================================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2275152
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
210 UNIVERSITY DRIVE
SUITE 700
CORAL SPRINGS, FLORIDA 33071
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 755-0559
Not Applicable
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- -----
As of November 1, 1996 there were 26,574,865 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
Total Number of Pages: 37
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CITRIX SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Operations:
Three Months and Nine Months ended September 30,
1996 and 1995
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 1996 and 1995
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
Exhibit 10
Exhibit 11
Exhibit 27
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1996 1995
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 97,568,929 $43,471,491
Short-term investments 31,008,459 -
Accounts receivable, net of allowances
of $1,922,998 and $1,008,425 at
September 30, 1996 and December 31,
1995, respectively 5,860,575 2,328,512
Inventories 595,115 194,023
Prepaid expenses 218,971 230,313
Note receivable from officer, including
accrued interest of $28,910 at December
31, 1995 - 128,910
Other current assets 1,948,840 -
--------------------------
Total current assets 137,200,889 46,353,249
Property and equipment, net 650,777 301,996
Other assets - 59,941
--------------------------
$137,851,666 $46,715,186
==========================
See accompanying notes.
3
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 726,952 $ 546,266
Accrued royalties and other accounts
payable to shareholder 1,221,936 521,517
Other accrued expenses 2,153,121 1,137,478
Deferred revenue 1,275,539 680,767
Deferred revenue on contract with
shareholder 541,000 541,000
Current portion of capital lease
obligations payable to related
parties 112,963 144,976
Income taxes payable - 93,100
------------------------------
Total current liabilities 6,031,511 3,665,104
Long-term portion of capital lease
obligations payable to related
parties 17,719 88,379
------------------------------
Total liabilities 6,049,230 3,753,483
Shareholders' equity:
Preferred stock at $.01 par value--
5,000,000 shares authorized, none
issued and outstanding at September
30, 1996 and December 31, 1995 - -
Common stock at $.001 par value--
60,000,000 and 30,000,000 shares
authorized; and 26,521,144 and
23,650,916 issued and outstanding
at September 30, 1996 and December
31, 1995, respectively 26,521 23,651
Additional paid-in capital 131,992,069 54,938,583
Accumulated deficit (216,154) (12,000,531)
------------------------------
Total shareholders' equity 131,802,436 42,961,703
------------------------------
$137,851,666 $ 46,715,186
==============================
See accompanying notes.
4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-----------------------------------------------------------
Net revenues $ 11,685,801 $ 4,277,506 $ 28,958,658 $ 9,417,649
Cost of goods sold 1,240,597 522,345 3,454,252 1,255,811
-----------------------------------------------------------
Gross margin 10,445,204 3,755,161 25,504,406 8,161,838
Operating expenses:
Research and development 904,168 575,422 2,768,253 1,700,075
Sales, marketing and support 3,698,135 1,748,799 9,033,432 4,890,130
General and administrative 1,095,097 454,369 2,703,455 1,139,792
-----------------------------------------------------------
Total operating expenses 5,697,400 2,778,590 14,505,140 7,729,997
-----------------------------------------------------------
Income from operations 4,747,804 976,571 10,999,266 431,841
Other income, net 1,556,158 7,394 3,029,284 34,105
-----------------------------------------------------------
Net income before income taxes 6,303,962 983,965 14,028,550 465,946
Income taxes 990,004 - 2,244,173 -
-----------------------------------------------------------
Net income 5,313,958 983,965 11,784,377 465,946
Less redeemable convertible
preferred stock accretion - (22,356,546) - (34,534,944)
-----------------------------------------------------------
Net income (loss) attributable
to common shares $ 5,313,958 $(21,372,581) $11,784,377 $(34,068,998)
===========================================================
Historical:
Net income (loss) per share $ 0.19 $ (6.68) $ 0.44 $ (10.59)
===========================================================
Weighted average shares
outstanding 28,337,303 3,198,894 26,969,901 3,216,684
===========================================================
Supplementary:
Net income per share $ 0.19 $ 0.05 $ 0.44 $ 0.02
===========================================================
Weighted average shares
outstanding 28,337,303 19,951,856 26,969,901 20,161,186
===========================================================
See accompanying notes.
