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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to .
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-2275152
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
6400 NW 6TH WAY FORT LAUDERDALE, FLORIDA 33309
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 Par Value
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 10, 1997 (based on the last report sale price on the
NASDAQ National Market as of such date) was $345,079,267. As of March 10, 1997
there were 27,014,619 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December
31, 1996. Portions of such proxy statement are incorporated by reference into
Part III of this report.
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ITEM 1. BUSINESS.
GENERAL
Citrix Systems, Inc. ("Citrix" or the "Company") is a leading supplier of
multi-user application server products and technologies that enable the
effective and efficient enterprise-wide deployment of applications designed
for Windows(R) operating systems. The Company's WinFrame and WinView product
lines, developed under license and strategic alliance agreements with
Microsoft Corporation ("Microsoft"), permit organizations to deploy Windows
applications without regard to location, network connection, or type of client
hardware platforms.
INDUSTRY BACKGROUND
New information technologies have enabled enterprises to provide their
employees with broad access to business-critical information, including sales,
technical, human resources, vendor and supplier information. Because of their
many diverse end-user requirements, enterprises have made significant
investments in information systems infrastructure, frequently incorporating a
variety of software operating environments, computing platforms and
communications protocols. Business-critical enterprise applications and
personal productivity tools have historically been supplied by a variety of
different vendors, often resulting in incompatible systems and applications
within and among company locations. As a result of this proliferation of
technology, demand has increased for systems that offer users a standard
interface, transparent communications and the ability to integrate enterprise
and personal productivity applications to local and remote enterprise users.
Microsoft is the leading provider of desktop operating systems, supported by
a broad base of independent software developers who develop applications for
the Microsoft operating systems. With the introduction of Windows 95 and
Windows NT 32-bit operating system, Windows is the preferred environment for
enterprise applications.
Organizations seeking to broadly deploy line-of-business applications are
faced with a diverse set of challenges, including:
. Remote Users. The diversity of network connection types, protocols and
transmission speeds limit the ability of organizations to deploy Windows
applications on a cost-effective and efficient basis among remote users
such as mobile workers, telecommuters and branch office personnel.
. Client and Platform Diversity. In addition to Windows, desktop computing
systems within an enterprise may include DOS systems, UNIX workstations,
X-Terminals, Macintosh systems and OS/2 workstations. These systems do
not support 32-bit Windows applications. Additionally, certain
organizations require simpler, relatively low-cost devices, such as
personal digital assistants ("PDAs"), information kiosks and fixed
function terminals for certain enterprise applications, but these
devices currently may not be effectively utilized because Windows
support may not be available.
. Extended Enterprise. The extension of enterprise information systems to
suppliers, distributors, customers and prospects creates Windows
application deployment issues that are outside the control of
information systems managers, such as the quality and security of the
network connection, the client platform involved and the technical
expertise of the external user.
The Company believes that these challenges have impeded effective deployment
of Windows enterprise applications to essential user communities.
THE CITRIX SOLUTION
Citrix develops, markets, sells and supports innovative client and
application server software that enable the effective and efficient
enterprise-wide deployment of Windows line-of-business applications. The
Company's WinFrame and WinView product lines, developed under license and
strategic alliance agreements with Microsoft, permit organizations to deploy
Windows applications without regard to location or type of client
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hardware platforms. These products operate by executing the Windows
applications on a multi-user server and provide end-users access to the server
from a variety of client platforms that incorporate the Company's Independent
Computing Architecture ("ICA") protocol. This approach minimizes the
communications, memory and processing requirements of the client system,
resulting in a highly scaleable, bandwidth-independent solution for deployment
of enterprise Windows applications across a range of platforms and network
environments.
Leveraging its core technologies and strategic relationships, Citrix has
developed products which enable the broad deployment of Windows applications
in a variety of environments, including:
. Low bandwidth connections, such as dial-up, wide area networks, wireless
and the Internet.
. Existing Intel-based computer systems, such as 286, 386, 486 and Pentium
computers.
. Non-Intel platforms, such as UNIX workstations, X-Terminals, RISC-based
NT Workstations and Macintosh systems.
. Emerging platforms, such as hand-held wireless devices, PDAs,
information kiosks, Windows terminals and network computers.
To address deployment in these diverse environments, the Company has
developed two proprietary technologies: (i) the ICA(R) protocol and (ii)
multi-user Windows NT extensions developed under a source code license from
Microsoft.
ICA Protocol. The Company's ICA protocol separates the application's
graphical user interface from the application logic, allowing the user
interface to be displayed on one computer or device while the application
logic itself is executed on an application server. This distributed
architecture allows 16- and 32-bit Windows applications to run remotely over a
wide range of connection speeds including low bandwidth connections. The
Company believes that the ICA protocol significantly reduces many of the
difficulties associated with the manageable deployment of Windows applications
to a broad array of local and remote users.
Multi-user Windows NT Extensions. The Company's multi-user Windows NT
extensions, developed under source code license and strategic alliance
agreements with Microsoft, are integrated into the Windows NT operating system
in a manner that is transparent to the end-user. These extensions allow
multiple users to share an application server, with each user receiving a
"virtual" Windows environment through a dedicated ICA session. The systems
management and security extensions are fully integrated with the standard
Windows NT administrative features, allowing for consistent and integrated
multi-user server management facilities.
PRODUCTS
Citrix has two primary product lines:
WinView, first shipped in April 1993, is a Windows application server based
on an OS/2 operating system that is marketed to departments and workgroups to
implement remote applications systems.
WinFrame, first shipped in August 1995, is a Windows application server,
based on Windows NT that is marketed to enterprises to deploy advanced Windows
applications remotely, provide Windows applications to a broad array of client
platforms and publish enterprise applications on a corporate Intranet. The
Company, in conjunction with its strategic partners, intends to market a
family of products based on its WinFrame technology that will ultimately
include solutions for a number of targeted markets, including remote
computing, Web computing and Windows terminals or special purpose devices.
The WinView and WinFrame product lines consist of the following two
components:
Application Server Software. WinView and WinFrame application servers run on
industry-standard server hardware containing one or more Intel processors.
These application servers were created using source code licenses for
Microsoft's OS/2 and Windows NT Server operating systems. The application
server provides three areas of functionality: operating system extensions that
allow each user to receive a "virtual" Windows
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environment, communications support to allow the Company's ICA protocol to
operate on a variety of analog and digital network connections and management
configuration software. The application server is configured at the time of
sale to support a pre-specified number of concurrent users. This number can be
increased easily with the purchase of additional concurrent user licenses,
sold as add-on kits. The Company's application server software runs with off-
the-shelf, industry standard server hardware peripherals which are purchased
from third parties.
