Class C Earnout Payment Deduction 3.02(a)
Class C Holders 3.02(a)
Class C Replacements 3.02(a)
Closing 2.01
COBRA 7.04(d)
Contested Amount 9.03(d)
Contracts 4.13
Deductible 9.06
Disclosure Schedule Article IV preamble
Earnout Measurement Time 3.02(a)
Employee Plan 7.01
Environmental Laws 4.22(a)
Environmental Liabilities 4.22(b)
Equipment 2.01(iii)
EEOC 4.19
ERISA 7.01
ERISA Affiliate 7.01
Excluded Assets 2.02
Excluded Contracts 2.02(ii)
Excluded Liabilities 2.04
Financial Statements 4.06
First Earnout Payment 3.02(a)
First Earnout Payment Date 3.02(a)
Hazardous Materials 4.22(a)
Hired Parties 7.01
Income Statement 4.06
Indemnified Party 9.03(a)
Indemnifying Party 9.03(a)
Initial Payment 3.01(a)
IRS 8.03(e)
Losses 9.02
Maximum Earnout Payment 3.02(a)
Multi-Employer Plan 7.01
Notice of Claim 9.03(a)
Permits 2.01(x)
Post-Closing Tax Period 8.01
Pre-Closing Tax Period 8.01
Purchase Price 3.01
Purchased Assets 2.01
Real Property 2.01(iv)
Required Consent 4.05
Response Notice 9.03(c)
Second Earnout Payment 3.02(a)
Second Earnout Payment Date 3.02(a)
Seller preamble
<PAGE> 9
Asset Purchase Agreement -- 5
Seller Intellectual Property 4.17(a)
Shareholders preamble
Software Contracts 4.13(a)(i)
Tax 8.01
Tax Return 8.01
Technical Documentation 2.01(i)
ARTICLE II
PURCHASE AND SALE
2.01. PURCHASE AND SALE. Upon the terms and subject to the conditions
of this Agreement, Buyer agrees to purchase from Seller and Seller agrees to
sell, convey, transfer, assign and deliver, or cause to be sold, conveyed,
transferred, assigned and delivered, to Buyer, on the date hereof (the
"CLOSING"), good and marketable title (and also clear record title with respect
to any owned real property) to all of the assets, contract rights, properties
and business, other than the Excluded Assets, of every kind and description,
wherever located, real, personal or mixed, tangible or intangible, owned, held
or otherwise used by Seller, as the same shall exist on the Closing Date, free
and clear of all Liens, subject to Schedule 2.01 (all of the foregoing,
collectively, the "PURCHASED ASSETS"). Without limiting the generality of the
foregoing, the Purchased Assets shall include, among other things, the
following:
(i) All tangible and intangible property constituting the
Software listed on SCHEDULE 2.01(i), including without limitation (A) the media,
devices and documentation that constitute all full and partial copies of the
Software, (B) all technical and descriptive materials included in, or relating
to the acquisition, design, development, use, or maintenance of, the Software,
including object code, source code and any associated procedural code (the
"TECHNICAL DOCUMENTATION"), (C) all other documentation and items relating to
the Software and (D) all copyright interests owned or claimed by Seller
pertaining to the Software, together with all copyright interests accruing by
reason of international copyright conventions.
(ii) All of Seller's rights, free of third party offsets,
under all of its contracts, agreements, licenses, commitments, arrangements and
understandings other than under the Excluded Contracts, including, without
limitation, those contracts, agreements, licenses, commitments, arrangements and
understandings listed on SCHEDULE 2.01(ii) (the "ASSIGNED CONTRACTS").
(iii) All equipment, machines, furniture, vehicles, tools,
supplies and devices (including data processing hardware and related
telecommunications equipment, media, and tools) used by Seller (the
"EQUIPMENT"), including Seller's rights under all related warranties. As of the
Closing Date, the Equipment consists of all items listed on SCHEDULE 2.01(iii).
(iv) All real property of Seller, including all leasehold
interests, the buildings, structures, and other improvements located thereon,
the fixtures contained therein, and the appurtenances thereto, and the
easements, privileges, hereditaments and other rights relating thereto (the
"REAL PROPERTY"). As of the Closing Date, the Real Property consists of the
property listed and described on SCHEDULE 2.01(iv).
(v) All business, marketing and technical records, including
accounting and operating records, asset ledgers, inventory records, budgets,
personnel records, payroll records, customer lists, employment and consulting
agreements, supplier lists, information and data respecting leased or owned
<PAGE> 10
Asset Purchase Agreement -- 6
equipment, files, correspondence and mailing lists, marketing and advertising
materials and brochures, and other business records (excluding those set forth
in Section 2.02(i) below) used in the Business as of the Closing Date (the
"BUSINESS RECORDS"), including with respect to supplier and customer lists,
addresses and names and telephone numbers of contact persons.
(vi) All accounts receivable, including without limitation all
license fees and maintenance and support fees and charges owing or to become
owing to Seller (the "ACCOUNTS RECEIVABLE").
(vii) All Intellectual Property Rights owned (and all of
Seller's rights to the Intellectual Property Rights used but not owned) by
Seller, including, without limitation, the Intellectual Property Rights owned by
Seller pertaining to the Software and all of Seller's right, title and interest
in the name Innovex Group, Inc., "InnTerprise" and in any related logos.
(viii) All claims Seller may have against any person relating
to or arising from the Purchased Assets or the Business or otherwise, including
rights to recoveries for any damages or defective goods, to refunds, claims,
breaches of warranty and chooses in action ("CLAIMS").
(ix) All deposits, prepaid income, other receivable items and
prepaid expense items (other than with respect to insurance policies) of Seller,
including those items listed on SCHEDULE 2.01(ix), plus all cash, cash
equivalents, deposits, notes receivable, other receivable items, and investments
of Seller, and all other products and proceeds of any Purchased Assets.
(x) To the extent assignable, all licenses, permits, approvals
or other governmental authorizations, approvals or filings affecting, or
relating in any way to, the Seller or its Business (the "PERMITS"). As of the
Closing Date, the Permits consist of the items listed on SCHEDULE 2.01(x).
(xi) All inventory of Seller, including raw materials, work in
process and finished goods.
(xii) All rights to receive mail and other communications
addressed to Seller with respect to mail and written communications from
customers, suppliers, distributors, agents and others in connection with the
Purchased Assets or the Business.
(xiii) All goodwill associated with the Business or the
Purchased Assets or otherwise with Seller, together with the right to represent
to third parties that Buyer is the successor to the Business.
2.02. EXCLUDED ASSETS. The only assets that Seller shall not sell,
convey, transfer, assign or deliver, and Buyer shall not purchase or accept
assignment from Seller of, are the following (the "EXCLUDED ASSETS"):
(i) Seller's corporate and company charters, Tax records,
qualifications to conduct business as a corporation, taxpayer and other
identification numbers, seals, minute books, stock transfer books, blank stock
certificates and other such documents relating to the organization, maintenance
and existence of Seller as a corporation.
(ii) All of Seller's rights under this Agreement, the
Ancillary Agreements and the contracts and agreements listed on SCHEDULE
2.02(ii) (the "EXCLUDED CONTRACTS").
(iii) The Purchase Price.
<PAGE> 11
Asset Purchase Agreement -- 7
(iv) The Permits listed on SCHEDULE 2.02(iv) that are not
assignable.
(v) All of Seller's insurance policies.
2.03. ASSUMPTION OF LIABILITIES. Upon the terms and subject to the
conditions of this Agreement, Buyer agrees, effective at the time of Closing, to
assume all of the following specific liabilities of Seller and no other
Liabilities (the "ASSUMED LIABILITIES"):
(i) All obligations of Seller under the Assigned Contracts
after the Closing Date arising by reason of events or circumstances occurring
after the Closing Date in accordance with the express terms of the Assigned
Contracts, except to the extent such obligations are attributable to or arise
from any breach or default by Seller or another Person under any Assigned
Contract on or before the Closing Date. In the case of the Leases listed on
SCHEDULE 2.01(iv), the only Leases to be assumed are those in which Seller
receives the appropriate consent from the respective landlords to the assignment
of such Leases.
(ii) The specific Liabilities of Seller listed on SCHEDULE
2.03(ii), but only to the extent of the specific dollar amounts listed on
SCHEDULE 2.03(ii), and other normal and usual costs and expenses incurred in the
ordinary course of Seller's business which do not exceed $10,000 in the
aggregate.
2.04. EXCLUDED LIABILITIES. Notwithstanding any provision in this
Agreement or any other writing to the contrary, Buyer is not assuming, and
Seller shall retain and pay and perform when due, all Liabilities that are not
Assumed Liabilities, including, without limitation, and by way of example only,
the following Liabilities of Seller, even if such Liabilities are disclosed by
Seller in any of the schedules to this Agreement (other than SCHEDULE 2.03(ii))
(the "EXCLUDED LIABILITIES"):
(i) Any Liability of Seller that is not specifically
enumerated as an Assumed Liability in Section 2.03.
(ii) Any Liability of Seller to the extent that the existence
of such Liability either gives rise to, or results from or reflects, facts and
circumstances that constitute a breach of any representation and warranty set
forth in Article IV of this Agreement.
(iii) Any Liability of Seller under this Agreement or any
Ancillary Agreement.
(iv) Any obligation or liability for any Taxes of Seller and
the Shareholders attributable to or arising from or in connection with the
income, business, assets, properties or operations of Seller for any Pre-Closing
Tax Period, or payable in connection with the transactions contemplated by this
Agreement (including the payment of the Earnout Payments), together with any
interest or any penalty, addition to or additional amount imposed by any
governmental authority as a result of the failure by Seller or Shareholders to
pay when due any such Tax.
(v) Any Liability resulting from violations of any applicable
laws or regulations by Seller on or prior to the Closing Date, any tort of
Seller committed on or prior to the Closing Date, or any infringement by Seller
of third-party rights or interests, including third-party Intellectual Property
Rights.
(vi) Any Liability arising by reason of any breach or alleged
breach by Seller or pre-Closing by any other Person (other than Buyer) of any
agreement, contract, lease, license, commitment, instrument, judgment or order
or decree.
<PAGE> 12
Asset Purchase Agreement -- 8
(vii) Except for those Assumed Liabilities in the amounts
specified on SCHEDULE 2.03(ii), any employee Liabilities relating to present and
past employees of Seller with respect to plans, programs, policies, commitments,
and other benefit entitlements established or existing on or prior to Closing
(whether or not such liabilities are accrued or payable at Closing, and whether
or not such liabilities are contingent in nature), including any Liability (A)
for severance or dismissal pay or otherwise in connection with any termination
of employment by Seller, (B) for accrued vacation or sick time or (C) relating
to any Employee Plan or Benefit Arrangement.
(viii) Any Liability for product liability or warranty claims
or damage claims arising out of defects (or alleged defects) in or failures (or
alleged failures) of any product or services, Computer Program, or material of
Seller or the Business provided, distributed, licensed, or delivered on or prior
to the Closing Date.
(ix) Any Liability associated with any of the Excluded Assets.
(x) Any pre-Closing Environmental Liability.
(xi) All Liabilities under or in connection with the Excluded
Contracts, except as specified on SCHEDULE 2.03(ii).
(xii) Any Liability of Seller and the Shareholders for legal
and accounting or other expenses related to the transactions contemplated by
this Agreement (including tax advice and consulting expenses).
(xiii) All Liabilities (including premiums) relating to all of
Seller's insurance policies.
2.05. INSTRUMENTS OF TRANSFER AND CONVEYANCE. The sale, conveyance,
transfer, assignment and delivery of the Purchased Assets shall be effected by
delivery on the Closing Date by Seller to Buyer of such deeds, transfers in
registrable form, bills of sale in registrable form, endorsements, assurances,
conveyances, releases, discharges, assignments, certificates, drafts, checks or
other instruments of transfer and conveyance, duly executed by Seller, as Buyer
or its title insurance company shall reasonably deem necessary to vest in Buyer
good and marketable title (and clear record title with respect to any owned Real
Property) to such Purchased Assets free and clear of all Liens (subject to
SCHEDULE 2.01), and such other documents as Buyer may reasonably request to
demonstrate satisfaction of the conditions of and compliance with this Agreement
by Seller, including, without limitation, the Assignment and Assumption
Agreement. The assumption by Buyer of the Assumed Liabilities shall be effected
by delivery on the Closing Date by Buyer to Seller of the Assignment and
Assumption Agreement, and such other documents as Seller may reasonably request
to demonstrate satisfaction of the conditions of and compliance with this
Agreement by Buyer.