5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
----------------------------
OPERATING ACTIVITIES
Net income $ 11,784,377 $ 465,946
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 217,538 133,140
Provision for doubtful accounts 266,354 112,176
Tax benefit related to the exercise
of non-statutory stock options and
disqualifying dispositions of
incentive stock options 3,509,763 -
Changes in operating assets
and liabilities:
Accounts receivable (3,798,417) (238,775)
Inventories (401,092) (109,781)
Prepaid expenses 11,342 (41,607)
Interest on note receivable from officer 28,910 (6,057)
Other assets (1,888,900) (70,459)
Accounts payable 180,686 147,798
Accrued royalties and other accounts
payable to shareholder 700,419 59,445
Other accrued expenses 1,015,643 160,001
Deferred revenue 594,772 583,427
Deferred revenue on contract with
shareholder - 204,337
Income taxes payable (93,100) -
--------------------------
Net cash provided by operating
activities 12,128,295 1,399,591
INVESTING ACTIVITIES
Purchases of short-term investments (31,008,459) -
Proceeds from note receivable from
officer 100,000 -
Purchases of property and equipment (566,318) (22,386)
--------------------------
Net cash used in investing
activities (31,474,777) (22,386)
FINANCING ACTIVITIES
Net proceeds from issuance of
common stock 73,546,593 34,464
Repurchase of common stock
previously issued - (4,856)
Proceeds from line of credit - 600,000
Payments on line of credit - (600,000)
Payments on capital lease obligations
payable to related parties (102,673) (71,253)
--------------------------
Net cash provided by (used in)
financing activities 73,443,920 (41,645)
--------------------------
Increase in cash and cash equivalents 54,097,438 1,335,560
Cash and cash equivalents at
beginning of period 43,471,491 1,912,781
--------------------------
Cash and cash equivalents at end
of period $ 97,568,929 $3,248,341
==========================
SUPPLEMENTARY DISCLOSURE OF
NON-CASH INVESTING ACTIVITY
Property and equipment acquired under
capital leases $ - $ 169,459
==========================
See accompanying notes.
6
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
adjustments which, in the opinion of management, are considered necessary for a
fair presentation of the results of operations for the periods shown have been
included. The results of operations for the periods presented are not
necessarily indicative of the results expected for the full fiscal year or for
any future period. The information included in these unaudited condensed
consolidated financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and accompanying notes
included in the Citrix Systems, Inc.'s (the "Company") 1995 Annual Report on
Form 10-K.
2. SIGNIFICANT ACCOUNTING POLICIES
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 condensed consolidated financial statements
and accompanying notes. While the Company believes that such estimates are fair
when considered in conjunction with the condensed consolidated financial
position and results of operations taken as a whole, the actual amount of such
estimates, when known, may vary from these estimates.
NET INCOME (LOSS) PER SHARE
Historical net income (loss) per share is calculated using the weighted average
number of common and common equivalent shares outstanding during the respective
periods. Pursuant to the requirements of the Securities and Exchange
Commission, common shares and common equivalent shares issued at prices below
the Company's initial public offering price during the twelve months immediately
preceding the date of the initial filing of the Company's October 24, 1995
Registration Statement have been included in the calculation of common shares
and common equivalent shares, using the treasury stock method, as if they were
outstanding for all periods presented. Dilutive common stock equivalents
consist of warrants and 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 two-for-three reverse stock split of
the Company's Common Stock effective December 7, 1995 and the two-for-one stock
split of the Company's Common Stock effective June 4, 1996.
Supplementary net income per share is computed in the same manner as historical
net income (loss) per share, after giving effect to the conversion of Redeemable
Convertible Preferred Stock into an aggregate of 15,359,388 shares of Common
Stock, which occurred in December 1995, as though it occurred at the beginning
of 1995.