Client Software. Each client that accesses a WinView or WinFrame server
requires software or hardware that runs the ICA protocol. The client
establishes a communications link with the server over dial-up, local area
network ("LAN"), wide area network ("WAN") or Internet connections, and has
three basic functions: establishing a server connection over the specified
network connection, sending and receiving ICA protocol data over the network
link and providing compatibility with DOS, Windows 3.x, Windows for
Workgroups, Windows 95 and Windows NT operating systems.
TARGET MARKETS
Remote Computing. In the remote computing market, the Company's products are
used by workgroups, departments and enterprises to deploy applications whose
scale, performance, reliability and security requirements are more demanding
than those associated with simple remote access. Citrix markets its
application servers as a scaleable platform for the widespread deployment of
enterprise applications. Without the use of WinView or WinFrame, remote
deployment of these applications is slow and expensive because LAN
applications typically require a lot of memory, fast processors, and
relatively high-speed communication bandwidth.
The remote computing market incorporates dial-in remote access for large
field workforces, branch office locations and deployment of applications over
an enterprise WAN. For enterprises with any of these deployment requirements,
scaleable implementation of legacy and client/server applications can be an
issue.
Web Computing. The Company views the development of intranets as an
important potential market for its application server products. Although the
intranet market is rapidly gaining in popularity and companies are developing
new types of applications, they need to integrate Web technologies and their
Windows applications. A Citrix WinFrame application server, when used in
conjunction with a Web server, allows an organization to provide intranet
access to standard and custom developed Windows applications. For example,
using this approach, an organization could add secure interactive access to a
large Lotus Notes database directly from a Web page without developing any new
programs or changing the existing Lotus Notes application program.
The Company believes that there are a number of opportunities to market its
line of WinFrame servers as a system platform for the deployment of Windows
applications in an Intranet environment. These capabilities are intended to
permit organizations to publish Windows applications using their standard Web
server infrastructure.
Specialized Windows Terminals. Citrix has licensed its ICA technology to
companies such as Wyse Technology ("Wyse") and Boundless Technologies to
enable the development of low-cost Windows terminals. In addition, the Company
intends to continue to develop strategic relationships and work with key
strategic partners to deploy Windows applications on point of sale terminals
and information kiosks. The Company believes that its WinFrame application
servers, when coupled with these new devices, will provide an effective
alternative to character-based UNIX implementations and will capitalize on
existing Windows applications, tools and development facilities.
Wireless Windows Servers and PDAs. The Company believes that there is a
strong and growing demand for wireless, collaborative computing. Many device
manufacturers, including Apple Computer, Inc., Motorola, Inc., Sharp
Corporation, Sony Corporation and others have announced and are shipping
portable wireless devices. In most cases, the acceptance of these devices
requires low-cost, long battery life and portability. These requirements are
inconsistent with the latest generation of Windows applications and Windows
development tools, which need substantial RAM, processing power and
communications bandwidth for adequate performance.
4
The Company believes the application of its technology will enable these
devices to access the latest generation of Windows 95 and Windows NT
applications. Citrix has licensed technology to Telxon Corporation and Psion
Software PLC for potential inclusion in a line of portable wireless devices.
UNIX, X-Terminal, DOS and Macintosh Support for Windows. The introduction of
Windows 95 has caused a major transition in the Windows application software
market. As independent software vendors ("ISVs") move to develop applications
which capitalize on the new features of the Windows 95 system, they are
expecting organizations to upgrade client systems in order to run these
applications. In many large establishments, there is a heterogeneous mix of
computing platforms, including DOS systems, Windows 3.x systems, UNIX
workstations, X-Terminals and Macintosh computers. In conjunction with the
appropriate ICA client software, Citrix application server products can
deliver Windows 32-bit applications, running on the server, to most types of
network-attached client systems. The Company has licensed Tektronix, Inc.
("Tektronix"), and Insignia Solutions, Inc. ("Insignia"), to incorporate ICA
technology into their products and to resell application servers to deliver
Windows applications to UNIX systems, X-Terminals and Macintosh systems. In
addition to the clients supported by these OEM relationships, the standard
Citrix products deliver Windows applications to DOS, Windows 3.x, Windows for
Workgroups, Windows NT and OS/2 systems.
STRATEGIC RELATIONSHIPS
The Company has entered into a number of strategic relationships to develop
its existing and future product lines, develop markets for the application of
its technology and to broaden deployment and acceptance of the ICA protocol as
a de facto industry standard presentation services protocol for distributed
Windows computing. In connection with the Company's development of the
WinFrame and WinView product lines and markets, the Company has entered into
strategic relationships with the following key partners:
Microsoft Corporation. Since its inception, the Company has been a party to
a number of license agreements with Microsoft, including licenses to Microsoft
OS/2, Windows 3.x, Windows for Workgroups and Windows NT. Under these
agreements, the Company has access to certain Microsoft source and object
code, technical support and other materials. In addition, the Company is
permitted to sublicense Microsoft Windows NT server as a part of its WinFrame
line of products, pursuant to which the Company pays royalties to Microsoft.
The license agreements had an initial term which expired in September 1994,
and was extended for a period of five years. The Company may further extend
these agreements until September 2001. The license agreements may not be
assigned by the Company without the prior written consent of Microsoft, which
consent shall not be unreasonably withheld, provided that Microsoft's refusal
to permit assignment to a competitor shall not be considered "unreasonably
withheld." For purposes of the agreements, an assignment shall be deemed to
include, with certain exceptions, a merger of the Company with another party,
whether or not the Company is the surviving entity, the acquisition by a third
party of more than 25% of the Company's voting stock or the sale of more than
50% of the Company's assets. These provisions may impede the Company's ability
to enter into certain transactions with third parties, such as mergers with or
acquisitions by third parties. In addition to its contractual agreements, the
Company and Microsoft are cooperating in connection with the application of
Citrix technology in vertical, educational and the intranet markets.
In July 1996, the Company entered into a license, development, and marketing
agreement with Microsoft relating to the inclusion of ICA as an embedded
component in future versions of Windows 95, Windows 3.X, Windows NT and the
Internet Explorer for Windows. Pursuant to this agreement, the Company
licenses its ICA technology to Microsoft, royalty-free, as included in the
above Microsoft Windows family of products.