2.06. CLOSING. The closing of the purchase and sale of the Purchased
Assets, the assignment of the Assigned Contracts and the assumption of the
Assumed Liabilities hereunder shall take place at the offices of Testa, Hurwitz
& Thibeault, LLP in Boston, Massachusetts on the date hereof.
2.07. DELIVERIES AT THE CLOSING.
<PAGE> 13
Asset Purchase Agreement -- 9
(a) DELIVERIES OF SELLER. In addition to the taking of such
other actions as may be provided for in this Agreement, at the Closing:
(i) Seller shall deliver to Buyer the Bill of Sale,
the Assignment and Assumption Agreement, the Assignment
of Trademarks and Service Marks and such other bills of sale, endorsements,
consents, assignments and other good and sufficient instruments of conveyance
and assignment as the parties and their respective counsel shall deem reasonably
necessary or appropriate to vest in Buyer all right, title and interest in, to
and under the Purchased Assets, as well as physical possession of all of the
Purchased Assets.
(ii) Seller shall deliver to Buyer Seller's entire
inventory of copies of the Software and all other
Computer Programs used by Seller in both object code and source code forms
including all Technical Documentation and other documentation related thereto.
(iii) Seller shall cause the opinion of Holland and
Knight LLP, dated the Closing Date, in the form
attached hereto as EXHIBIT G, to be delivered to Buyer.
(iv) Seller shall cause to be delivered to Buyer
evidence of the payment of all Liabilities listed on
SCHEDULE 2.07(iv) that are being paid by Seller at the Closing, including
without limitation (A) by returning all applicable notes, financing statements
or other evidences of indebtedness marked "paid in full," and (B) by presenting
evidence to the Buyer's reasonable satisfaction that the employee vacation and
overtime expense accrued to date shall have been paid.
(v) Seller shall deliver to Buyer a list of all its
present customers and suppliers and all its past
customers and suppliers since January 1, 1997, as well as, in each case, their
addresses, telephone numbers, and principal contact names.
(vi) Each Shareholder shall have signed Buyer's
standard Non-Disclosure Agreement and standard Proprietary
Information, Inventions, Non-Competition and Non-Solicitation Agreement.
(vii) Seller shall provide evidence of the filing of
an amendment to Seller's certificate of incorporation changing Seller's name
from Innovex Group, Inc. to Kobayashi, Soze and Bast, Inc.
(viii) Seller shall provide a Certificate of the
Secretary of Seller certifying that attached thereto is a
true, correct and complete copy of (A) the Articles of Incorporation of the
Seller, (B) the By-laws of Seller, (C) all resolutions adopted by the
shareholders of Seller in connection with this Agreement and the transactions
contemplated hereby, and (D) all resolutions adopted by the Board of Directors
of Seller in connection with this Agreement and the transactions contemplated
hereby.
(ix) A Certificate of Good Standing of the Seller
issued by the Secretary of State of the State of Florida.
(x) Seller shall execute the Option Exchange
Agreement with respect to each optionee and each holder of
restricted stock.
(b) DELIVERIES OF BUYER. In addition to the taking of such
other actions as may be provided for in this Agreement, at the Closing:
<PAGE> 14
Asset Purchase Agreement -- 10
(i) Buyer shall make all payments due at Closing.
(ii) Buyer shall deliver to Seller the Assignment and
Assumption Agreement.
(iii) Seller shall cause the opinion of Testa,
Hurwitz & Thibeault, LLP, dated the Closing Date, in the
form attached hereto as EXHIBIT H, to be delivered to Seller.
ARTICLE III
PURCHASE PRICE
3.01. PURCHASE PRICE; PAYMENTS AT CLOSING. The aggregate consideration
to be paid by Buyer to Seller for the Purchased Assets (the "PURCHASE PRICE")
shall be (i) $28,680,000 in cash (the "INITIAL PAYMENT") to be paid at the
Closing, PLUS (ii) the Earnout Payments (if any) determined pursuant to Section
3.02, PLUS (iii) the assumption of the Assumed Liabilities.
3.02. EARNOUT PAYMENTS.
(a) DEFINITIONS:
"CLASS A HOLDERS" shall mean the Shareholders.
"CLASS B EARNOUT PAYMENT DEDUCTION" shall mean with respect to each
Earnout Payment, (i) if 80% or more of the Class B Holders are employed by Buyer
or any of its successors or Affiliates as of the applicable Earnout Measurement
Time, zero; (ii) if none of the Class B Holders are employed by Buyer or any of
its successors or Affiliates as of the applicable Earnout Measurement Time, the
product of (a) 65% TIMES (b) the Maximum Earnout Payment; or (iii) if less than
80% but more than zero of the Class B Holders are employed by Buyer or any of
its successors or Affiliates as of the applicable Earnout Measurement Time, the
product of (a) the Maximum Earnout Payment TIMES (b) 65%; TIMES (c) one minus a
fraction, the numerator of which is the percentage of Class B Holders still
employed by Buyer or any of its successors or Affiliates as of the applicable
Earnout Measurement Time and the denominator of which is 80%.
"CLASS B HOLDERS" shall mean the persons identified on SCHEDULE
3.02(a)(i).
"CLASS C EARNOUT PAYMENT DEDUCTION" shall mean with respect to each
Earnout Payment, (i) if 70% or more of the Class C Holders are employed by Buyer
or any of its successors or Affiliates as of the applicable Earnout Measurement
Time, zero; (ii) if none of the Class C Holders are employed by Buyer or any of
its successors or Affiliates as of the applicable Earnout Measurement Time, the
product of (a) 35% TIMES (b) the Maximum Earnout Payment; or (iii) if less than
70% but more than zero of the Class C Holders are employed by Buyer or any of
its successors or Affiliates as of the applicable Earnout Measurement Time, the
product of (a) the Maximum Earnout Payment TIMES (b) 35%; TIMES (c) one minus a
fraction, the numerator of which is the percentage of Class C Holders still
employed by Buyer or any of its successors or Affiliates as of the applicable
Earnout Measurement Time and the denominator of which is 70%.
<PAGE> 15
Asset Purchase Agreement -- 11
"CLASS C HOLDERS" shall mean the persons identified on SCHEDULE
3.02(a)(ii) and, to the extent that Shareholders Agent elects to replace up to
four (4) of such Persons as a result of the termination of their employment with
Buyer or any of its successors or Affiliates (for any reason), the Class C
Replacements, substituted on a one-for-one basis with respect to each such
former employee.
"CLASS C REPLACEMENTS" shall mean the Persons identified on SCHEDULE
3.02(a)(iii), for so long as such Persons are employed with Buyer or any of its
successors or Affiliates.
"EARNOUT MEASUREMENT TIME" shall mean with respect to each Earnout
Payment, 5:00 p.m. Eastern time on the day prior to the First Earnout Payment
Date, or Second Earnout Payment Date, as the case may be.
"FIRST EARNOUT PAYMENT" shall mean (i) the Maximum Earnout Payment
MINUS (ii) the sum of (a) the applicable Class B Earnout Payment Deduction PLUS
(b) the applicable Class C Earnout Payment Deduction.
"FIRST EARNOUT PAYMENT DATE" shall mean August 15, 2001.
"MAXIMUM EARNOUT PAYMENT" shall mean, with respect to each of the
First Earnout Payment and the Second Earnout Payment, $9,560,000.
"SECOND EARNOUT PAYMENT" shall mean (i) the Maximum Earnout Payment
MINUS (ii) the sum of (a) the applicable Class B Earnout Payment Deduction PLUS
(b) the applicable Class C Earnout Payment Deduction.
"SECOND EARNOUT PAYMENT DATE" shall mean February 15, 2002.
(b) Subject to the terms and conditions set forth herein, Buyer agrees
to make the following payments (the "EARNOUT PAYMENTS"):
(i) Not later than August 15, 2001, Buyer shall pay,
subject to provisions of Section 9.05, to Seller, the
First Earnout Payment. Any such payments shall include interest accrued on such
amount from the Closing Date at the Applicable Interest Rate.
(ii) Not later than February 15, 2002, Buyer shall
pay, subject to provisions of Section 9.05, to Seller, the Second Earnout
Payment. Any such payments shall include interest accrued on such amount from
the Closing Date at the Applicable Interest Rate.
(c) For purposes of determining the Class B Earnout Payment
Deduction or the Class C Earnout Payment Deduction at any given time, the Class
B Holders or Class C Holders no longer employed by Buyer or any of its
successors or Affiliates by reason of such Person's death, Disability or
Termination Without Cause shall be counted as if they are still employed by
Buyer. No Hired Employee shall be transferred outside the consulting services
group of Buyer without the consent of Shareholders Agent, such consent not to be
unreasonably withheld.
3.03. PAYMENT TO EQUITYHOLDERS. Seller and Shareholders Agent (on
behalf of the Class A Holders, Class B Holders and the Class C Holders)
acknowledge and agree that any payments due
<PAGE> 16
Asset Purchase Agreement -- 12
pursuant to Section 3.01 and Section 3.02 by Seller to the Persons listed in
SCHEDULE 3.03 shall be made in accordance with the relative percentages set
forth in such schedule, which shall not be amended without Buyer's express
written consent.
3.04. METHOD OF PAYMENT. All payments from Buyer to Seller pursuant to
this Article III shall be made by wire transfer of immediately available funds
to an account or accounts designated in writing by Shareholders Agent.
3.05. ALLOCATION OF PURCHASE PRICE. As soon as practicable after the
Closing, but in no event later than 30 days post-Closing, Buyer shall deliver to
Seller a statement (the "Allocation Statement"), which shall be used for the
allocation of the Purchase Price (together with the Assumed Liabilities) among
the Purchased Assets and the covenant not to compete described in Section
6.01(d) hereof. The Seller and Buyer agree to report an allocation of such
Purchase Price among the Purchased Assets in a manner entirely consistent with
the Allocation Statement and agree to act in accordance with such Allocation
Statement in the preparation of financial statements and filing of all tax
returns (including, without limitation, filing Form 8594 with its Federal income
tax return for the taxable year that includes the date of the Closing) and in
the course of any tax audit, tax review or tax litigation relating thereto.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
AND THE SHAREHOLDERS
Each of Seller and the Shareholders hereby, severally and not jointly,
represent and warrant to Buyer that the statements contained in this Article IV
are true and correct, except as expressly set forth on the Disclosure Schedule
attached hereto (the "DISCLOSURE SCHEDULE"). The Disclosure Schedule shall be
arranged in numbered sections corresponding to the sections contained in this
Article IV. Any item disclosed on the Disclosure Schedule which makes explicit
reference to a specific representation or warranty as to which exception is
taken shall be only effective as to such representation or warranty and to no
other representations and warranties.
4.01. CORPORATE EXISTENCE AND POWER. Seller is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Florida, and has all corporate power and authority required to carry on its
business as now conducted. Seller is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where such
qualification is required, except where the failure to qualify would not have a
Material Adverse Effect. Set forth on SECTION 4.01 OF THE DISCLOSURE SCHEDULE is
a complete list of all of the addresses at which Seller maintains offices,
property or assets. Seller has heretofore delivered to Buyer true and complete
copies of the corporate charter and bylaws of Seller as currently in effect. All
of the outstanding shares of capital stock of Seller are owned, beneficially and
of record, by the Persons and in the amounts set forth on SECTION 4.01 OF THE
DISCLOSURE SCHEDULE. All currently outstanding options, warrants and any other
securities convertible or exercisable for any equity securities of Seller are
held by the Persons, in the amounts and have the vesting schedule set forth in
SECTION 4.01 OF THE DISCLOSURE SCHEDULE.
4.02. AUTHORIZATION. The Seller has the requisite corporate power and
authority to enter into this Agreement and the Ancillary Agreements to which it
is a party and to consummate the transactions contemplated hereby and thereby.
The execution, delivery and performance by Seller of this Agreement
<PAGE> 17
Asset Purchase Agreement -- 13
and each of the Ancillary Agreements to which it is a party and the consummation
by Seller of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action (including without limitation the
approval of Seller's directors and shareholders) on the part of Seller. Each of
this Agreement and the Ancillary Agreements to which the Seller is a party has
been duly executed and delivered by the Seller and constitutes the valid and
binding obligation of the Seller, enforceable against Seller in accordance with
its terms. This Agreement has been duly executed and delivered by each of the
Shareholders and constitutes the valid and binding obligation of each such
Shareholder, enforceable against each such Shareholder in accordance with its
terms.