7
INCOME TAXES
The income taxes recorded in the three months and nine months ended September
30, 1996 have been computed based upon the Company's estimated annual effective
tax rate for the fiscal year ending December 31, 1996, giving effect to the
utilization of all of the Company's income tax net operating loss carryforwards
and tax credit carryforwards from prior periods.
The Company recorded income tax expense of approximately $990,000 during the
third quarter of 1996.
Other current assets primarily consist of estimated payments of federal income
taxes and anticipated tax benefits from the exercise of non-statutory stock
options and disqualifying dispositions of incentive stock options in excess of
the income taxes otherwise due.
SHORT-TERM INVESTMENTS
Short-term investments at September 30, 1996 primarily consist of commercial
paper. The Company follows the provisions of Statement of Financial Accounting
Standards Board No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (FASB No. 115). FASB No. 115 requires investments to be classified
based on management's intent in three categories: held-to-maturity securities,
available-for-sale securities and trading securities. Held-to-maturity
securities are recorded at amortized cost. Available-for-sale securities are
recorded at market value with unrealized gains and losses reported as a separate
component of shareholders' equity. Trading securities are recorded at market
value with unrealized gains and losses reported in the earnings. The Company
classifies its short-term investments as available-for-sale securities. The
market value of these securities at September 30, 1996 approximated cost.
3. SECONDARY OFFERING
In June 1996, the Company issued an additional 2,364,888 shares in connection
with the second public offering of its Common Stock, which generated net
proceeds of approximately $73,200,000.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports innovative client and
application server software that enables effective and efficient deployment of
enterprise applications that are designed for Windows operating systems. The
Company was incorporated in April 1989, and shipped its initial products in
1991.
From its introduction in the second quarter of 1993 through the second quarter
of 1995, the WinView product represented the largest source of the Company's
revenues. The Company began shipping WinFrame products in final form in the
third quarter of 1995.
The Company anticipates that the WinFrame product line will constitute a
majority of its revenues for the foreseeable future. The Company anticipates
that revenues from the WinView product will decline over time as the Company's
distribution channels and customer base transition to WinFrame products.
Revenues from WinFrame and WinView products result primarily from license fees
for "shrink wrapped" product sold to distributors and resellers. The Company
also derives revenue from initial license fees and associated quarterly
royalties from original equipment manufacturers ("OEMs"), non-recurring
engineering fees and training, consulting and service revenue.
Product revenues are recognized upon shipment only if no significant Company
obligations remain and collection of the resulting receivable is deemed
probable. In the case of non-cancelable product licensing arrangements under
which certain OEMs have software reproduction rights, recognition of revenue
also requires delivery and customer acceptance of the product master or first
copy. Product returns and sales allowances, including stock rotations, are
estimated and provided for at the time of sale. Non-recurring engineering fees
are recognized ratably as the work is performed. Revenues from training and
consulting are recognized when the services are performed. Service revenues
from customer maintenance fees for ongoing customer support and product updates
are recognized ratably over the term of the contract, which is typically twelve
months. Service revenues, which are immaterial when compared to net revenues,
are included in net revenues on the face of the income statement.
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.
CHANGE FROM THREE CHANGE FROM NINE
THREE MONTHS ENDED NINE MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
----------------------------- --------------------------- 1996 VS 1996 VS
1996 1995 1996 1995 1995 1995
-------------------------------------------------------------------------------------------------------
Net revenues............... 100.0% 100.0% 100.0% 100.0% 173.2% 207.5%
Cost of goods sold......... 10.6 12.2 11.9 13.3 137.5 175.1
----- ----- ----- ----- ----- -----
Gross margin............... 89.4 87.8 88.1 86.7 178.2 212.5
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development. 7.7 13.5 9.6 18.1 57.1 62.8
Sales, marketing and
support................. 31.6 40.9 31.2 51.9 111.5 84.7
General and
administrative.......... 9.4 10.6 9.3 12.1 141.0 137.2
Total operating ----- ----- ----- ----- ----- -----
expenses........... 48.7 65.0 50.1 82.1 105.0 87.7
----- ----- ----- ----- ----- -----
Income from operations.... 40.7 22.8 38.0 4.6 * *
Other income, net.......... 13.3 0.2 10.5 0.4 * *
----- ----- ----- ----- ----- -----
Income before income
taxes................. 54.0 23.0 48.5 5.0 * *
Income taxes............... 8.5 0.0 7.7 0.0 *
----- ----- ----- ----- ----- -----
Net income................. 45.5% 23.0% 40.8% 5.0% * % * %
===== ===== ===== ===== ===== =====
* Not meaningful.