5
Citrix and Microsoft are currently in negotiations regarding the licensing
of their technologies for Windows NT Version 4.0 and certain future versions
of Windows NT technology, as well as licensing certain technology of the
Company. In February 1997, Microsoft informed Citrix that it intends to
provide system capability that permits concurrent use of its operating system
by multiple end-users and additional remote access capabilities for future
versions of Windows NT. In the event that Microsoft determines to develop the
technology internally or to pursue alternative sources of the technology,
Citrix believes that such determination will have a material adverse effect on
the Company's business, results of operations and financial condition.
Although the Company is pursuing negotiations with Microsoft regarding the
cross-licensing of such technologies, there are no assurances that these
negotiations will be successful. Additionally, as a result of these
discussions with Microsoft and if the Company is able to secure the licensing,
the Company believes that royalties payable to Microsoft associated with such
licensing of the Windows NT Version 4.0 and future versions of NT technology
will increase from current levels. If the companies are unable to agree upon
the terms of such cross-licensing or, if the terms of such cross-licensing are
less favorable to Citrix than in the past, the Company believes that its net
revenues, cost of goods sold and corresponding gross margin may be adversely
impacted so that they will have, in the aggregate, a material adverse effect
on the Company's business, results of operations and financial condition. The
Company cannot currently quantify the impact on its business, results of
operations and financial condition.
Insignia Solutions, Inc. In August 1995, the Company entered into a software
license agreement with Insignia pursuant to which the Company granted a
license to Insignia to incorporate its ICA technology in products designed for
X-Terminals, UNIX workstations and Macintosh platforms. Insignia is authorized
to market products incorporating ICA technology through their software
channels. Insignia is re-marketing the enhanced Citrix WinFrame server under
the trademark of "NTRIGUE."
Network Computing Devices, Inc. In March 1996, the Company entered into a
software license with Network Computing Devices, Inc. ("NCD") to deliver
Windows applications to X-devices. The agreement allows NCD to implement a
native-X driver for WinFrame and remarket the driver and the WinFrame server
under the name of "WinCenter Pro."
Tektronix, Inc. In September 1994, the Company entered into a software
license agreement with Tektronix pursuant to which the Company granted a
license to Tektronix to incorporate its ICA technology to enable PC
application access from X-Terminals and UNIX workstations. The Company
believes that its collaboration with Tektronix has resulted in the first
product line to deliver Windows 95 applications to X-Terminals and UNIX
workstations. Tektronix implemented a native-X version of the ICA client
program and is re-marketing the Citrix WinFrame server under the name of
WinDD.
Wyse Technology. In June 1995, the Company entered into a software license
agreement with Wyse pursuant to which the Company and Wyse began cooperative
efforts concerning the design and development of a new class of Windows-
capable client devices that function in conjunction with the Company's
application server. Citrix and Wyse are also working to build sales and
marketing channels to deliver the combined products to the UNIX marketplace.
Sun Microsystems, Inc. In September 1996, the Company entered into a
software licensing agreement with Sun Microsystems, Inc. ("Sun") pursuant to
which the Company granted a license to Sun to distribute a version of the
Company's ICA client software designed for Java-based devices. Sun is
authorized to market products incorporating the ICA technology through their
sales channels.
CUSTOMERS
Tech Data Corporation ("Tech Data") and Unique Co-operative Solutions, Inc.
("UCSI"), distributors of the Company's products pursuant to distributor
agreements, accounted for 22% and 12%, respectively, of the Company's total
net sales in 1996 and 22% and 6%, respectively, in 1995. The Company's
agreements with Tech Data and UCSI are not exclusive, have no stated minimum
purchase obligations and may be terminated by
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either party without cause. The Company believes that in the event of a
termination of either relationship, the Company could replace such
relationship with an alternate distributor and that such replacement would not
have a material adverse effect on the Company's business, results of
operations and financial condition.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on developing new
products and core technologies for its markets and further enhancing the
functionality, reliability, performance and flexibility of existing products.
Extensive input concerning product development is obtained from users, both
directly and indirectly through its channel distributors.
The Company believes that its software development team and core
technologies represent a significant competitive advantage for the Company.
The software development team includes a number of key members from the
engineering team that developed the original version of OS/2 at International
Business Machines Corporation. Since May 1993, this team has been involved in
the development of system software products utilizing Windows NT technology.
The Company has made significant development investments in two key core
technologies: its ICA protocol and multi-user Windows extensions to NT and
OS/2.
In 1996, 1995 and 1994, the Company's research and development expenses were
approximately $3.8 million, $2.3 million and $1.9 million, respectively. To
date, all software development costs have been expensed as incurred.
SALES, MARKETING AND SUPPORT
Citrix markets its products through multiple indirect channels worldwide,
including distributors, value-added resellers, system integrators and OEM
licensees. In January 1996, Citrix announced its Citrix Solutions Network
("CSN"), which provides training and certification to integrators, value-added
resellers and consultants for a full-range of WinFrame based application
deployment solutions and services. As of December 31, 1996, the Company had
sales/marketing relationships with four national distributors, three regional
distributors, approximately 400 CSN Authorized Gold Solutions Providers,
approximately 660 CSN Authorized Silver Solutions Providers in addition to
over 600 other Citrix-authorized value-added resellers, system integrators and
OEM licensees. Internationally, the Company had relationships with
approximately 50 distributors. A number of the Company's strategic partners
and OEM licensees provide additional indirect sales channels for Citrix
products under either a Citrix brand or private brand name.
Citrix's sales and marketing organization actively supports its distributors
and resellers. The Company's marketing department provides training, sales
event support, sales collateral, advertising, direct mail and public relations
coverage to its indirect channels to aid in market development and in
attracting new customers. The Company's sales organization consists of field-
based systems engineers and corporate sales professionals. These field
personnel are supported by an inside sales group based in Fort Lauderdale,
Florida. Inside sales personnel recruit prospective customers, provide
technical advice with respect to Citrix products and work closely with key
distributors and resellers of the Company's products. In addition, the Company
plans to hire a number of direct sales personnel to increase product demand
among large corporate 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 amount of additional Citrix
products. Although the Company believes that it has adequate reserves to cover
product returns, there can be no assurance that Citrix will not experience
significant returns in the future or that such reserves will be adequate. The
Company also provides most of its distributors and resellers with price
protection rights. Price protection rights require that Citrix grant
retroactive price adjustments for inventories of Citrix products held by
distributors or resellers if Citrix lowers its prices for such products. In
the event that the Company determines to reduce its prices, it will establish
a reserve to cover exposure to distributor inventory.