4.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Seller and the Shareholders of this Agreement and each of the
Ancillary Agreements do not require any action by or in respect of, filing with,
approval, authorization of or consent from any governmental body, agency,
official or authority, except in connection with the Assignment of Trademarks
and Service Marks.
4.04. NON-CONTRAVENTION. The execution, delivery and performance by
Seller and the Shareholders of this Agreement and each of the Ancillary
Agreements do not and will not (i) contravene or conflict with the corporate
charter or bylaws, as amended to date, of Seller; (ii) contravene or conflict
with or constitute a violation of any provision of any law, regulation,
judgment, injunction, order or decree binding upon or applicable to Seller, the
Purchased Assets or the Business, or any of the Shareholders; (iii) constitute a
default under or violation of any contract or agreement, or give rise to any
right of termination, cancellation or acceleration of, any right or obligation
of Seller, or to a loss of any benefit relating to the Purchased Assets or the
Business, under any provision of any agreement, contract or other instrument
binding upon Seller or by which it or any of the Purchased Assets or the
Business is or may be bound, or any Permit; (iv) result in the creation or
imposition of any Lien on any Purchased Asset; or (v) require the consent of,
the waiver of any right of first refusal from, the giving of notice to, the
filing of notice with, or the approval or authorization of, any Person (except
as expressly set forth in Section 4.05 below and except in connection with the
Assignment of Trademarks and Service Marks).
4.05. REQUIRED CONSENTS. Each of SCHEDULE 2.01(ii) and SCHEDULE 2.01(x)
denotes those Assigned Contracts and those Permits, respectively, requiring
consents of any Person as a result of the execution, delivery and performance of
this Agreement and the Ancillary Agreements or the consummation of the
transactions contemplated hereby and thereby, including the assignment of the
Purchased Assets and Assigned Contracts to Buyer hereunder (each such consent, a
"REQUIRED CONSENT"). Except as set forth in SECTION 4.05 OF THE DISCLOSURE
SCHEDULE, all of the Required Consents have been duly and validly obtained, are
in full force and effect, have not been withdrawn, and are enforceable in
accordance with their respective terms. Other than the Required Consents, no
consent, approval or authorization of any governmental agency, any stockholder
or director of Seller or any Person with whom Seller has entered into a contract
or agreement, or, to the knowledge of Seller, otherwise is necessary for Buyer
to conduct the Business substantially in the manner conducted by Seller prior to
the Closing.
4.06. FINANCIAL STATEMENTS. (a) Seller has heretofore furnished Buyer
with (i) the unaudited balance sheet of the Seller as of December 31, 1999 (the
"BALANCE SHEET") and (ii) the unaudited income statement of the Seller for the
year ended December 31, 1999 (the "INCOME STATEMENT") (the items under clauses
(i) and (ii) above being referred to herein collectively, as the "FINANCIAL
STATEMENTS"). The Financial Statements present fairly the financial position of
Seller as of their respective dates, and the results of operations for the
respective periods then ended and are consistent with the business records of
Seller.
<PAGE> 18
Asset Purchase Agreement -- 14
(b) Except for the Excluded Liabilities and the Liabilities
referred to in Section 2.03, Seller does not have any Liabilities.
4.07. ABSENCE OF CERTAIN CHANGES. Except for entering into this
Agreement and the Ancillary Agreements or as otherwise set forth on SECTION 4.07
OF THE DISCLOSURE SCHEDULE, since the Balance Sheet Date, Seller has conducted
the Business in the ordinary course consistent with past practice and has not:
(i) suffered any Material Adverse Change or any event,
occurrence, development or state of circumstances or facts which has had or
could reasonably be expected to result in or have a Material Adverse Effect on
Seller;
(ii) incurred, assumed or guaranteed any indebtedness for
money borrowed, or incurred any Liabilities other than in the ordinary course of
business consistent with past practice;
(iii) paid, discharged or satisfied any claim, Lien or
Liability, other than those (i) which were reflected or reserved against in the
Balance Sheet and which were paid, discharged or satisfied in the ordinary
course of business consistent with past practice, or (ii) which were incurred
and paid, discharged or satisfied (other than legal fees and related expenses in
connection with the transactions contemplated by this Agreement) since the
Balance Sheet Date in the ordinary course of business consistent with past
practice;
(iv) permitted or allowed any of the Purchased Assets to be
mortgaged, pledged or subjected to any Lien;
(v) written down the value of any inventory other than in the
ordinary course of business consistent with past practice, or written off as
uncollectible any notes, accounts or other receivables or any portion thereof;
(vi) made, leased or acquired any capital asset other than in
the ordinary course of business and in any event not in excess of $10,000 in the
aggregate;
(vii) declared, paid or made, or set aside for payment or
making of, any dividend or other distribution in respect of its capital stock or
other securities, or directly or indirectly sold, issued, redeemed, purchased or
otherwise acquired, or subdivided, combined or in any way reclassified, any of
its capital stock or other securities, other than issuances of options under the
Innovex Group, Inc. 1998 Stock Option Plan and issuances of restricted stock;
(viii) suffered any damage, destruction or other casualty loss
(whether or not covered by insurance) adversely affecting the Business or the
Purchased Assets;
(ix) entered into any transaction with any of its shareholders
or officers or directors, except in their capacities as employees in the
ordinary course of employment;
(x) made any change in any method of financial or tax
accounting or any financial or tax accounting practice or in its method of
maintaining books and records;
(xi) increased the rate of compensation of, or paid any bonus
to, any of its directors, officers or employees, other than periodic increases
in the ordinary course of business consistent with
<PAGE> 19
Asset Purchase Agreement -- 15
past practice, or entered into or amended any employment, management,
consulting, deferred compensation, severance or other similar contract or
agreement;
(xii) entered into or modified (except as may be required by
applicable law) any Employee Plan, or any trust agreement or insurance contract
related thereto, in respect of any of its present or former directors, officers
or employees;
(xiii) experienced any labor dispute, other than routine
individual grievances, or any activity or proceeding by a labor union or
representative thereof to organize any of its employees, or any lockouts,
strikes, slowdowns, work stoppages or threats thereof by or with respect to any
of its employees;
(xiv) entered into any transaction, contract or agreement
relating to the Purchased Assets or the Business (including the acquisition or
disposition of any of the Purchased Assets or any other asset of Seller) or to
the relinquishment by the Seller of any contract or other right, other than
transactions, contracts, agreements and relinquishments entered into in the
ordinary course of business consistent with past practices and those
contemplated by this Agreement; or
(xv) agreed to, or made any commitment to, do any of the
foregoing.
4.08. PROPERTIES. (a) SCHEDULE 2.01(iv) correctly describes all Real
Property pertaining to the Business, including all leasehold interests,
easements, rights of way, privileges, licenses and other rights benefiting or
appurtenant to such Real Property. Seller does not own a fee simple interest in
any Real Property and does not lease any Real Property to others as landlord or
sublandlord. Seller does not lease any Real Property as tenant other than those
leases set forth in SCHEDULE 2.01(iv).
(b) SECTION 4.08(b) OF THE DISCLOSURE SCHEDULE describes all
personal property used in the Business included in the Purchased Assets,
including but not limited to Equipment, other equipment, furniture, vehicles,
storage tanks, spare and replacement parts, fuel and other trade fixtures and
fixed assets, and any Liens thereon, specifying in the case of leases or
subleases, the name of the lessor or sublessor, the lease term and basic annual
rent.
(c)(i) The Seller has good and marketable indefeasible, fee
simple title to all Purchased Assets that are real, personal, mixed or tangible
property, free of all Liens, subject to SCHEDULE 2.01.
(ii) The Real Property includes all real property owned or
leased by Seller or otherwise used or held for use in connection with the
conduct of the Business as heretofore conducted.
(iii) All leases of real and personal property are in good
standing and are valid, binding and enforceable in accordance with their
respective terms, and, other than in connection with this Agreement and the
transactions contemplated hereby, there does not exist under any such lease any
default by Seller or, to the knowledge of Seller and the Shareholders, by any
other Person, or any event that, with notice or lapse of time or both, would
constitute a default by Seller or, to the knowledge of Seller and the
Shareholders, by any other Person.
(iv) The plants, buildings, structures and equipment included
in the Purchased Assets have no material defects, are in good operating
condition and repair and have been reasonably maintained consistent with
standards generally followed in the industry (giving due account to the age and
length of
<PAGE> 20
Asset Purchase Agreement -- 16
use of same, ordinary wear and tear excepted), are suitable for their
present uses and, in the case of Real Property (including without limitation,
the roofs thereof), are structurally sound.
(v) Except for the leases listed on SCHEDULE 2.01(iv), no
portions of the Real Property are subject to any leases or other occupancy
agreements or are occupied by anyone other than Seller.
(vi) Seller has delivered to Buyer complete and accurate
copies of all leases relating to the Purchased Assets, both real and personal,
including all amendments related thereto.
(vii) All rent and other charges currently due on the Real
Property leases are listed on SCHEDULE 2.01(iv) and Seller has not assigned such
Real Property leases or subleased all or any portion of the premises leased
thereunder.
(viii) Seller has not made any alterations, additions or
improvements to the premises leased under the Real Property leases listed on
SCHEDULE 2.01(IV) that are required to be removed (or of which lessor could
require removal) at the termination of the respective lease terms.
(d) No Purchased Asset is subject to any Lien, except for Liens
disclosed on the Balance Sheet or on SCHEDULE 2.01.
(e) No violation of any law, regulation or ordinance (including,
without limitation, laws, regulations or ordinances relating to zoning, health,
safety, handicapped persons, city planning or similar matters) relating to
Seller, the Business or any Purchased Asset which would have a Material Adverse
Effect currently exists or has existed at any time since Seller's incorporation.
There are no developments, other than those developments that are known
generally to the public, affecting any of the Purchased Assets pending or, to
the knowledge of Seller and the Shareholders threatened, which might detract
from the value of such Purchased Assets, interfere with any present use of any
such Purchased Assets or adversely affect the marketability of such Purchased
Assets. In addition, except as set forth on SECTION 4.08(e) OF THE DISCLOSURE
SCHEDULE, the Real Property and the present use of the Real Property are not in
violation of or out of conformity with (i) any zoning, subdivision, building,
building code, health, safety, traffic, environmental, flood control, wetlands,
or other land use laws, statutes, ordinances, rules, regulations, variances,
permits or orders of any local, state, or federal authorities or any other
governmental entity having jurisdiction over the Real Property, including,
without limitation, the Americans with Disabilities Act of 1990 or (ii) any
Liens affecting the Real Property, in either case which would have a Material
Adverse Effect.
4.09. SUFFICIENCY OF PURCHASED ASSETS. The Purchased Assets constitute,
and on the Closing Date will constitute, all of the assets or property used or
held for use in the Business necessary to operate the Business as currently
conducted.
4.10. TITLE TO PURCHASED ASSETS. Upon consummation of the transactions
contemplated hereby, Buyer will have acquired good and marketable title in and
to, or a valid leasehold interest in (as applicable), the Purchased Assets, free
and clear of all Liens, subject to SCHEDULE 2.01.
4.11. SUBSIDIARIES. Seller does not have any Subsidiaries.
4.12. LITIGATION. Except as set forth on SECTION 4.12 OF THE DISCLOSURE
SCHEDULE, there is no action, suit, charge, or proceeding pending against (or
any basis therefor), and to the knowledge of Seller
<PAGE> 21
Asset Purchase Agreement -- 17
and the Shareholders, there is no investigation pending, and no action, suit,
charge or proceeding threatened against or affecting, the Business, any
Purchased Asset or Seller, before any court or arbitrator or any governmental
body, agency or official, or that in any manner challenges or seeks to prevent,
enjoin, alter or materially delay the transactions contemplated hereby.