9
Net Revenues. Net revenues were approximately $11.7 million and $4.3 million
for the three months ended September 30, 1996 and 1995, respectively,
representing an increase of 173.2%. For the nine months ended September 30,
1996 and 1995, net revenues were approximately $29.0 million and $9.4 million,
respectively, representing an increase of 207.5%. The increase in net revenues
for both periods primarily reflects revenues generated from the Company's
WinFrame products, whose first production version was shipped in the third
quarter of 1995 and, to a lesser extent, increased OEM revenues. These
increases in net revenues were partially offset by a decline in the Company's
WinView product revenues.
WinFrame and OEM revenues approximated 71.2% and 18.8% of revenues,
respectively, in the three months ended September 30, 1996 and 59.2% and 27.7%
of revenues, respectively, in the nine months ended September 30, 1996. Both
the Company's WinFrame and OEM revenues represent product license fees based
upon the Company's multiuser NT-based technology. The Company anticipates that
WinView revenues will continue to decline as a percentage of the Company's
revenues in future periods.
Cost of Goods Sold. Cost of goods sold consists primarily of the cost of
royalties, product media and duplication, manuals, packaging materials and
shipping expense. Cost of OEM revenues included in cost of goods sold primarily
consists of cost of royalties, except where the OEM elects to purchase shrink
wrapped products in which case such costs are as described above. Costs
associated with non-recurring engineering fees are included in research and
development expenses and are not separately identifiable. All development costs
included in the research and development of software products and enhancements
to existing products have been expensed as incurred. Consequently, there is no
amortization of capitalized research and development costs included in cost of
goods sold.
Gross Margin. Gross margin increased from 87.8% in the third quarter of
fiscal 1995 to 89.4% in the third quarter of fiscal 1996 and from 86.7% in the
first nine months of 1995 to 88.1% in the first nine months of 1996. The
increase in gross margin was primarily attributable to changes in product mix,
representing changes in the mix of OEM revenues versus product sold to
distributors and resellers, and different products within the WinFrame product
line. Gross margin as a percentage of net revenues may decrease in future
periods as a result of additional costs associated with the development or
acquisition of new technologies or enhancements to existing products.
Research and Development Expenses. Research and development expenses were
approximately $900,000 and $575,000 for the three months ended September 30,
1996 and 1995, respectively, and $2.8 million and $1.7 million for the nine
months ended September 30, 1996 and 1995, respectively. Increases in research
and development expenses in the third quarter of 1996 compared to the third
quarter of 1995 resulted primarily from additional staffing, associated salaries
and related expenses. The increase in research and development expenses for the
nine months ended September 30, 1996 is primarily due, in addition to the above,
to expenses associated with the translation and localization of the WinFrame
products and increased expenses associated with patent filings relating to
certain aspects of the Company's software products and technology.
Sales, Marketing and Support Expenses. Sales, marketing and support expenses
approximated $3.7 million and $1.7 million for the three months ended September
30, 1996 and 1995, respectively, and $9.0 million and $4.9 million for the nine
months ended September 30, 1996 and 1995, respectively. The increase for both
periods resulted primarily from increases in promotional activities, such as
reseller and distributor programs, advertising literature, and trade shows.
Sales staff and associated salaries, commissions and related expenses as well
as marketing staff, associated salaries and related expenses, also increased.