7
The majority of Citrix's service and support activities are related to
software and network integration issues. Due to the nature of Citrix products,
remote access via a telephone connection can often be used to troubleshoot and
diagnose network problems. Citrix also provides technical support and training
to channel and strategic partners, who are utilized as the first line of
support for their own customers. Additionally, users can choose from a
comprehensive fee-based support program which ranges from one-time incident
charges to an annual support agreement covering multiple sites and servers.
Citrix also provides on-line services to distribute technical advice and
software updates. These services include a bulletin board service, fax service
and access via CompuServe, the Internet and electronic mail.
Citrix conducts its sales, marketing and support activities from its
principal offices in Fort Lauderdale, Florida as well as through satellite
offices in the United Kingdom, France, and Germany.
OPERATIONS
The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations. All production and
warehousing is performed by an independent contractor. Shipping is made
primarily from the location of the independent contractor, although limited
shipments are made from the Company's facilities. Master software diskettes,
development of user manuals, packaging designs, initial product quality
control and testing are performed at the Company's facilities. Diskette and
CD-ROM duplication, printing of documentation, packaging and assembly are
performed by the independent contractor to the Company's specifications. To
date, the Company has not experienced any material difficulties or delays in
the manufacture and assembly of its products.
The Company has identified and evaluated alternative manufacturing vendors
and believes that such alternative vendors are capable of producing the
requisite quality and volumes at competitive prices. However, if difficulties
and delays were to be encountered, and transition to an alternate manufacturer
was not completed promptly, the Company's business, results of operations and
financial condition could be materially adversely affected.
The Company generally ships products upon receipt of an order. As a result,
the Company has relatively little backlog at any given time, and does not
consider backlog to be a significant indicator of future performance.
COMPETITION
The markets in which the Company competes are intensely competitive and
offer a variety of solutions. Remote computing products range from simple
remote control software for a single PC to remote node hardware products to
branch office routers. Competitive factors in the remote computing market
include completeness of features, product quality and functionality, marketing
and sales resources and customer service and support. While the Company
believes that it presently competes on a favorable basis with respect to these
factors, there can be no assurance that the Company will be able to establish
and maintain a market position in the face of increased competition. The
Company faces competition from organizations that seek alternative approaches
to remote computing from such companies as 3Com Corp., Bay Networks, Inc.,
Cisco Systems, Inc., Microsoft, Novell, Inc., Shiva Corporation and Symantec
Corporation, all of whom are significantly larger than the Company and have
greater financial resources.
Additionally, the Company believes that companies, including Microsoft, have
entered or will enter the market with solutions that involve a similar
approach to Citrix's multi-user application server. Companies with products
that compete with multi-user features of WinFrame include Exodus Technologies
and Groupe Prologue. (See " -- Strategic Relationships" and "Management's
Discussion and Analysis of Operations -- Certain Factors Which May Affect
Future Results".)
In addition, alternative products exist for Internet commerce that directly
or indirectly compete with the Company's products. Existing or new products
that extend Web site software to provide database access or
8
interactive computing can materially impact the Company's ability to sell its
products in this market. Competitors in this market include Microsoft,
Netscape Communications Corporation, Quarterdeck Corp. and Sun and other
makers of Web server and browser software. In the multi-user graphical
platform market, the key competitor is The Santa Cruz Operation, Inc., and, to
a lesser extent, other manufacturers of UNIX application servers. The Company
will encounter competition from The Santa Cruz Operation to the extent it is
able to provide a low-cost graphical computing platform for Windows
applications. As markets for the Company's products continue to develop,
additional companies, including companies with significant market presence in
the computer hardware, software and networking industries, may enter the
markets in which the Company competes and further intensify competition. Most
of these competitors and potential competitors have significantly greater
financial, technical, sales, marketing, support and other resources than the
Company. There can be no assurance that the Company will be able to establish
and maintain a market position in the face of increased competition. Although
the Company believes that price has historically been a less significant
competitive factor than product performance, reliability and functionality,
the Company believes that price competition, with a resultant diminution of
profit margins, may become more significant in the future. The Company may not
be able to maintain its historic prices, and an inability to do so could
adversely affect the Company's business, results of operations and financial
condition.
PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon proprietary technology.
While the Company has recently filed 12 patent applications, to date the
Company has no patents, and existing copyright laws afford only limited
protection for the Company's software. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent
as do the laws of the United States. Accordingly, the Company relies primarily
on trade secret protection and confidentiality and proprietary information
agreements to protect its proprietary technology. The loss of any material
trade secret, trademark, trade name or copyright could have a material adverse
effect on the Company. There can be no assurance that the Company's efforts to
protect its proprietary technology rights will be successful. Despite the
Company's precautions, it may be possible for unauthorized third parties to
copy certain portions of the Company's products or to obtain and use
information that the Company regards as proprietary. Substantially all of the
Company's sales are derived from the licensing of Company products under
"shrink wrap" license agreements that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions.
Although the Company does not believe that its products infringe on the rights
of third parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such
assertion will not result in costly litigation or require the Company to
obtain a license to proprietary technology rights of such parties. In
addition, there can be no assurance that such licenses will be available on
reasonable terms or at all.
While the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that because of the
rapid pace of technological change in the industry, factors such as the
technical expertise, knowledge and innovative skill of the Company's
management and technical personnel, its strategic relationships, name
recognition, the timeliness and quality of support services provided by the
Company and its ability to rapidly develop, enhance and market software
products may be more significant in maintaining the Company's competitive
position.
EMPLOYEES
As of March 10, 1997, the Company had a total of 163 employees. Three of the
Company's employees are represented by a statutory collective bargaining
agreement in France and the Company believes that its relations with employees
are good.
ITEM 2. PROPERTIES.
The Company occupies approximately 46,000 square feet of leased and
subleased office space in Fort Lauderdale, Florida. Additionally, the Company
anticipates that it will occupy an additional 24,000 square feet
9
in this facility within the next twelve months. The lease expires in September
2001. The Company may renew such lease, subject to acceptable renewal terms
and subject to any rent escalation (based on the consumer price index) as
provided for in the lease.
ITEM 3. LEGAL PROCEEDINGS.
On March 7, 1997, a purported class action lawsuit was filed in the United
States District Court for the Southern District of Florida, Southern Division,
against the Company, Roger W. Roberts, President, Chief Executive Officer,
Secretary and a member of the Board of Directors (the "Board"), Edward E.