4.13. CONTRACTS. (a) SCHEDULE 2.01(ii) and SCHEDULE 2.02(ii), list all
contracts, agreements, arrangements and understandings to which Seller is a
party or by which it is bound, such contracts, agreements, arrangements and
understandings, whether constituting Assigned Contracts or Excluded Contracts,
being referred to herein collectively as the "CONTRACTS." SCHEDULE 2.01(ii) also
denotes with an asterisk (*) each Contract for which the consent of any Person
is necessary to transfer to Buyer all rights and any Assumed Liabilities
pursuant to Section 2.01 or to otherwise consummate the transactions
contemplated by this Agreement. In addition, each of the contracts listed on
SCHEDULE 2.01(ii) is expressly classified on such SCHEDULE 2.01(ii) under one of
the following categories:
(i) Contracts relating to the ownership, license,
acquisition, design, development, distribution, marketing, use, maintenance or
support of each Computer Program or any other software and related items (all of
such Contracts as so classified being referred to herein as the "SOFTWARE
CONTRACTS"). The Software Contracts are further classified on SCHEDULE 2.01(ii)
as (A) licenses to Seller from third parties (development and/or marketing
and/or relicensing to third parties); (B) licenses from third parties to Seller
(Seller's internal use); (C) development contracts, work-for-hire agreements and
consulting and employment agreements; (D) distributorships, dealerships, value
added reseller, franchises, sales or marketing representatives, and
manufacturer's representative contracts (from third parties to Seller, or from
Seller to third parties); (E) licenses and sublicenses to others; or (F)
maintenance, support or enhancement agreements.
(ii) Leases of (A) real property; (B) equipment; (C)
office furnishings and fixtures; and (D) other
personalty, in each case as used in the Business.
(iii) Agreements currently in effect concerning
employment, confidentiality, noncompetition,
non-solicitation of employees or any acquisition proposal.
(iv) Agreements under which Seller has created,
incurred or assumed or guaranteed any secured or unsecured
indebtedness for borrowed money or any capitalized lease obligation.
(v) Any other contracts, agreements, arrangements or
understandings to which Seller is a party and not
elsewhere classified pursuant to this Section 4.13(a).
(b) Seller has delivered to Buyer a correct and complete copy
of each written agreement listed in SCHEDULE 2.01(ii) and SCHEDULE 2.02(ii).
Except as set forth on SECTION 4.13 OF THE DISCLOSURE SCHEDULE, each Assigned
Contract is a valid and binding agreement of Seller and is in full force and
effect enforceable against the parties thereto in accordance with its terms not
subject to any valid claims, counterclaims or offsets, and neither Seller nor,
to the knowledge of Seller and the Shareholders, any other party thereto is in
default nor is there a basis for any such default by Seller (or, to the
knowledge of Seller and the Shareholders, by any other party thereto) under the
terms of any such Assigned contract, nor has any event or circumstance occurred
that, with notice or lapse of time or both, would constitute any default
thereunder with respect to Seller or, to the knowledge of Seller and the
Shareholders, any other party thereto, nor is there any claim under the terms of
any such Assigned Contract (or basis for any claim), including, without
limitation, any claims relating to products or
<PAGE> 22
Asset Purchase Agreement -- 18
services, against Seller and the Shareholders or with respect to the Business,
any of the Purchased Assets or any Assigned Contract. There is no contract,
agreement, commitment or obligation to which Seller is a party or is bound that
at the time it was entered into or made was, or is currently, known or could be
reasonably expected to result in, any loss to Seller upon completion or
performance thereof, or any bid, offer or proposal which if accepted would
result in such a loss, contract, agreement, commitment or obligation.
4.14. PERMITS. SCHEDULE 2.01(x) correctly lists all Permits. SCHEDULE
2.01(x) also denotes with an asterisk (*) each Permit for which the consent of
any Person is necessary to transfer to Buyer all rights under such Permit or to
otherwise consummate the transactions contemplated by this Agreement. Such
Permits are valid and in full force and effect, are not subject to any adverse
disputes or claims, to the extent transferable, have been validly and lawfully
transferred by Seller to Buyer as of the date hereof and will not be violated,
invalidated, terminated or impaired or become terminable as a result of the
transactions contemplated hereby. Upon consummation of the transactions
contemplated hereby, Buyer will have all of the right, title and interest in and
to all the Permits (to the extent transferable) and they constitute all of the
licenses, permits, approvals or other governmental authorizations, approvals or
filings necessary to own and operate the Real Property and to conduct the
Business as currently conducted.
4.15. INSURANCE. Seller has furnished to Buyer a list of, and true and
complete copies of, all insurance policies and fidelity bonds covering the
Purchased Assets, the business and operations of the Business and Seller and its
employees.
4.16. COMPLIANCE WITH LAWS. Seller is not in violation of, and
immediately upon the consummation of the transactions contemplated hereby will
not be in violation of, and to Seller's knowledge is not under investigation
with respect to, and has not been threatened to be charged with or given notice
of, nor is there any basis for, any violation of, any law, rule, ordinance or
regulation, or judgment, order or decree entered by any court, arbitrator or
governmental authority, domestic or foreign, applicable to Seller, the Purchased
Assets or the conduct of the Business, the violation of which would have a
Material Adverse Effect.
4.17. INTELLECTUAL PROPERTY. (a) Seller owns free and clear of all
Liens (or, with respect to Intellectual Property Rights used by Seller in the
Business and owned by a third party, has the valid right to use) and Buyer shall
receive at Closing, good and marketable title to (or, with respect to
Intellectual Property Rights used by Seller in the Business and owned by third
parties, obtain the valid right to use) all Intellectual Property Rights owned
or used by Seller in the Business, which include all Intellectual Property
Rights necessary for the use of the Purchased Assets and the conduct of the
Business as currently conducted (collectively, "SELLER INTELLECTUAL PROPERTY").
SECTION 4.17 OF THE DISCLOSURE SCHEDULE contains a list of all of the following
that are included in the Seller Intellectual Property: (i) patents and patent
applications, (ii) trademarks, trade names and service marks and registrations
thereof and applications therefor, and (iii) registered copyrights and
applications for copyright registration. SECTION 4.17 OF THE DISCLOSURE SCHEDULE
identifies the owner of each item listed thereon and, in the case of
registrations and applications, the registration or application number and date.
Seller has made no foreign applications or registrations with respect to any
Intellectual Property Rights.
(b) (i) Except for the restrictions disclosed on SECTION 4.17
OF THE DISCLOSURE SCHEDULE, Seller holds free from contractual restrictions and
any other restrictions, all of the Seller Intellectual Property, (ii) the Seller
Intellectual Property does not infringe any Intellectual Property Rights of any
other Person, and no claims have been asserted with respect to the use by Seller
of the Seller
<PAGE> 23
Asset Purchase Agreement -- 19
Intellectual Property or otherwise for patent, copyright, trade secret or trade
mark infringement, (iii) the Seller Intellectual Property owned by Seller and,
to the knowledge of Seller and the Shareholders, the Seller Intellectual
Property owned by third parties is valid and enforceable, and (iv) Seller is not
aware of any infringement by any other Person of any Seller Intellectual
Property. None of the Seller Intellectual Property is subject to any outstanding
order, judgment, decree, stipulation or agreement restricting the use thereof by
Seller or restricting the licensing thereof by Seller to any Person. Seller has
not entered into any agreement to indemnify any other Person against any charge
of infringement of any patent, trademark, trade name, service mark or copyright.
(c) None of the processes, methodologies, trade secrets,
research and development results and other know-how included in the Seller
Intellectual Property, the value of which is contingent upon maintenance of the
confidentiality thereof, has been disclosed by Seller to any Person other than
employees, contractors, customers, representatives and agents of the Seller who
are parties to customary confidentiality and non-disclosure agreements with the
Seller or subject to other non-disclosure obligations.
4.18. SOFTWARE. (a) The Technical Documentation includes the source
code and system documentation for all of the Software, as well as any pertinent
commentary or explanation that may be necessary to render such materials
understandable and usable by a trained computer programmer. The Technical
Documentation also includes any Computer Program (including compilers), tools,
and higher level language used for the development, maintenance, and
implementation of the Software.
(b) Seller has validly obtained the right and license to use,
copy, modify, maintain, support, install, license and distribute the third-party
Computer Programs and materials contained in or relicensed with the Software,
the Technical Documentation and all other Computer Programs used by Seller
pursuant to the Contracts identified as "licenses from third parties
(development and/or marketing and/or relicensing to third parties)" or "Licenses
from third parties (internal use only)" in SCHEDULE 2.01(ii). Seller has good
and marketable title to the Software (including the Technical Documentation),
and the Software (including the Technical Documentation) contains no other
Computer Programs or materials in which any third party may claim superior,
joint, or common ownership, including any right or license.
(c) Except as set forth on SECTION 4.18 OF THE DISCLOSURE
SCHEDULE, (i) the Software conforms in all material respects to the Technical
Documentation and all other documentation published by Seller with respect to
the Software; (ii) no portion of the Software contains any software routines or
hardware components designed to permit unauthorized access; or to disable or
erase software, hardware or data; and (iii) the performance of the Software has
not been affected by the advent of the year 2000, and the Software is capable of
correctly processing, receiving and providing date data between the twentieth
and twenty-first centuries.
(d) All personnel, including employees, agents, consultants,
and contractors, who have contributed to or participated in the conception and
development of any of the Software either (i) have been party to a
"work-for-hire" arrangement or agreement with the Seller that has accorded the
Seller full, effective, exclusive and original ownership of all tangible and
intangible property thereby arising, or (ii) have executed appropriate
instruments of assignment in favor of the Seller as assignee that have conveyed
to the Seller full, effective and exclusive ownership of all tangible and
intangible property thereby arising. All employees currently employed, or
employed during the past two years, by Seller have signed the Employee
Confidentiality, Nonsolicitation and Noncompetition Agreement in the form
attached to SECTION 4.18(d) OF THE DISCLOSURE SCHEDULE.
<PAGE> 24
Asset Purchase Agreement -- 20
4.19. EMPLOYEES. SECTION 4.19 OF THE DISCLOSURE SCHEDULE sets forth a
true and complete list of (a) the names, addresses, social security numbers,
titles, annual salaries and other compensation of all Hired Employees of the
Business, date of last review and date of last compensation adjustment and (b)
the wage rates for non-salaried Hired Employees of the Business (by
classification). None of such employees and no other key employee of the
Business has indicated to Seller or Shareholder that he does not wish to become
an employee of Buyer upon consummation of the transactions contemplated by this
Agreement.
Seller is in compliance in all material respects with all applicable
U.S. Federal, state and local laws respecting employment and employment
practices, employee benefits, terms and conditions of employment, wage and
hours, and is not engaged in any unfair labor or unlawful employment practice
relating to the Business. Seller represents and warrants there is no unlawful
employment practice pending before the Equal Employment Opportunity Commission
("EEOC"), EEOC recognized state "referral agency" or any other Governmental
Authority. None of the employees of Seller are represented by any labor union.
No grievance or arbitration proceeding relating to the employees of Seller are
pending and no written claim therefore exists with respect to Seller.
4.20. WARRANTY OR OTHER CLAIMS. There are no existing or, to the
knowledge of Seller and the Shareholders, threatened claims, against Seller for
products (including the Software or other Computer Programs of third parties),
parts or services which are defective or fail to meet any applicable warranty,
representation or other term or provision, nor is there any basis therefor.
Except as described in the preceding sentence, no claim has been asserted and is
currently outstanding against Seller for renegotiation or price redetermination
of any business transaction with respect to the Business, nor is there any basis
for any such claim. SECTION 4.20 OF THE DISCLOSURE SCHEDULE attached hereto
accurately describes all express warranties and service policies of Seller
relating to the Software, the conduct of the Business or the other Purchased
Assets that are currently in effect or that were in effect at any time during
the past year and discloses Seller's terms and conditions with respect to the
sale, distribution or licensing of the Software (including, without limitation,
all express warranties) and service policies currently in effect or that were in
effect during the past year. Any express warranties, service policies or terms
and conditions with respect to the Assigned Contracts currently in effect are
expressly set forth in such Assigned Contracts.
4.21. BROKERS' FEES. There is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on behalf
of Seller or Shareholders who might be entitled to any fee or commission upon
consummation of the transactions contemplated by this Agreement.
4.22. ENVIRONMENTAL COMPLIANCE. (a) Except as disclosed on SECTION 4.22
OF THE DISCLOSURE SCHEDULE, (i) the Seller has complied in all material respects
with all federal, state and local laws (including, without limitation, case law,
rules, regulations, orders, judgments, decrees, permits, licenses and
governmental approvals) which are intended to protect the environment and/or
human health or safety (collectively, "Environmental Laws"); (ii) the Seller has
not handled, generated, used, stored, transported or disposed of any material,
substance or waste which is regulated by Environmental Laws ("Hazardous
Materials"), except for reasonable amounts of ordinary office and/or
office-cleaning supplies which have been used in compliance with Environmental
Laws; (iii) there is not now, nor has there ever been, any underground storage
tank or asbestos-containing material on any real property owned, operated or
leased by the Seller; (iv) the Seller has not conducted, nor is it aware of, any
<PAGE> 25
Asset Purchase Agreement -- 21
environmental investigations, studies, audits, tests, reviews or analyses, the
purpose of which was to discover, identify, or otherwise characterize the
condition of the soil, groundwater, air or the presence of Hazardous Materials
at any real property owned, operated or leased by the Seller; and (v) there are
no "Environmental Liabilities".