General and Administrative Expenses. General and administrative expenses were
approximately $1.1 million and $500,000 for the three months ended September 30,
1996 and 1995, respectively, and $2.7 million and $1.1 million for the nine
months ended September 30, 1996 and 1995, respectively. The increase in general
and administrative expenses for both periods is primarily due to expenditures
associated with being a public company such as increased legal fees and
associated regulatory filings and expenses as well as expenses associated with
investor relations, and increased staff, associated salaries and related
expenses. In addition to the aforementioned, the provision for doubtful
accounts is higher in both periods due to an increased level of accounts
receivable attributable to each period's respective increase in sales.
Other Income, Net. Other income, net, amounted to approximately $1.6 million
and $7,000 for the three months ended September 30, 1996 and 1995, respectively,
and $3.0 million and $34,000 for the nine months ended September 30, 1996 and
1995, respectively. The increase in each period is primarily due to interest
income generated from the net proceeds of the Company's initial and second
public offerings completed in December 1995 and June 1996, respectively.
10
Income Taxes. During the three months and nine months ended September 30,
1996, the Company incurred income taxes of approximately $990,000 and $2.2
million, respectively, based on its estimated annual effective tax rate. Income
tax net operating loss carryforwards and income tax credit carryforwards are
included in the computation of the estimated annual effective tax rate. If the
Company continues to remain profitable, such loss and tax credit carryforwards
will reduce the amount of taxes payable in future periods. The amount of the
loss and tax credit carryforwards which can be utilized in any period may be
limited in the event that a change in ownership exceeding certain limits
prescribed by Section 382 of the Internal Revenue Code is deemed to occur in the
future.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, the Company generated
positive operating cash flows primarily from increased profitability. The
increase in accounts receivable was partially funded by corresponding increases
in other accrued expenses and accrued royalties. During the same period, the
Company recognized tax benefits from the exercise of non-statutory stock options
and disqualifying dispositions of incentive stock options of approximately $3.5
million. In June 1996, the Company completed its second public offering, which
generated net proceeds of approximately $73.2 million. Additionally, the
Company purchased short-term investments for approximately $31.0 million during
the same period. The Company also generated positive operating cash flows in
the nine months ended September 30, 1995 primarily due to an increase in
deferred revenues and increased profitability, which was partially offset by an
increase in accounts receivable.
The Company has lines of credit for working capital and equipment lease
financing aggregating $2.0 million and $500,000, respectively. These lines
expire in February 1997. The working capital credit line is limited to a
percentage of eligible accounts receivable. The credit lines are secured by the
accounts receivable and the equipment leased, respectively, and are subject to
certain performance and operating ratios. The credit line agreement also
restricts the Company's ability to pay cash dividends. There were no borrowings
outstanding under the working capital credit line as of September 30, 1996.
At September 30, 1996, the Company had approximately $97.6 million in cash
and cash equivalents, $31.0 million in short-term investments and $131.2 million
of working capital. The Company's cash and cash equivalents and short-term
investments are invested in investment grade, interest bearing securities to
minimize interest rate risk and allow for flexibility in the event of immediate
cash needs. On such date, the Company had approximately $5.9 million in
accounts receivable, net of allowances, and $1.8 million of deferred revenues,
most of which the Company anticipates will be earned over the next twelve
months.
The Company expects that its requirements for office facilities and equipment
will grow as staffing requirements dictate. The Company plans to increase its
professional staff during 1996 and 1997 as sales, marketing, support, product
development efforts and associated administrative systems are implemented to
support planned growth. As a result of this planned growth the Company entered
into a 63-month lease in June 1996 for approximately 46,000 rentable square feet
and intends to relocate to this new facility by December 31, 1996.
Additionally, the Company anticipates that it will occupy an additional 24,000
square feet in the new facility within the next eighteen months. The Company
believes that the cost of moving its operations to such facilities will not
significantly impact its financial position or results of operations.
The Company believes existing cash and cash equivalents and short-term
investments, together with borrowings available under the Company's lines of
credit, will be sufficient to meet operating and capital expenditures
requirements for at least the next twelve months.
The Company has not paid cash dividends on its common stock.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The Company's
operating results and financial condition have varied and may in the future vary
significantly depending on a number of factors. Except for the historical
information contained herein, the matters contained in this report include
forward-looking statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ materially from
those contained in forward-looking statements made in this report and presented
elsewhere by management from time to time. Such factors, among others, may have
a material adverse effect upon the Company's business, results of operations and
financial condition.