Iacobucci, Chairman of the Board, Vice President of Strategy & Technology and
Chief Technology Officer, and Gregory B. Maffei, a member of the Board. In its
complaint, the plaintiff asserts, on behalf of itself and a putative class of
purchasers of the Company's common stock during the period from January 20,
1997 through February 26, 1997, claims: (1) under section 10(b) and 20(a) of
the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder;
and (2) for negligent misrepresentation.
On March 19, 1997, a purported class action lawsuit was filed in the United
States District Court for the Southern District of Florida, Northern Division,
against the Company, Roger W. Roberts, President, Chief Executive Officer,
Secretary and a member of the Board, Kevin R. Compton, a member of the Board,
James J. Felcyn, Jr., Chief Financial Officer, Treasurer, Vice President of
Finance and Administration and Assistant Secretary, and Bruce C. Chittenden,
Vice President--Engineering. In the complaint, the plaintiffs assert, on
behalf of themselves and a putative class of purchasers of the Company's
common stock during the period from January 21, 1997, through February 26,
1997, claims under section 10(b) and 20(a) of the Securities Exchange Act of
1934, and Rule 10b-5 promulgated thereunder.
The claims in each of the lawsuits relate principally to certain statements
made by the Company, or certain of its representatives, concerning the status
of the Company's relationship with Microsoft. The complaints seek unspecified
damages and costs, including attorneys' and experts' fees and other
disbursements. The outcome of litigation cannot yet be determined.
Accordingly, no provision for any liability that may result from these matters
has been recognized in the accompanying consolidated financial statements.
There can be no assurances, however, that the outcome of this litigation will
not have a material adverse effect on the Company's business, results of
operations, and financial condition.
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 1996.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is currently traded on The Nasdaq National Market
under the symbol "CTXS." Public trading of the Common Stock commenced on
December 8, 1995. Prior to that time, there was no public market for the
Company's Common Stock. The following table sets forth the high and low bid
prices for the Company's Common Stock as reported on the Nasdaq National
Market for the periods indicated, as adjusted to the nearest 1/16 to reflect
the two-for-one stock split in the form of a stock dividend paid on or about
June 4, 1996 to holders of record of the Company's Common Stock on May 28,
1996. Such information reflects inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.
HIGH LOW
------- -------
FISCAL YEAR 1995:
Fourth Quarter (from December 8, 1995)....................... $17 1/2 $12 3/8
FISCAL YEAR 1996:
First Quarter................................................ $27 7/8 $11 3/4
Second Quarter............................................... $44 $21 7/8
Third Quarter................................................ $51 3/4 $24
Fourth Quarter............................................... $56 1/4 $37 3/4
FISCAL YEAR 1997:
First Quarter (through March 10, 1997)....................... $50 1/2 $ 9 3/4
On March 10, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $13 per share. As of March 10, 1997, there were
approximately 425 holders of record of the Common Stock.
The Company has never declared or paid cash dividends. 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.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data set forth below with
respect to the years ended December 31, 1996, 1995 and 1994, and the
consolidated balance sheet data as of December 31, 1996 and 1995 are derived
from the consolidated financial statements of the Company, included herein,
which have been audited by Ernst & Young LLP, independent certified public
accountants. The statement of operations data for the years ended December 31,
1993 and 1992, and the balance sheet data as of December 31, 1994, 1993 and
1992, have been derived from financial statements not included herein. Except
as otherwise noted, all information contained in this Form 10-K reflects a 2-
for-1 stock split of the Common Stock and a 2-for-3 reverse stock split of the
Common Stock, effected June 4, 1996 and December 7, 1995, respectively. The
following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and Notes thereto
included as Item 8 in this Form 10-K.
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
-------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues.................... $ 44,527 $14,568 $ 10,085 $ 5,164 $ 1,801
Cost of goods sold.............. 5,099 1,956 2,137 929 498
-------- ------- -------- -------- --------
Gross Margin.................... 39,428 12,612 7,948 4,235 1,303
-------- ------- -------- -------- --------
Operating expenses:
Research and development...... 3,843 2,343 1,912 1,722 1,529
Sales, marketing and support.. 13,741 6,670 4,444 3,866 2,678
General and administrative.... 4,126 1,784 1,395 1,370 832
-------- ------- -------- -------- --------
Total operating expenses.... 21,710 10,797 7,751 6,958 5,039
-------- ------- -------- -------- --------
Income (loss) from operations... 17,718 1,815 197 (2,723) (3,736)
Other income, net............... 4,545 173 45 1 49
-------- ------- -------- -------- --------
Income (loss) before income tax-
es............................. 22,263 1,988 242 (2,722) (3,687)
Income taxes.................... 3,562 93 -- -- --
-------- ------- -------- -------- --------
Net income (loss)............... $ 18,701 $ 1,895 $ 242 $ (2,722) $ (3,687)
======== ======= ======== ======== ========
Net income per share............ $ 0.68 $ 0.09
======== =======
Pro forma net income per share
(1)............................ $ 0.01
========
Weighted average shares out-
standing:
Historical.................... 27,303 20,404
======== =======
Pro forma (1)................. 20,194
========
DECEMBER 31,
---------------------------------------------
1996 1995 1994 1993 1992
-------- ------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficiency).. $139,778 $42,688 $ 1,989 $ 366 $ (443)
Total assets.................. 149,580 46,715 3,932 2,306 1,043
Long term portion of capital
lease obligations............ 8 88 68 -- --
Redeemable convertible pre-
ferred stock................. -- -- 18,608 16,630 11,627
Common shareholders' equity
(deficit) (2)................ 141,851 42,962 (16,473) (16,103) (11,932)
- --------
(1) Pro forma net income per share and the Pro forma weighted average shares
outstanding are calculated using the weighted average number of common and
common equivalent shares outstanding during the period after giving effect
to the conversion of the redeemable convertible preferred stock into an
aggregate of 15,359,388 shares of Common Stock.
12
(2) At December 31, 1994, 1993 and 1992 the common shareholders' equity
(deficit) included certain amounts attributable to the accretion of
redeemable convertible preferred stock. See Note 7 of the Notes to
Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports innovative client and
application server software that enables effective and efficient deployment of
enterprise applications that are designed for Windows operating systems. The
Company was incorporated in April 1989, and shipped its initial products in
1991.
From inception until the introduction of WinView in 1993, substantially all
of the Company's revenue was derived from its initial products. From its
introduction in the second quarter of 1993 through the second quarter of 1995,
the WinView product represented the largest source of the Company's revenue.