(b) For purposes of this Agreement, "Environmental
Liabilities" are any claims, demands, or liabilities under Environmental Laws
which (i) arise out of or in any way relate to the Seller's operations or
activities, or any real property at any time owned, operated or leased by the
Seller, or any Shareholder's use or ownership thereof, whether vested or
unvested, contingent or fixed, actual or potential, and (ii) arise from or
relate to actions occurring (including any failure to act) or conditions
existing on or before the Closing Date.
4.23. COMPLIANCE WITH CERTIFICATE OF INCORPORATION AND BY-LAWS. Seller,
in the conduct of the Business, the ownership of the Purchased Assets and
otherwise, is in compliance in all respects with the terms and provisions of its
corporate charter and bylaws, both as amended to date.
4.24. ABSENCE OF CONFLICTS. Except as otherwise set forth on SECTION
4.24 OF THE DISCLOSURE SCHEDULE, neither the Shareholders nor any officer,
director or other Affiliate of Seller and the Shareholders (i) has (or in the
past three years had) any material direct or indirect interest in any Person
that does business with Seller; (ii) has (or in the past three years had) any
direct or indirect interest in the Business or the Purchased Assets; or (iii)
has (or in the past three years had) any other business relationships with
Seller, other than such relationships that arise in the ordinary course from
being an officer, director or shareholder of Seller.
4.25. BUYER. Notwithstanding anything contained herein to the contrary,
Seller and the Shareholders make no representation or warranty relating to any
Contract, agreement or understanding with Buyer, or any proceeds thereof, to the
extent such representation or warranty would be affected by any action or
inaction by Buyer.
4.26. REPRESENTATIONS AND WARRANTIES. No representation or warranty by
Seller or any Shareholder set forth in this Agreement, and no statement
contained in any exhibit or schedule hereto or any certificate or writing
delivered in connection with this Agreement and the transactions herein
contemplated in connection with this Agreement contains any untrue statement of
a material fact, or omits to state a material fact necessary in order to make
the statements contained herein or therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller and the Shareholders
that:
5.01. ORGANIZATION AND EXISTENCE. Buyer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has all corporate power and authority required to carry on its
business as now conducted. Buyer is duly qualified to do business as a foreign
corporation and is in good standing in the State of Florida.
<PAGE> 26
Asset Purchase Agreement -- 22
5.02. CORPORATE AUTHORIZATION. Buyer has the requisite corporate power
and authority to enter into this Agreement and the Ancillary Agreements to which
it is a party and to consummate the transactions contemplated hereby and
thereby. The execution, delivery and performance of this Agreement and the
Ancillary Agreements to which Buyer is a party, and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of Buyer. Each of this Agreement and the
Ancillary Agreements to which Buyer is a party has been duly executed and
delivered by Buyer and constitutes the valid and binding obligation of Buyer
enforceable against Buyer in accordance with its terms.
5.03. GOVERNMENTAL AUTHORIZATION. The execution, delivery and
performance by Buyer of this Agreement and each of the Ancillary Agreements do
not require any action by or in respect of, filing with, authorization or
consent from any governmental body, agency, official or authority.
5.04. NON-CONTRAVENTION. The execution, delivery and performance by
Buyer of this Agreement and each of the Ancillary Agreements do not and will not
(i) contravene or conflict with the corporate charter or bylaws of Buyer; (ii)
contravene or conflict with or constitute a violation of any provision of any
law, regulation, judgment, injunction, order or decree binding upon or
applicable to Buyer; (iii) constitute a default under or violation of any
contract or agreement, or give rise to any right of termination, cancellation or
acceleration of, any right or obligation of Buyer under any provision of any
agreement, contract or other instrument binding upon Buyer or by which Buyer is
or may be bound; or (iv) require the consent of, the waiver of any right of
first refusal from, the giving of notice to, filing of notice with, or the
approval or authorization of, any Person.
5.05. FINDERS' FEES. There is no investment banker, broker, finder or
other intermediary that has been retained by or is authorized to act on behalf
of Buyer who might be entitled to any fee or commission upon consummation of the
transactions contemplated by this Agreement.
5.06. LITIGATION. There is no action, suit, charge, investigation or
proceeding pending against, or to the knowledge of Buyer threatened against or
affecting Buyer before any court or arbitrator or any governmental body, agency
or official that in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the transactions contemplated hereby.
5.07. REPRESENTATIONS AND WARRANTIES. No representation or warranty by
Buyer set forth in this Agreement, and no statement contained in any exhibit or
schedule hereto or any certificate or writing delivered in connection with this
Agreement and the transactions herein contemplated in connection with this
Agreement contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading.
ARTICLE VI
COVENANTS FOLLOWING THE CLOSING
6.01. COVENANTS OF THE SELLER AND THE SHAREHOLDERS. Seller and each
Shareholder, jointly and severally, agree that:
(a) CONFIDENTIALITY AND OTHER MATTERS. Seller and each
Shareholder will hold, and will use their best efforts to cause Seller's
Affiliates, officers, directors, employees, accountants, counsel,
<PAGE> 27
Asset Purchase Agreement -- 23
consultants, advisors and agents to hold, in confidence, unless compelled to
disclose by judicial or administrative process or by other requirements of law,
all proprietary or confidential documents and information concerning Buyer,
Seller or the Business (including any such documents and information provided by
Buyer to Seller and the Shareholders after the Closing Date pursuant to Section
6.02 of this Agreement or otherwise) and will not use and will use their best
efforts to cause Seller's officers, directors, employees, consultants, advisors
and agents not to use, any such proprietary or confidential documents or
information for any purpose whatsoever, except to the extent that such
information can be shown to have been in the public domain through no fault of
Seller or any Shareholder. Seller and each Shareholder, jointly and severally,
covenant that they shall not, directly or indirectly, for a period of one year
after the Closing Date, solicit, cause to be solicited, hire or cause to be
hired any Hired Employee or other employee of Buyer or its Affiliates or
cooperate with any person in doing any of the foregoing. For the avoidance of
doubt, any information obtained by Seller or any of the Shareholders pursuant to
Section 6.02 of this Agreement shall be deemed to be confidential information of
Buyer and the Business for purposes of the obligations of Seller and the
Shareholders under this Section 6.01(a).
(b) TRADEMARKS; TRADENAMES. As soon as practicable after the
Closing Date but in no event later than one month thereafter, Seller shall cease
using, and eliminate the use of, all of the trademarks, tradenames, service
marks and service names used in the Business or by Seller, including the use of
the names "Innovex Group, Inc.," "InnTerprise", and the use of any names
confusingly similar to such trademarks, tradenames, service marks and service
names, and all logos used in the Business on all advertising, stationery,
business cards, checks, purchase orders and acknowledgments, customer agreements
and other contracts and business documents or otherwise. Seller shall change the
corporate name of Seller so as not to be confusingly similar to the current name
of Seller. On the Closing Date and at any time thereafter as requested by Buyer,
Seller shall provide to Buyer any additional consents in writing requested by
Buyer, to the use of the names in this subsection and in the absence of such
consents Buyer may use either such name for any and all purposes whatsoever
without the approval of Seller. In addition, no Shareholder shall use the names
"Innovex Group, Inc.," "InnTerprise," or any names confusingly similar to such
name.
(c) BOOKS AND RECORDS. Seller shall afford for a period of six
years following the Closing (or such longer period as the following records are
retained by Seller), the officers, attorneys, accountants and other authorized
representatives of Buyer or its Affiliates free and full access during normal
business hours to all items pertaining to the Purchased Assets, whether in hard
copy or computer format, and Buyer and its Affiliates shall be permitted to make
abstracts from, or copies of all such items.
(d) NON-COMPETITION. Until the first anniversary of the
Closing Date, Seller shall not engage, directly or indirectly (including,
without limitation, as a principal, member, owner, partner, shareholder or
investor (other than as a shareholder of one percent or less of the outstanding
voting stock of a company whose stock is traded on Nasdaq or any registered
stock exchange), independent contractor, consultant, advisor, or otherwise) in
any activity that competes with the Business as conducted by Seller prior to the
Closing.
(e) REASONABLE EFFORTS; FURTHER ASSURANCES. (i) Seller and
each Shareholder agree to execute and deliver such other documents,
certificates, agreements and other writings and to take such other actions as
may be necessary or desirable in order to consummate or implement expeditiously
the transactions contemplated by this Agreement and to vest in Buyer good and
marketable title to the Purchased Assets.
<PAGE> 28
Asset Purchase Agreement -- 24
(ii) Seller hereby constitutes and appoints,
effective as of the Closing Date, Buyer and its successors and assigns as the
true and lawful attorney of Seller with full power of substitution in the name
of Buyer or in the name of Seller, but for the benefit of Buyer (A) to collect
for the account of Buyer any items of Purchased Assets and (B) subject to
Article IX of this Agreement, to institute and prosecute all proceedings which
Buyer may in its sole discretion deem proper in order to assert or enforce any
right, title or interest in, to or under the Purchased Assets, and to defend or
compromise any and all actions, suits or proceedings in respect of the Purchased
Assets. Buyer shall be entitled to retain for its account any amounts collected
pursuant to the foregoing powers, including any amounts payable as interest in
respect thereof.
(f) REQUIRED CONSENTS; LIENS. Seller shall use commercially
reasonable efforts to obtain promptly (in no event more than 20 days) after the
Closing all Required Consents. Buyer agrees to use commercially reasonable
efforts to cooperate with Seller in obtaining such Required Consents. Seller
shall use commercially reasonable efforts to cause the release, discharge or
termination of all Liens on the Purchased Assets, including without limitation
evidence of the termination and removal of all UCC-1 financing statements and
the discharge of all mortgages and other monetary Liens.
6.02. COVENANTS OF ALL PARTIES. The parties hereto agree that Seller
and Buyer shall cooperate with one another (i) in determining whether any action
by or in respect of, or filing with, any governmental body, agency, official or
authority is required in connection with the consummation of the transactions
contemplated by this Agreement and (ii) in taking such actions or making any
such filings, furnishing information required in connection therewith and
seeking timely to obtain any such actions, all as set forth in Section 6.02(i).
Notwithstanding the foregoing, Seller and the Shareholders shall remain solely,
jointly and severally responsible for all filings and approvals relating to
Environmental Laws covering (i) conditions existing before the Closing Date and
(ii) actions to correct unpermitted or noncompliant conditions existing before
the Closing Date.
6.03. COVENANTS OF BUYER. After the Closing, Buyer shall use
commercially reasonable efforts to promptly arrange for the termination of all
personal guarantees by any of the Shareholders relating to the Assigned
Contracts, Assumed Liabilities or any other Purchased Asset. To the extent that
any Shareholder is held liable under any such guarantee (other than guarantees
relating to an Excluded Liability), with regard to any obligation arising after
the Closing as a result of actions taken by Buyer, Buyer shall indemnify and
hold such Shareholder harmless with regard thereto.
ARTICLE VII
EMPLOYEE BENEFITS
7.01. EMPLOYEE BENEFITS DEFINITIONS. The following terms, as used
herein, having the following meaning:
"BENEFIT ARRANGEMENT" means an employment, severance or similar
contract, arrangement or policy and each plan or arrangement providing for
severance, insurance coverage (including any self-insured arrangements),
workers' compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, pension or retirement benefits or for deferred compensation,
profit-sharing, bonuses, stock options, stock appreciation rights or other forms
of incentive compensation or post-retirement insurance, compensation or benefits
that (i) is not an Employee Plan and (ii) is maintained or contributed to by
Seller or any of its ERISA Affiliates, as the case may be.
<PAGE> 29
Asset Purchase Agreement -- 25
"EMPLOYEE PLAN" means each "employee benefit plan", as such term is
defined in Section 3(3) of ERISA, that (i) is subject to any provision of ERISA
and (ii) is maintained or contributed to by Seller or any of its ERISA
Affiliates, as the case may be.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA AFFILIATE" of any entity means any other entity that, together
with such entity, would be treated as a single employer under Section 414 of the
Code.