11
Reliance Upon Strategic Relationship with Microsoft. Microsoft Corporation
("Microsoft") is the leading provider of desktop operating systems. The Company
is dependent upon the license of certain key technology from Microsoft,
including certain source and object code licenses, technical support and other
materials. The Company is also dependent on its strategic alliance agreement
with Microsoft which provides for cooperation in the development of
technologies for advanced operating systems, and the promotion of advanced
Windows application program interfaces.
Dependence Upon Broad-Based Acceptance of ICA Protocol. The Company believes
that its success in the markets in which it competes will depend upon its
ability to make its Intelligent Console Architecture ("ICA") protocol a de facto
standard for supporting distributed Windows applications, thereby creating
demand for its server products.
Dependence Upon Strategic Relationships. In addition to its relationship with
Microsoft, the Company has relationships with a number of strategic partners.
The Company is dependent on its strategic partners to successfully incorporate
the Company's technology into their products and to successfully market and sell
such products.
Competition. The markets in which the Company competes are intensely
competitive. Most of the competitors and potential competitors, including a
shareholder, have significantly greater financial, technical, sales and
marketing and other resources than the Company.
Dependence on Proprietary Technology. The Company relies on a combination of
copyright, trademark and trade secret laws, as well as confidentiality
procedures and contractual provisions to protect its proprietary rights.
Despite the Company's precautions, it may be possible for unauthorized third
parties to copy certain portions of the Company's products or to obtain and use
information regarded as proprietary. Additionally, the laws of some foreign
countries do not protect the Company's intellectual property to the same extent
as do the laws of the United States and Canada.
Product Concentration. The Company anticipates that one of its product
technologies, 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.
Management of Growth. 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. To manage its growth effectively, the Company will be required
to continue to implement additional management and financial systems and
controls, and to expand, train and manage its employee base.
Dependence on Key Personnel. The Company's success will depend, in large part,
upon the services of a number of key employees. The effective management of the
Company's anticipated growth will depend, in large part, upon the Company's
ability to retain its highly skilled technical, managerial and marketing
personnel as well as its ability to attract and maintain replacements for and
additions to such personnel in the future.
New Products and Technological Change. The markets for the Company's products
are relatively new and are characterized by rapid technological change, evolving
industry standards, changes in end-user requirements and frequent new product
introductions and enhancements. Additionally, the Company and others may
announce new products, capabilities or technologies that could replace or
shorten the life cycle of the Company's existing product offerings. These
market characteristics will require the Company to continuously enhance its
current products and develop and introduce new products to keep pace with
technological developments and respond to evolving end-user requirements.
Potential for Undetected Errors. Despite significant testing by the Company
and by current and potential customers, errors may not be found in new products
until after commencement of commercial shipments. Additionally, third party
products, upon which the Company's products are dependent, may contain defects
which could reduce the performance of the Company's products or render them
useless.
Reliance Upon Indirect Distribution Channels and Major Distributors. The
Company relies significantly on independent distributors and resellers for the
marketing and distribution of its products. The Company's distributors and
resellers are not within the control of the Company, are not obligated to
purchase products from the Company, and may also represent other lines of
products.
12
Need to Expand Channels of Distribution. The Company intends to leverage its
relationships with hardware and software vendors and systems integrators to
encourage these parties to recommend or distribute the Company's products. In
addition, an integral part of the Company's strategy is to expand its sales
force and add third-party distributors both domestically and internationally.
The Company is currently investing, and intends to continue to invest,
significant resources to develop these channels, which could adversely affect
the Company's operating margins.
Product Returns and Price Reductions. The Company provides most of its
distributors and resellers with product return rights for stock balancing or
limited product evaluation. The Company also provides most of its distributors
and resellers with price protection rights. The Company has established
reserves for each of these circumstances where appropriate, based on historical
trends and evaluation of current circumstances.