The Company's WinFrame products shipped in final form in the third quarter of
1995 and represented approximately 63% of the Company's revenue in 1996. The
Company anticipates that the WinFrame product line will constitute a majority
of its revenue 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. 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 noncancelable product licensing arrangements under
which certain OEMs have software reproduction rights, recognition of revenue
also requires delivery and customer acceptance of the product master or first
copy. Product returns and sales allowances are estimated and provided for at
the time of sale. Non-recurring engineering fees are recognized ratably as the
work is performed. Revenues from training and consulting are recognized when
the services are performed. Service revenues from customer maintenance fees
for ongoing customer support and product updates are recognized ratably over
the term of the contract, which is typically twelve months. Service revenues,
which are immaterial when compared to net revenues, are included in net
revenues on the face of the income statement.
Citrix and Microsoft are currently in negotiations regarding the licensing
of Windows NT Version 4.0 and certain future versions of Windows NT
technology, as well as licensing certain technology of the Company. In
February 1997, Microsoft informed Citrix that it intends to provide system
capability that permits concurrent use of its operating system by multiple
end-users and additional remote access capabilities for future versions of
Windows NT. In the event that Microsoft determines to develop the technology
internally or to pursue alternative sources of the technology, Citrix believes
that such determination will have a material adverse effect on the Company's
business, results of operations and financial condition. Although the Company
is pursuing negotiations with Microsoft regarding the cross-licensing of such
technologies, there are no assurances that these negotiations will be
successful. Additionally, as a result of these discussions with Microsoft and
if the Company is able to secure the licensing of the Windows NT Version 4.0
and future versions of NT technoglogy, the Company believes that royalties
payable to Microsoft associated with such licensing will increase from current
levels. If the companies are unable to agree upon the terms of such cross-
licensing or, if the terms of such cross-licensing are less favorable to
Citrix than in the past, the Company believes that its net revenues, cost of
goods sold and corresponding gross margin may be adversely impacted so that
they will have, in the aggregate, a material adverse effect on the Company's
business, results of operations and financial condition. The Company cannot
currently quantify the impact on its business, results of operations and
financial condition.
13
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of the Company
expressed as a percentage of net revenues and as a percentage of change from
period-to-period for the periods indicated.
YEAR ENDED DECEMBER 31, 1996 1995
------------------------- COMPARED TO COMPARED TO
1996 1995 1994 1995 1994
------- ------- ------- ----------- -----------
Net revenues................ 100.0% 100.0% 100.0% 205.7% 44.5%
Cost of goods sold.......... 11.5 13.4 21.2 160.7 (8.5)
------- ------- ------- ----- -----
Gross margin................ 88.5 86.6 78.8 212.6 58.7
------- ------- ------- ----- -----
Operating expenses:
Research and development.. 8.6 16.1 19.0 64.0 22.5
Sales, marketing and sup-
port..................... 30.9 45.8 44.1 106.0 50.1
General and administra-
tive..................... 9.2 12.2 13.8 131.2 27.9
------- ------- ------- ----- -----
Total operating ex-
penses................. 48.7 74.1 76.9 101.1 39.3
------- ------- ------- ----- -----
Income from operations...... 39.8 12.5 1.9 876.1 821.3
Interest income, net........ 10.2 1.2 0.4 * 284.4
------- ------- ------- ----- -----
Income before income taxes.. 50.0 13.6 2.3 * 721.5
Income taxes................ 8.0 0.6 -- * *
------- ------- ------- ----- -----
Net income.................. 42.0% 13.0% 2.3% 886.9% 683.1%
======= ======= ======= ===== =====
- --------
* Not meaningful.
Net Revenues. Net revenues were $44.5 million, $14.6 million and $10.1
million in 1996, 1995 and 1994, respectively, representing increases of 205.7%
and 44.5% from 1995 to 1996 and from 1994 to 1995, respectively. The Company's
net revenues during 1996, 1995, and 1994 were derived primarily from product
license revenues and in 1994, certain developmental work (non-recurring
engineering fees) for strategic partners of the Company.
The increase in net revenues for 1996 as compared to 1995 and 1995 as
compared to 1994 primarily reflects revenues generated from the Company's
WinFrame products, whose first production version was shipped in August 1995,
and, to a lesser extent, increased OEM revenues. These increases in net
revenues were partially offset by a decline in the Company's NetWare Access
Server ("NAS"), WinView, and other product revenues in addition to an increase
in the Company's provision for stock rotation and product returns.
WinFrame and OEM revenues approximated 62.9% and 26.0% of revenues,
respectively, in 1996 and 34.3% and 17.9% of revenues, respectively, in 1995.
WinView revenues approximated 6.8%, 40.8%, and 68.5% of revenues respectively,
in 1996, 1995, and 1994. The Company's WinFrame and OEM revenues represent
product license fees based upon the Company's multi-user NT-based technology.
The Company and Microsoft are currently in negotiations regarding the
license and distribution of a version of WinFrame based on Microsoft Windows
NT Version 4.0 and certain future versions of Windows NT technology. Further,
Microsoft recently announced that it intends to provide system capability that
permits concurrent use of its operating system by multiple end-users and
additional remote access capabilities for future versions of Windows NT. If
the negotiations involving such licensing arrangements result in less
favorable terms for Citrix than in the past, if the negotiations are
unsuccessful, or if Microsoft determines to develop the technology internally
or to pursue alternative sources for the technology, Citrix believes that such
events will have a material adverse effect on the Company's net revenues in
future periods. The Company cannot currently quantify the impact on its net
revenues.
Cost of Goods Sold. Cost of goods sold consisted primarily of the cost of
royalties, product media and duplication, manuals, packaging materials and
shipping expense. Cost of OEM revenues consisted of cost of
14
royalties except where the OEM elected to purchase shrink wrapped products, in
which case such costs were as described in the preceding sentence. Costs
associated with non-recurring engineering fees were included in research and
development expenses and are not separately identifiable. All development
costs included in the research and development of software products and
enhancements to existing products have been expensed as incurred.
Consequently, there is no amortization of capitalized research and development
costs included in cost of goods sold.
If negotiations with Microsoft regarding the license and distribution of a
version of WinFrame based on Microsoft Windows NT Version 4.0 and certain
future versions of Windows NT technology are successful, the Company believes
it will be required to pay increased royalty rates on sales of Windows NT
server-based products. Accordingly, the cost of goods sold as a percentage of
net revenues will increase in future period and could have a material adverse
effect on the Company's business, results of operations and financial
condition. The Company cannot currently quantify the impact on its cost of
goods sold.