"HIRED PARTIES" means those employees or independent contractors of
Seller who are offered employment by Buyer and who commence employment with
Buyer as of the Closing Date.
"MULTI-EMPLOYER PLAN" means each Employee Plan that is a multi-employer
plan, as defined in Section 3(37) of ERISA.
7.02. ERISA REPRESENTATIONS. Seller and each Shareholder hereby,
severally represent and warrant to Buyer that:
(a) SCHEDULE 7.02(a) attached hereto lists each Employee Plan
and each Benefit Arrangement that covers any employee of the Seller, copies or
descriptions of all of which have previously been made available or furnished to
Buyer. With respect to each Employee Plan, Seller has provided the most recently
filed Form 5500 and an accurate summary description of such plan. Seller has
provided Buyer with complete age, salary, service and related data as of the
most recent practicable date for each employee of Seller.
(b) Neither the Seller nor any ERISA Affiliate maintains or
has ever maintained or contributed to any Multiemployer Plan or Employee Plan
subject to Title IV of ERISA.
(c) None of the Employee Plans or Benefit Arrangements listed
on SCHEDULE 7.02(a) covers any non-United States employee or non-United States
former employee of the Seller.
(d) No "prohibited transaction", as defined in Section 406 of
ERISA or Section 4975 of the Code, has occurred with respect to any Employee
Plan.
(e) Each Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. Seller has furnished to
Buyer copies of the most recent Internal Revenue Service determination letters
with respect to each such Plan. Each Employee Plan has been maintained in
compliance with its terms and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including but not limited to ERISA and
the Code, which are applicable to such Employee Plan.
(f) Each Benefit Arrangement has been maintained in compliance
with its terms and in all material respects with the requirements prescribed by
any and all statutes, orders, rules and regulations, including but not limited
to ERISA and the Code, which are applicable to such Benefit Arrangement.
<PAGE> 30
Asset Purchase Agreement -- 26
(g) There has been no amendment to, written interpretation of
or announcement (whether or not written) by Seller or any of its ERISA
Affiliates relating to, or change in employee participation or coverage under,
any Employee Plan or Benefit Arrangement that would increase materially the
expense of maintaining such Employee Plan or Benefit Arrangement above the level
of the expense incurred in respect thereof for the fiscal year ended prior to
the date hereof.
(h) No Tax under Section 4980B or 4980D of the Code has been
incurred in respect of any Employee Plan that is a group health plan, as defined
in Section 5000(b)(1) of the Code.
(i) With respect to the employees and former employees of the
Seller, there are no employee post-retirement medical or health plans in effect,
except as required by Section 4980B of the Code.
(j) No employee of the Seller will become entitled to any
bonus, retirement, severance or similar benefit or enhanced benefit solely as a
result of the transactions contemplated hereby.
(k) There is no contract or agreement of any kind covering any
employee or former employee of Seller that would prevent such employee or former
employee from becoming employed by Buyer on or after the Closing Date.
7.03. EMPLOYEES AND OFFERS OF EMPLOYMENT. On or prior to the Closing
Date, Buyer shall offer employment to all of the persons listed in Section 4.19
of the Disclosure Schedule; PROVIDED, that Buyer may terminate at any time after
the Closing Date the employment of any employee who accepts such offer. Buyer
shall grant to each such person who accepts its offer of employment an
employment and benefits package which provides for: (i) employment at a rate of
base pay substantially comparable to that in effect for such person immediately
prior to Closing; (ii) a benefits package which is substantially comparable in
the aggregate to the benefits package provided to Buyer's employees as of
Closing; and (iii) a carryover from Seller of all applicable calculations of
years of service, waiting periods and other limitations or prerequisites so that
eligibility for, or current level of employee benefits provided to (but not
prior accruals or contributions of benefits for), such person shall be
substantially comparable as if such person had been employed by Buyer for a
period equal to his employment by Seller. Neither Seller nor any Shareholder
will take any action that would impede, hinder, interfere or otherwise compete
with Buyer's effort to hire any Hired Parties. Buyer shall not assume
responsibility for any such employee until such employee commences employment
with Buyer, but in no event whatsoever shall Buyer assume any responsibility for
any commitment or liability of Seller to any such employee. Buyer shall not
assume responsibility for any employee of Seller who is not a Hired Party and
Seller agrees to continue to assume all responsibilities, commitments and/or
liabilities for any employee of Seller who is not a Hired Party.
7.04. SELLER'S EMPLOYEE BENEFIT PLANS. (a) Seller shall retain, perform
and pay all obligations and liabilities under the Employee Plans and Benefit
Arrangements in respect of each employee or former employee (including any
beneficiary thereof of Seller). Seller shall retain, perform and pay all
liabilities and obligations in respect of benefits accrued as of the Closing
Date by or for Hired Parties under the Employee Plans and Benefit Arrangements
or otherwise, and Buyer shall not have any liability with respect thereto. No
assets of any Employee Plan or Benefit Arrangement shall be transferred to Buyer
or to any plan of Buyer, without the written consent of Buyer. However, with
respect to Seller's 401(k)
<PAGE> 31
Asset Purchase Agreement -- 27
retirement plan, Seller shall cooperate and assist any Hired Party who so
requests, in making a direct rollover of the Hired Party's vested account
balance to Buyer's 401(k) plan as soon as practicable after the Closing Date.
Buyer shall cooperate with Seller and any Hired Party with respect to such
direct rollover, provided that Buyer determines that the direct rollover is
permitted under the Code and regulations thereunder. Each of the parties hereto
shall pay its own expenses in connection with such direct rollover.
(b) With respect to the Hired Parties (including any
beneficiary or dependent thereof), Seller shall retain (i) all liabilities and
obligations arising under any group life, accident, medical, dental or
disability plan or similar arrangement (whether or not insured) to the extent
that such liability or obligation relates to contributions or premiums accrued
(whether or not payable), or to claims incurred (whether or not reported), on or
prior to the Closing Date, (ii) all liabilities and obligations arising under
any worker's compensation arrangement to the extent such liability or obligation
relates to the period on or prior to the Closing Date, including liability for
any retroactive workman's compensation premiums attributable to such period and
(iii) all other liabilities and obligations arising under the Employee Plans and
the Benefit Arrangements.
(c) With respect to any Hired Party (including any beneficiary
or dependent thereof) who enters a hospital or is on short-term disability under
any Benefit Arrangement on or prior to the Closing Date, Seller shall be
responsible for claims and expenses incurred before the Closing Date in
connection with such Person. With respect to any of Seller's Benefit
Arrangements covering medical expenses and other costs relating to pregnancies
and maternity leave, Seller shall be responsible for all claims (whether or not
reported) and expenses incurred by any Hired Party during the period prior to
and ending on the Closing Date.
(d) Seller shall provide or shall cause Paychex Business
Solutions to provide all notices and any continuation of health benefit coverage
required to be provided to any of Seller's employees, former employees, or the
beneficiaries or dependents of such employees or former employees, under Section
4980B of the Code (herein collectively referred to as "COBRA"), to the extent
such notices and continuation of health benefit coverage are required to be
provided by reason of events occurring prior to or on the Closing Date or by
reason of the transactions contemplated by this Agreement. Seller shall continue
the health coverage required by COBRA and the provisions of this Agreement
irrespective of the elimination of any health benefit plan of Seller. Seller
shall promptly notify Buyer of the elimination of any health benefit plan of
Seller prior to the end of the maximum coverage period described in Section
4980B(f)(2)(1)(B) and shall provide Buyer with evidence, to the satisfaction of
Buyer, of continuing compliance with this Section 7.04(d).
7.05. NO THIRD PARTY BENEFICIARIES. No provision of this Article VII
shall create any third party beneficiary or other rights in any employee or
former employee (including any beneficiary or dependent thereof) of Seller in
respect of continued employment (or resumed employment) with Buyer, and no
provision of this Article VII shall create any such rights in any such Persons
in respect of any benefits that may be provided, directly or indirectly, under
any Employee Plan or Benefit Arrangement or any plan or arrangement that may be
established by Buyer. No provision of this Agreement shall constitute a
limitation on rights to amend, modify or terminate after the Closing Date any
such plans or arrangements of Buyer. No provision of this Agreement shall cause
any employee to be a third party beneficiary of any rights herein.
<PAGE> 32
Asset Purchase Agreement -- 28
ARTICLE VIII
TAX MATTERS
8.01. TAX DEFINITIONS. The following terms, as used herein, have the
following meanings:
"POST-CLOSING TAX PERIOD" means any Tax period (or portion thereof)
ending after the Closing Date.
"PRE-CLOSING TAX PERIOD" means any Tax period (or portion thereof)
ending on or before the close of business on the Closing Date.
"TAX" means any federal, state, local or foreign net income,
alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad
valorem, franchise, capital, paid-up capital, profits, greenmail, license,
withholding, payroll, employment, excise, severance, stamp, occupation, premium,
property, environmental or windfall profit tax, custom, duty or other tax,
governmental fee or other like assessment or charge of any kind whatsoever,
together with any interest or any penalty, addition to tax or additional amount
imposed by any governmental authority (domestic or foreign) responsible for the
imposition of any such tax.
"TAX RETURN" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
8.02. TAX MATTERS. Seller and each Shareholder hereby, jointly and
severally, represent and warrant to Buyer that:
(a) Seller has timely filed all Tax Returns required to be filed and
all Taxes owed (whether or not shown as due on such Tax Returns) have been paid
or remitted, in each case, to the extent such Taxes and Tax Returns related to
the Purchased Assets or the operation of the Business. All such Tax Returns were
complete and correct in all material respects. No portion of any Tax Return that
relates to the Purchased Assets or the operation of the Business has been the
subject of any audit, action, suit, proceeding, claim or examination by any
governmental authority, and no such audit, action, suit, proceeding, claim,
deficiency or assessment is pending or, to the knowledge of the Seller,
threatened. Seller is not currently the beneficiary of any extension of time
within which to file any Tax Return, and Seller has not waived any statute of
limitation with respect to any Tax or agreed to any extension of time with
respect to a Tax assessment or deficiency. No claim has ever been made by a Tax
authority in a jurisdiction where Seller does not file Tax Returns that it is or
may be subject to taxation by that jurisdiction. There are no Liens for Taxes
upon the Purchased Assets other than for real property Taxes not yet due. Seller
does not have, and has not had, a permanent establishment in any foreign
country, as defined in any applicable Tax treaty or convention between the
United States and such foreign country. Seller does not have any liability for
the Taxes of any Person (other than the Seller) under Treasury Regulation
Section 1.1502-6 (or any corresponding provision of state, local or foreign Tax
law), as a transferee or successor, by contract, or otherwise. No portion of the
Purchase Price is subject to any Tax withholding provision of federal, state,
local or foreign law.
(b) Seller has withheld and paid all Taxes required to have been
withheld and paid in
<PAGE> 33
Asset Purchase Agreement -- 29
connection with amounts paid or owing to any employee, independent contractor,
creditor, or other third party. None of the Assumed Liabilities is an obligation
to make a payment that will not be deductible under Section 280G of the Code.
(c) No state of facts exists or has existed with regard to Seller or
any of its shareholders that would constitute grounds for the assessment against
Buyer, whether by reason of transferee liability or otherwise, of any liability
for any Tax of anyone other than Buyer.
(d) Seller has timely paid all Taxes due and payable by it for the
Pre-Closing Tax Period which will have been required to be paid on or prior to
the Closing Date, the non-payment of which would result in a Lien on any
Purchased Asset, would otherwise adversely affect the Business or would result
in Buyer becoming liable or responsible therefor.
(e) Seller has established, on a basis consistent with that of
preceding periods, adequate reserves for the payment of, and will timely pay all
Taxes which arise from or with respect to the Purchased Assets or the operation
of the Business, the non-payment of which would result in a Lien on any
Purchased Asset, would otherwise adversely affect the Business or would result
in Buyer becoming liable therefor.
8.03. TAX COOPERATION; ALLOCATION OF TAXES. (a) Buyer and Seller agree
to furnish or cause to be furnished to each other, upon request, as promptly as
practicable, such information and assistance relating to the Purchased Assets
and the Business as is reasonably necessary for the filing of all Tax Returns,
and making of any election related to Taxes, the preparation for any audit by
any governmental authority, and the prosecution or defense of any claim, suit or
proceeding relating to any Tax Return. Seller and Buyer shall cooperate with
each other in the conduct of any audit or other proceeding related to Taxes
involving the Business or the Purchased Assets and each shall execute and
deliver such powers of attorney and other documents as are necessary to carry
out the intent of this paragraph (a) of Section 8.03.