International Operations. The Company's continued growth and profitability
will require expansion of its international operations. To successfully expand
international sales, the Company will need to establish additional foreign
operations, hire additional personnel and recruit additional international
resellers. Such international operations are subject to certain risks, such as
difficulties in staffing and managing foreign operations, dependence on
independent relicensors, fluctuations in foreign currency exchange rates,
compliance with foreign regulatory and market requirements, variability of
foreign economic conditions and changing restrictions imposed by regulatory
requirements, tariffs or other trade barriers or by United States export laws,
costs of localizing products and marketing such products in foreign countries,
longer accounts receivable payment cycles, potentially adverse tax consequences,
including restrictions on repatriation of earnings and the burdens of complying
with a wide variety of foreign laws.
Fluctuations in Economic and Market Conditions. The demand for the Company's
products depends in part upon the general demand for computer hardware and
software, which fluctuates based on numerous factors, including capital spending
levels and general economic conditions.
Fluctuations in Quarterly Operating Results. The Company's quarterly operating
results have in the past varied and may in the future vary significantly
depending on factors such as the success of the Company's recently introduced
WinFrame products, the size, timing and recognition of revenue from significant
orders, increased competition, the proportion of revenues derived from
distributors, OEMs and other channels, changes in the Company's pricing policies
or those of its competitors, the financial stability of major customers, new
product introductions or enhancements by competitors and partners, delays in the
introduction of products or product enhancements by the Company or by
competitors and partners, customer order deferrals in anticipation of upgrades
and new products, market acceptance of new products, the timing and nature of
sales and marketing expenses (such as trade shows and other promotions), other
changes in operating expenses, personnel changes (including the addition of
personnel), foreign currency exchange rates and general economic conditions. The
Company operates with little order backlog because its software products
typically are shipped shortly after orders are received. In addition, like many
systems level software companies, the Company has often recognized a substantial
portion of its revenues in the last month of a quarter with these revenues
frequently concentrated in the last weeks or days of the quarter. As a result,
the product revenues in any quarter are substantially dependent on orders booked
and shipped in that quarter, and revenues for any future quarter are not
predictable with any degree of certainty. Any significant deferral of purchases
of the Company's products could have a material adverse effect on the Company's
business, results of operations and financial condition in any particular
quarter, and to the extent significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected. Royalty and
license revenues are impacted by fluctuations in OEM licensing activity from
quarter to quarter because initial license fees generally are recognized upon
customer acceptance and continuing royalty and license revenues are recognized
when the amount of such licensing activity can be reasonably determined. The
Company's expense levels are based, in part, on its expectations of future
orders and sales, and the Company may be unable to adjust spending in a timely
manner to compensate for any sales shortfall. If sales are below expectations,
operating results are likely to be adversely affected. Net income may be
disproportionately affected by a reduction in sales because a significant
portion of the Company's expenses do not vary with revenues. The Company may
also choose to reduce prices or increase spending in response to competition or
to pursue new market opportunities. In particular, if new competitors,
technological advances by existing competitors or other competitive factors
require the Company to invest significantly greater resources in research and
development efforts, the Company's operating margins in the future may be
adversely affected.
13
Because of these factors, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits which are filed with the report as set forth on the
Exhibit Index appearing on Page 17 of this report and are
incorporated herein by this reference.
(a) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period
ended September 30, 1996.
15
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITRIX SYSTEMS, INC.
/s/ ROGER W. ROBERTS
----------------------------------------------
Roger W. Roberts
President, Chief Executive Officer
and Secretary
(Principal Executive Officer)
/s/ JAMES J. FELCYN, JR.
---------------------------------------------
James J. Felcyn, Jr.
Vice-President of Finance and
Administration and Chief Financial Officer
(Principal Financial and Accounting Officer)
16
EXHIBIT INDEX
10* License, Development and Marketing Agreement dated
July 9, 1996 between the Company and Microsoft Corporation
11 Computation of Earnings (Losses) Per Share
27 Financial Data Schedule
*Confidential treatment requested pursuant to Rule 24b-2 promulgated under
the Securities Exchange Act of 1934, as amended.
17