Gross Margin. Gross margin increased from 86.6% in 1995 to 88.5% in 1996,
and from 78.8% in 1994 to 86.6% in 1995. The increase in gross margin as a
percent of gross revenues from 1995 to 1996 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. The increase in gross margin in 1995 was primarily
attributable to decreased shipments of the Company's NAS product line, which
had higher associated royalties than WinFrame and WinView products.
The Company anticipates that gross margin and gross margin as a percentage
of net revenues may decrease as a result of the factors and events described
above in Overview, Net Revenues and Cost of Goods Sold. The Company cannot
currently quantify the impact of such decrease.
Research and Development Expenses. Research and development expenses were
$3.8 million, $2.3 million and $1.9 million in 1996, 1995 and 1994,
representing 8.6%, 16.1%, and 19.0% of net revenues, for the years ended
December 31, 1996, 1995 and 1994, respectively. Research and development
expenses consisted primarily of personnel-related costs. Increases in research
and development expenses in 1996 and 1995 resulted primarily from additional
staffing, associated salaries and related expenses required to expand and
enhance the Company's product lines and, in 1996, third-party expenses
associated with the translation and localization of the WinFrame products as
well as increased expenses associated with patent filings relating to certain
aspects of the Company's software products and technology.
Sales, Marketing and Support Expenses. Sales, marketing and support expenses
approximated $13.7 million, $6.7 million and $4.4 million, representing 30.9%,
45.8% and 44.1% of net revenues for the years ended December 31, 1996, 1995
and 1994, respectively. The increases in sales, marketing, and support
expenses in 1996 and 1995 resulted primarily from increases in promotional and
advertising activities, which include co-op advertising programs and other
promotional activities such as those directed at resellers, training programs,
trade shows and other direct mail and advertising activities. Sales and
marketing staff and associated salaries, commissions and related expenses,
also increased, resulting from efforts to expand the Company's product
distribution. Additionally, in 1995, recruiting and relocation expenses
contributed to the increase in these expenses.
General and Administrative Expenses. General and administrative expenses
were $4.1 million, $1.8 million and $1.4 million, representing 9.2%, 12.2% and
13.8% of net revenues, for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in general and administrative expenses in 1996 was
primarily due to expenditures associated with being a public company such as
increased legal fees and associated regulatory filing expenses as well as
expenses associated with the investor relations function. Additionally, for
both 1996 and 1995, the increase was also due to increased staff, associated
salaries and related expenses necessary to support overall increases in the
scope of the Company's operations, as well as an increase in the provision for
doubtful accounts due to an increased level of accounts receivable
attributable to each period's respective increase in sales.
15
Interest Income, Net. Interest income, net, amounted to $4.5 million,
$173,000 and $45,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in interest income, net, in 1996 and 1995 was
primarily due to interest income generated from the net proceeds of the
Company's public offerings which were completed in June 1996 and December
1995.
Income Taxes. In 1996, the Company's effective tax rate was 16%, reflecting
the utilization of substantially all of the Company's income tax net operating
loss carryforwards. In 1995, the Company incurred income tax expense of
$93,000, representing only Alternative Minimum Taxes due to limitations in
utilizing the Company's net operating loss carryforwards. The Company had not
incurred any significant income tax expense from its inception through the
year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
In 1996 and 1995, the Company generated positive operating cash flows
primarily from increased profitability. The increases in accounts receivable
were funded by corresponding increases in deferred revenue, accounts payable
and accrued royalties and other accounts payable to a shareholder as well as
other accrued expenses. In June 1996 and December 1995, the Company completed
public offerings which generated net proceeds of approximately $73.3 million
and $38.9 million, respectively. During 1996, the Company recognized tax
benefits from the exercise of non-statutory stock options and disqualifying
dispositions of incentive stock options of approximately $6.3 million.
Additionally, deferred tax assets increased during 1996 by approximately $3.2
million. The increase in deferred tax assets was primarily due to a reduction
in the valuation allowance of such deferred tax assets when compared to 1995.
The Company also purchased short-term investments for approximately $38.2
million during 1996.
The Company generated positive cash flow from operations in 1994 primarily
from increases in deferred revenue, accrued royalties and other accounts
payable to a shareholder. These increases were partially offset by an increase
in accounts receivable.
The Company had lines of credit for working capital and equipment lease
financing aggregating $2.0 million and $500,000, respectively. These credit
lines have expired in February 1997. There were no borrowings outstanding
under the working capital credit line as of December 31, 1996.
At December 31, 1996, the Company had $137.3 million in cash and cash
equivalents and short-term investments and $139.8 million of working capital.
The Company's cash and cash equivalents are invested in short-term securities
to minimize interest rate risk and allow for flexibility in the event of
immediate cash needs. The Company had $5.5 million in accounts receivable, net
of allowances, and $2.1 million of deferred revenues, most of which the
Company anticipates will be earned over the next 12 months.
The Company believes existing cash and cash equivalents and short-term
investments will be sufficient to meet operating and capital expenditures
requirements through 1997.
The Company has not paid, and does not intend to pay in the foreseeable
future, 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.
16
Reliance Upon Strategic Relationship with Microsoft. Microsoft is the
leading provider of desktop operating systems. The Company is dependent upon
the license of certain key technology from Microsoft, including certain source
and object code licenses, technical support and other materials. The Company
is also dependent on its strategic alliance agreement with Microsoft which
provides for cooperation in the development of technologies for advanced
operating systems, and the promotion of advanced Windows application program
interfaces. Citrix and Microsoft are currently in negotiations regarding the
licensing of Windows NT Version 4.0 and certain future versions of Windows NT
technology, as well as licensing certain technology of the Company. In
February 1997, Microsoft informed Citrix that it intends to provide system
capability that permits concurrent use of its operating system by multiple
end-users and additional remote access capabilities for future versions of
Windows NT. In the event that Microsoft determines to develop the technology
internally or to pursue alternative sources of the technology, Citrix believes
that such determination will have a material adverse effect on the Company's
business, results of operations and financial condition. Although the Company
is pursuing negotiations with Microsoft regarding the cross-licensing of such
technologies, there are no assurances that these negotiations will be
successful. Additionally, as a result of these discussions with Microsoft and
if the Company is able to secure the licensing of Windows NT Version 4.0 and
certain future versions of NT technology, the Company believes that royalties
payable to Microsoft associated with such licensing will increase from current
levels. If the companies are unable to agree upon the terms of such cross-
licensing or, if the terms of such cross-licensing are less favorable to
Citrix than in the past, the Company believes that its net revenues, cost of
goods sold and corresponding gross margin may be adversely impacted so that
they will have, in the aggregate, a material adverse effect on the Company's
business, results of operations and financial condition. The Company cannot
currently quantify the impact on its business, results of operations and
financial condition.