(b) All real property taxes, personal property taxes and similar AD
VALOREM obligations levied with respect to the Purchased Assets for a taxable
period which includes (but does not end on) the Closing Date (collectively, the
"APPORTIONED OBLIGATIONS") shall be apportioned between Seller and Buyer as of
the Closing Date based on the number of days of such taxable period included in
the Pre-Closing Tax Period and the number of days of such taxable period
included in the Post-Closing Tax Period. Seller shall be liable for the
proportionate amount of such taxes that is attributable to the Pre-Closing Tax
Period. Within 90 days after the Closing, Seller and Buyer shall present a
statement to the other setting forth the amount of reimbursement to which each
is entitled under this Section 8.03(b) together with such supporting evidence as
is reasonably necessary to calculate the proration amount. The proration amount
shall be paid by the party owing it to the other within 10 days after delivery
of such statement. Thereafter, Seller shall notify Buyer upon receipt of any
bill for real or personal property taxes relating to the Purchased Assets, part
or all of which are attributable to the Post-Closing Tax Period, and shall
promptly deliver such bill to Buyer who shall pay the same to the appropriate
governmental authority, provided that if such bill covers the Pre-Closing Tax
Period, Seller shall also remit prior to the due date of assessment to Buyer
payment for the proportionate amount of such bill that is attributable to the
Pre-Closing Tax Period. If either Seller or Buyer shall thereafter make a
payment for which it is entitled to reimbursement under this Section 8.03(b),
the other party shall make such reimbursement promptly but in no event later
than 30 days after the presentation of a statement setting forth the amount of
reimbursement to which the presenting party is entitled along with such
supporting evidence as is reasonably necessary to calculate the amount of
reimbursement. Any payment required under this
<PAGE> 34
Asset Purchase Agreement -- 30
Section and not made within 10 days of delivery of the statement shall bear
interest at the rate per annum determined, from time to time, under the
provisions of Section 6621(a)(2) of the Code for each day until paid.
(c) Any transfer, documentary, sales, use or other Taxes assessed upon
or with respect to the transfer of the Purchased Assets to Buyer and any
recording or filing fees with respect thereto shall be paid by Seller, and
Seller shall promptly reimburse Buyer for any such Taxes paid by Buyer.
(d) Prior to the Closing Date, Seller shall provide Buyer with a
clearance certificate or similar document(s) which may be required by any
governmental authority in order to relieve Buyer of any obligation to withhold
any portion of the Purchase Price. No new elections with respect to Taxes, or
any changes in current elections with respect to Taxes, affecting the Purchased
Assets shall be made after the date of this Agreement without the prior written
consent of Buyer, which consent shall not be unreasonably withheld.
(e) Buyer, Seller and each Shareholder shall file all Tax Returns
consistent with the Allocation Statement and shall not make any inconsistent
written statements or take any inconsistent position on any Tax Return, in any
refund claim, during the course of any U.S. Internal Revenue Service ("IRS")
audit or other tax audit, for any financial or regulatory purpose, in any
litigation or investigation or otherwise. Each party shall notify the other
parties if it receives notice that the IRS or other governmental agency proposes
any allocation different than that set forth in the Allocation Statement.
ARTICLE IX
SURVIVAL; INDEMNIFICATION
9.01. SURVIVAL. The covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement or in any
certificate, schedule or other writing delivered pursuant hereto or in
connection herewith shall survive the Closing until the second anniversary of
the Closing Date, except (i) as to matters as to which an Indemnified Party has
made a claim for indemnity or given a Notice of Claim on or prior to the second
anniversary of the Closing Date, which matters shall survive the expiration of
such period until such claim is finally resolved and any obligations with
respect thereto are fully satisfied, (ii) with respect to any misrepresentation
or breach of warranty under Section 8.02 and 8.03 which shall survive so long as
the applicable statute of limitations shall provide (giving effect to any waiver
or extension thereof) and (iii) with respect to any misrepresentation or breach
of warranty under Sections 4.17 and 4.18, which shall survive indefinitely. Any
investigation or other examination that may have been made or may be made at any
time by or on behalf of the party to whom representations and warranties are
made shall not limit, diminish or in any way affect the representations and
warranties in this Agreement, and the parties may rely on the representations
and warranties in this Agreement irrespective of any information obtained by
them by any investigation, examination or otherwise.
9.02. INDEMNIFICATION. (a) Seller and each Shareholder, hereby agree
severally to indemnify Buyer against and agree to hold it harmless from any and
all damage, loss, liability or cost or any diminution in value of a Purchased
Asset and any expense (including, without limitation, reasonable expenses of
investigation and reasonable attorneys' fees and expenses in connection with any
action, suit or proceeding) (collectively, "LOSSES") incurred or suffered by
Buyer or any of its Affiliates arising out of (i) any misrepresentation or
breach of warranty, covenant or agreement made or to be performed by
<PAGE> 35
Asset Purchase Agreement -- 31
Seller or such Shareholder pursuant to this Agreement, whether or not discovered
by Buyer prior to Closing; (ii) any failure to comply with any "bulk sales" or
similar laws relating to notice to creditors; (iii) any failure to obtain any
Required Consents prior to the Closing; or (iv) any failure to release,
discharge or terminate all Liens on the Purchased Assets, including without
limitation evidence of the termination and removal of all UCC-1 financing
statements and the discharge of all mortgages and other monetary Liens, prior to
the Closing.
(b) Seller and each Shareholder, hereby agree severally to indemnify
Buyer against and agree to hold it harmless from any and all Losses incurred or
suffered by Buyer or any of its Affiliates arising out of any costs incurred by
the Buyer or penalties levied against the Buyer in connection with the Seller's
accrual of employee overtime and vacation time prior to the Closing.
(c) Buyer hereby agrees to indemnify Seller and the Shareholders
against and agrees to hold each of them harmless from any and all losses
incurred by Seller and any Shareholder arising out of any misrepresentation or
breach of warranty, covenant or agreement made or to be performed by Buyer
pursuant to this Agreement, whether or not discovered by Seller or any
Shareholder prior to Closing. Notwithstanding anything else to the contrary in
this Agreement, Buyer shall not indemnify or hold harmless any Person, or
otherwise be liable for, any Losses arising from or attributable to the
termination of Seller's status as an "S corporation" within the meaning of
1362(a) of the Code.
9.03. PROCEDURES. (a) The party seeking indemnification under this
Article IX (the "INDEMNIFIED PARTY") agrees to give prompt notice (the "NOTICE
OF CLAIM") to the party or parties from whom indemnification is sought (the
"INDEMNIFYING PARTY") of the assertion of any claim, or the commencement of any
suit, action or proceeding by a third party in respect of which indemnity may be
sought under this Article IX; PROVIDED, HOWEVER, that no delay on the part of
the Indemnified Party in notifying the Indemnifying Party shall relieve the
Indemnifying Party of any liability or obligation hereunder, except to the
extent that the Indemnifying Party demonstrates that the defense of any third
party suit, action or proceeding has been materially prejudiced by the
Indemnified Party's failure to give such notice. If such Notice of Claim relates
to a suit, action or proceeding by a third party, the Indemnifying Party may
upon written notice given to the Indemnified Party within 20 days of the receipt
by the Indemnifying Party of such Notice of Claim, assume control of the defense
of such action, suit or proceeding with counsel reasonably satisfactory to the
Indemnified Party. If the Indemnifying Party does not so assume control of such
defense or if the Indemnifying Party fails to give reasonable written assurance
to the Indemnified Party of Indemnifying Party's financial capacity to defend
and/or provide indemnification as required hereby, the Indemnified Party shall
have the right to control such defense. The party not controlling such defense
may participate therein at its own expense; PROVIDED THAT, if the Indemnifying
Party assumes control of such defense and there exists a conflict of interest
between the interests of the Indemnified Party and those of the Indemnifying
Party with respect to such claim, or if the Indemnifying Party shall fail to
assume responsibility for such defense, the Indemnified Party may retain counsel
satisfactory to it and the reasonable fees and expenses of counsel to the
Indemnified Party shall be considered Losses for purposes of this Agreement.
Notwithstanding anything to the contrary contained herein, in the event that
Buyer determines in its reasonable judgment that there is a probability that a
claim may materially adversely affect it or the Purchased Assets or its rights
under this Agreement other than as a result of monetary damages for which it
would be entitled to indemnification under this Agreement, then Buyer may, by
written notice to the Indemnifying Party, assume the exclusive right to defend
such claim and the reasonable fees and expenses of counsel shall be considered
Losses for purposes of this Agreement. Seller and the Shareholders hereby
acknowledge that any claim involving taxes or Seller's Intellectual Property
shall be deemed to satisfy the requirements for Buyer to assume the
<PAGE> 36
Asset Purchase Agreement -- 32
defense of any related claims. In all such cases, Seller and the Shareholders
will have the right to participate, at Seller's expense, in the defense or
settlement of such claim. The party controlling such defense shall keep the
other party advised of the status of such action, suit or proceeding and the
defense thereof and shall consider in good faith recommendations made by the
other party with respect thereto.
(b) The Indemnifying Party shall not agree to any settlement of any
action, suit or proceeding without the prior written consent of the Indemnified
Party, which consent shall not be unreasonably withheld or delayed. For purposes
hereof, the Indemnified Party's withholding of its consent to any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to the Indemnified Party of a complete irrevocable release
from all liability in respect to such claim or litigation or which requires
action (or limits action) other than the payment of money by the Indemnifying
Party shall be deemed to be reasonable.
(c) In the event that an Indemnified Party seeks indemnification for
Losses pursuant to this Article IX, the procedures in this subsection (c) shall
also apply. Within 30 days after delivery of a Notice of Claim, the Indemnifying
Party shall provide to the Indemnified Party a written response (the "RESPONSE
NOTICE") in which the Indemnifying Party must either: (i) agree that some or all
of the Losses claimed should be indemnified and, in the case of any Losses
claimed and not so agreed to, contest such claimed amount, or (ii) contest all
of the Losses claimed. The Indemnifying Party may contest such claimed amount of
Losses only based upon a good faith belief that all or such portion of such
claimed amount does not constitute Losses for which the Indemnified Party is
entitled to indemnification hereunder. If no such Response Notice is delivered
by the Indemnifying Party within such 30-day period, the Indemnifying Party
shall be deemed to have agreed that all of the claimed amount should be
indemnified. Any such amount agreed to, or so deemed to be agreed to, by the
Indemnifying Party pursuant to clause (i) or (ii) of this subsection (c) or
otherwise pursuant to this Agreement being referred to herein as an "AGREED
AMOUNT."
(d) If the Indemnifying Party in the Response Notice contests all or
part of the claimed amount (thereupon, the "CONTESTED AMOUNT"), the Indemnifying
Party and the Indemnified Party shall attempt promptly and in good faith to
agree upon the rights of the parties with respect to the Contested Amount. If
the Indemnifying Party and the Indemnified Party should so agree, a memorandum
setting forth such agreement shall be prepared and signed by both parties and,
if such agreement provides that all or a portion of the contested Amount is to
be paid to the Indemnified Party (all or such portion of such Contested Amount
to be so paid to the Indemnified Party being also referred to herein as an
"AGREED AMOUNT"), the Indemnifying Party shall make such payments in accordance
with the terms of this Agreement. If no such agreement can be reached after good
faith negotiation within 30 days of the delivery of the Indemnifying Party's
Response Notice (or such longer period as the Indemnified Party and Indemnifying
Party may mutually agree), the matter shall be settled by binding arbitration in
accordance with Section 10.12 of this Agreement.
9.04. CONSENT TO JURISDICTION. The indemnifying party hereby consents
to the non-exclusive jurisdiction of any court in which a third-party claim is
brought against any Indemnified Party for purpose of any claim that an
indemnified party may have under this Agreement with respect to such claim or
the matters alleged therein, and agrees that process may be served on it with
respect to such a claim anywhere in the world.
9.05. BUYER'S RIGHT OF OFFSET. Buyer shall have the right to offset, in
whole or in part, against the payments to be made by Buyer to Seller or the
Shareholders under Sections 3.02(b)(i) and 3.02(b)(ii)
<PAGE> 37
Asset Purchase Agreement -- 33
of this Agreement (i) the Agreed Amount of any Losses incurred by Buyer; and
(ii) any Contested Amount, PROVIDED that such Contested Amount shall in all
events be paid by Buyer into a segregated interest bearing escrow account
pursuant to the terms of a mutually acceptable escrow agreement with a mutually
acceptable third party escrow agent pending a resolution with respect to such
Contested Amount pursuant to Section 10.12 of this Agreement. Such escrow
agreement shall provide that the escrow agent shall pay the Contested Amount,
together with interest thereon, in accordance with the arbitrator's award.
Pending selection of a third party escrow agent and the entering into of a
mutually acceptable escrow agreement, Buyer shall satisfy its obligations to
make payment in respect of such offset under this Section 9.05 by paying such
Contested Amount into a segregated interest bearing account.
9.06. THRESHOLD. No party hereto shall be liable for indemnity to the
other party pursuant to this Article IX unless and until the total aggregate
cumulative Losses for which it would be liable on account of all claims under
this Article IX exceed $100,000 (the "DEDUCTIBLE"), in which case the
Indemnifying Party shall be liable for indemnification to the Indemnified Party
pursuant to this Article IX for the full amount of all such Losses (including
the Deductible). In order to determine Losses as a result of a breach of a
representation and warranty or covenant, such representation and warranty or
covenant shall be deemed to exclude all exceptions as to materiality and
limitations as to materiality contained therein.
9.07 INTEREST. (a) Each Indemnifying Party shall be severally liable to
the Indemnified Party for interest at the simple annual rate of ten percent
(10%) on any Losses for which the Indemnifying Party is entitled to
indemnification under this Article IX that the Indemnifying Party has failed to
pay when due, upon written demand. All such interest shall be calculated from
the date of such written demand.
ARTICLE X
MISCELLANEOUS
10.01. NOTICES. All notices, requests, demands and other communications
provided for hereunder shall be in writing and mailed (by first class registered
or certified mail, postage prepaid), sent by express overnight courier service
or electronic facsimile transmission with a copy by mail, or delivered to the
applicable party at the addresses indicated below:
if to Buyer, to:
Citrix Systems, Inc.
6400 NW 6th Way
Fort Lauderdale, FL 33309
Attn: General Counsel
with a copy to:
Testa, Hurwitz & Thibeault, LLP
125 High Street
Boston, MA 02110
Telecopy: (617) 248-7100
Attn: Jonathan M. Moulton, Esq.
<PAGE> 38
Asset Purchase Agreement -- 34
if to Seller, to:
Innovex Group, Inc.
15500 New Barn Road, Suite 205
Miami Lakes, FL 33014
Attn: Randall P. Bast
with a copy to:
Holland & Knight LLP
701 Brickell Avenue
Miami, Florida 33131
Telecopy: (305) 789-7799
Attn: J. Thomas Cookson, Esq.
if to a Shareholder, to:
Randall P. Bast, Shareholders Agent
1551 N.W. 182nd Terrace
Pembroke Pines, FL 33029
or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section. All such notices, requests, demands and other
communications shall, when mailed or sent, respectively, be effective (i) five
days after being deposited in the mails or (ii) one day after being deposited
with an the express overnight courier service or sent by electronic facsimile
transmission (with receipt confirmed), respectively, addressed as aforesaid.
10.02. AMENDMENTS; NO WAIVERS. (a) Any provisions of this Agreement may
be amended or waived if, and only if, such amendment or waiver is in writing and
signed by Buyer, Seller and Shareholders Agent.
(b) No failure or delay by any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
(c) In no event will any party be deemed to waive any breach
by any other party of any representation, warranty, covenant or agreement by
reason of such party's completing the Closing with knowledge thereof.
10.03. EXPENSES. All costs and expenses incurred in connection with the
preparation or negotiation of this Agreement and the Ancillary Agreements shall
be paid by the party incurring such cost or expense; provided that all expenses
of Seller shall be paid by the Shareholders or shall be deducted from the
Initial Payment.
<PAGE> 39
Asset Purchase Agreement -- 35
10.04. SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; PROVIDED, HOWEVER, that Seller and the
Shareholders shall not be entitled to assign or in any way transfer any of their
rights or obligations hereunder, by operation of law or otherwise, without the
prior written consent of Buyer. Any attempted assignment of such rights by
Seller or Shareholders without such prior written consent shall be void and
prohibited.
10.05. GOVERNING LAW. This Agreement shall be construed in accordance
with and governed by the laws of the State of Florida, without regard to the
conflicts of laws principles thereof.
10.06. COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any
number of counterparts, each of which shall be deemed an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
a counterpart hereof (which may be a facsimile signature) signed by the other
parties hereto.
10.07. ENTIRE AGREEMENT. This Agreement and the Ancillary Agreements
constitute the sole and entire agreement between the parties with respect to the
subject matter hereof and thereof and supersede and terminate all prior
agreements, understandings and negotiations, both written and oral, among the
parties with respect to the subject matter of this Agreement and the Ancillary
Agreements. None of this Agreement and the Ancillary Agreements, nor any
provision hereof or thereof, is intended to confer upon any Person (other than
the parties hereto) as a third party beneficiary any rights or remedies
hereunder. Notwithstanding the foregoing, the Mutual Non-Disclosure Agreement
dated January 26, 2000 by and between Buyer and Seller shall not be superseded
and shall survive the Closing.
10.08. CAPTIONS. The captions herein are included for convenience of
reference only and shall be ignored in the construction or interpretation
hereof.
10.09. SEVERAL OBLIGATIONS. Each Shareholder hereby severally
irrevocably and unconditionally guarantees the performance of all covenants,
liabilities and obligations of Seller under this Agreement in addition to but
not in limitation of the foregoing.
10.10. INCLUDING. Words of inclusion shall not be construed as terms of
limitation herein, so that reference to "included" matters shall be regarded as
nonexclusive, noncharacterizing illustrations.
10.11. SEVERABILITY. If any provision of this Agreement shall be
declared void or unenforceable by any judicial or administrative authority, the
validity of any other provision and of the entire Agreement shall not be
effected thereby.
10.12. ARBITRATION. Any dispute, controversy or claim arising out of,
in connection with, or in relation to this Agreement or any breach thereof shall
be finally settled by arbitration in Ft. Lauderdale, Florida, pursuant to the
rules of the American Arbitration Association then in effect. Any award shall be
final, binding and conclusive upon the parties and a judgment upon the award
rendered thereon may be entered in any court having jurisdiction thereof. The
cost of such arbitration shall be borne equally by Buyer and Seller, and each
party shall pay for and bear the cost of its own experts, evidence and counsel.
The arbitrator shall choose the form of final decision that, in its judgment, is
most consistent with the terms of this Agreement and the intent of the parties,
including by awarding specific performance of either party's obligations
hereunder.
<PAGE> 40
Asset Purchase Agreement -- 36
10.13. REMEDIES. In addition to the rights and remedies set forth in
this Agreement and subject to the provisions of Section 10.12 of this Agreement,
the parties shall each have and retain all other rights and remedies existing in
their favor at law or equity, including without limitation, any actions for
specific performance and/or injunctive or other equitable relief (including the
remedy of recission) to enforce or prevent any violation of this Agreement.
Without limiting the generality of the foregoing, Seller hereby agrees that in
the event Seller fails to convey the Purchased Assets to Buyer in accordance
with the provisions of this Agreement, Buyer's remedy at law will be inadequate.
In such event, Buyer shall have the right, in addition to all other rights and
remedies it may have, to specific performance of the obligations of Seller to
convey the Purchased Assets.
10.14 PRESS RELEASES AND ANNOUNCEMENTS. No party hereto shall issue any
press release or announcement relating to the subject matter of this Agreement
prior to the Closing without the prior written approval of Buyer and the
Shareholders; PROVIDED, HOWEVER, that any party hereto may make any public
disclosure it believes in good faith is required by law or regulation (in which
case the disclosing party will advise the other parties hereto prior to making
the disclosure).
10.15 POWER OF ATTORNEY. Each Shareholder hereby constitutes and
appoints the Shareholders Agent as his true and lawful attorney-in-fact, agent
and representative, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to negotiate and
sign all amendments to this Agreement, and all other documents in connection
with the transactions contemplated by this Agreement, including without
limitation those instruments called for by this Agreement and all waivers,
consents, instructions, authorizations and other actions called for,
contemplated or that may otherwise be necessary or appropriate in connection
with this Agreement or any of the foregoing agreements or instruments, granting
unto the Shareholders Agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that the Shareholders Agent, or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof, including without limitation the power
and authority to receive and give receipt for all consideration due him pursuant
to this Agreement and to receive all notices, requests and demands that may be
made under and pursuant to this Agreement. Should the Shareholders Agent be
unable or unwilling to serve or to appoint his successor to serve in his stead,
and unless the Shareholders Agent appoint a successor to serve in his stead,
such Shareholders shall be deemed to be represented by such Shareholders (other
than the Shareholders Agent) who immediately prior to the Closing Date held a
majority in interest in Seller.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 41
Asset Purchase Agreement -- 37
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as an instrument under seal as of the day and year first above
written.
CITRIX SYSTEMS, INC.
By:
-----------------------------------
Name:
Title:
INNOVEX GROUP, INC.
By:
-----------------------------------
Name:
Title:
SHAREHOLDERS:
---------------------------------------
Randall P. Bast
---------------------------------------
Fernando Campo
---------------------------------------
Sherri Mansell
---------------------------------------
Stephen Marsh
<PAGE> 1
Exhibit 21
Subsidiaries
<TABLE>
<CAPTION>
Company Jurisdiction of Organization
------- ----------------------------
<S> <C> <C>
1. Citrix Systems Netherlands, B.V.* The Netherlands
2. Citrix Systems VI, Inc. Virgin Islands
3. Citrix Systems Canada, Inc. Canada
4. Citrix Systems Ges. mbH* Austria
5. Citrix Systems GmbH* Germany
6. Citrix Systems UK Limited* England
7. Citrix Systems Japan Kabushiki Kaisha* Japan
8. Citrix Systems Asia Pacific Pty Ltd.* Australia
9. Citrix Systems Singapore Pte Ltd.* Singapore
10. Citrix Systems (Research & Development) Ltd. (UK) England
11. Citrix Capital Corp. Nevada, USA
12. Citrix Systems Italia S.r.L.* Italy
13. Viewsoft, Inc. Delaware, USA
14. Citrix Sistemas de Mexico, S de RL De CV Mexico
15. Citrix Sistemas do Brasil Ltda Brazil
16. Citrix Systems Intl. Gmbh. Switzerland
17. Citrix Systems Sweden AB* Sweden
18. Citrix Systems Denmark ApS* Denmark
19. Citrix Systems Spain, SL* Spain
20. Citrix Systems Hong Kong Limited* Hong Kong
21. Citrix Systemes France SARL* France
</TABLE>
* Wholly owned subsidiaries of Citrix Systems Intl. Gmbh
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 333-78909) and related prospectus, the Registration
Statement (Form S-8 No. 33-80201) pertaining to the 1995 Stock Plan, the 1995
Non-Employee Director Stock Plan and the 1995 Employee Stock Purchase Plan and
the Registration Statement (Form S-8 No. 333-2030) pertaining to the 1989 Stock
Option Plan of Citrix Systems, Inc. of our report dated January 14, 2000, except
for the seventh paragraph of Note 7, as to which the date is January 19, 2000,
with respect to the consolidated financial statements and schedule of Citrix
Systems, Inc. included in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
West Palm Beach, Florida
March 21, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 216,116
<SECURITIES> 547,733
<RECEIVABLES> 63,569
<ALLOWANCES> 8,242
<INVENTORY> 7,731
<CURRENT-ASSETS> 570,244
<PP&E> 47,453
<DEPRECIATION> 15,923
<TOTAL-ASSETS> 1,037,857
<CURRENT-LIABILITIES> 136,995
<BONDS> 313,880
0
0
<COMMON> 181
<OTHER-SE> 532,889
<TOTAL-LIABILITY-AND-EQUITY> 1,037,857
<SALES> 403,285
<TOTAL-REVENUES> 403,285
<CGS> 14,579
<TOTAL-COSTS> 14,579
<OTHER-EXPENSES> 179,445
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,622
<INCOME-PRETAX> 182,725
<INCOME-TAX> 65,781
<INCOME-CONTINUING> 116,944
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,944
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.61
</TABLE>