Dependence Upon Broad-Based Acceptance of ICA Protocol. The Company believes
that its success in the markets in which it competes will depend upon its
ability to make its ICA protocol 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 strategic relationships with Insignia, NCD,
Tektronix, and Wyse. The Company is dependent on its strategic partners to
successfully incorporate the Company's technology into their products and to
successfully market and sell such products.
Competition. The markets in which the Company competes are intensely
competitive. Most of the competitors and potential competitors, including
Microsoft, have significantly greater financial, technical, sales and
marketing and other resources than the Company. Microsoft recently announced
that it intends to provide system capability that permits concurrent use of
the operating system by multiple end-users and additional remote access
capabilities for future versions of Windows NT. In the event that Microsoft
determines to develop the technology internally or to pursue alternative
sources of the technology, Citrix believes that such determination will have a
material adverse effect on the Company's net revenues in future periods. The
Company cannot currently quantify the impact on its net revenues in future
periods.
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 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. The Company anticipates that WinView
revenues will decline as a percentage of the Company's net revenues in future
periods.
17
Management of Growth and Anticipated Operating Expenses. The Company has
recently experienced rapid growth in the scope of its operations, the number
of its employees, and the geographic area of its operations. 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. Additionally, the Company expects that its
requirements for office facilities and equipment will grow as staffing
requirements dictate. The Company plans to increase its professional staff
during 1997 as sales, marketing and support and product development efforts as
well as associated administrative systems are implemented to support planned
growth. As a result of this planned growth in staff, the Company believes that
additional facilities will be required during 1997. The Company anticipates
that it will occupy an additional 24,000 square feet in the facility into
which it recently relocated. Although the Company believes that the cost of
expanding in such additional facilities will not significantly impact its
financial position or results of operations, the Company anticipates that
operating expenses will increase during 1997 as a result of its planned growth
in staff and that such increase may reduce its income from operations and cash
flows from operating activities in 1997.
Dependence on Key Personnel. The Company's success will depend, in large
part, upon the services of a number of key employees. The effective management
of the Company's anticipated growth will depend, in a large part, upon the
Company's ability to retain its highly skilled technical, managerial and
marketing personnel as well as its ability to attract and maintain
replacements for and additions to such personnel in the future.
New Products and Technological Change. The markets for the Company's
products are relatively new and are characterized by rapid technological
change, evolving industry standards, changes in end-user requirements and
frequent new product introductions and enhancements, including enhancements to
certain key technology licensed from Microsoft. The Company believes it will
incur additional costs and royalties associated with the development,
licensing, or acquisition of new technologies or enhancements to existing
products which will increase the Company's cost of goods sold and operating
expenses. The Company cannot currently quantify such increase. The Company may
use a substantial portion of its cash and cash equivalents and short-term
investments to fund these additional costs, in which case, the Company's
interest income will decrease. 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.
Furthermore, the Company and Microsoft are currently in negotiations regarding
the license and distribution of a version of WinFrame based on Microsoft
Windows NT Version 4.0 and certain future versions of Windows NT technology.
As mentioned above, if the negotiations involving such licensing arrangements
result in less favorable terms for Citrix than in the past, or if Citrix is
unsuccessful in securing the license and distribution of WinFrame based on
Microsoft Windows NT Version 4.0 and certain future versions of Windows NT
technology, the Company believes that its net revenues, cost of goods sold and
corresponding gross margin may be adversely impacted so that they will have,
in the aggregate, a material adverse effect on the Company's business, results
of operations and financial condition. The Company cannot currently quantify
the impact on its business, results of operations and financial condition.
Potential for Undetected Errors. Despite significant testing by the Company
and by current and potential customers, errors may not be found in new
products until after commencement of commercial shipments. Additionally, third
party products, upon which the Company's products are dependent, may contain
defects which could reduce the performance of the Company's products or render
them useless.
Reliance Upon Indirect Distribution Channels and Major Distributors. The
Company relies significantly on independent distributors and resellers for the
marketing and distribution of its products. The Company's distributors and
resellers are not within the control of the Company, are not obligated to
purchase products from the Company, and may also represent other lines of
products.
Need to Expand Channels of Distribution. The Company intends to leverage its
relationships with hardware and software vendors and systems integrators to
encourage these parties to recommend or distribute
18
the Company's products. In addition, an integral part of the Company's
strategy is to expand its direct sales force and add third-party distributors
both domestically and internationally. The Company is currently investing, and
intends to continue to invest, significant resources to develop these
channels, which could adversely affect the Company's operating margins and
related cash flows from operating activities.
Product Returns and Price Protection Rights. 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.
Effective Income Tax Rate. During 1996, the Company has used substantially
all of its income tax net operating loss carryforwards. Accordingly, while
certain tax credit carryforwards are available to effect future taxable
income, the Company's effective tax rate in the future will approximate the
federal and appropriate states' statutory income tax rates. The anticipated
increase in effective tax rate may reduce the Company's net income and cash
flows from operating activities in 1997.
Growth Rate. The Company's revenue growth rate in 1997 may not approach the
level attained in 1996, which was high, due primarily to the introduction of
WinFrame in late 1995. As discussed above, the Company believes that its costs
of goods sold and certain operating expenses will increase in 1997. Due to the
fixed nature of a significant portion of such expenses, together with the
possibility of slower revenue growth, the Company's income from operations and
cash flows from operating and investing activities may decrease in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Company's Financial Statements and Schedules, together with the
auditors' report thereon, appear at pages F-1 through F-21 and S-1,
respectively, of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most
recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1996.
19
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required under this item is incorporated herein by reference
to the Company's definitive proxy statement pursuant to Regulation 14A, which
proxy statement will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the Company's fiscal year ended
December 31, 1996.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS.
For a list of the consolidated financial information included
herein, see Index on Page F-1.
2. FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statement schedule is
included in Item 8:
Valuation and Qualifying Accounts
3. LIST OF EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(1) Amended and Restated Certificate of Incorporation of the Company
3.2(1) Amended and Restated By-laws of the Company
3.3(2) Certificate of Amendment of Amended and Restated Certificate of
Incorporation
4.1(1) Specimen certificate representing the Common Stock
10.1(1)* 1989 Stock Option Plan
10.2(1)* 1995 Stock Plan
10.3(1)* 1995 Non-Employee Director Stock Option Plan
10.4(1)* 1995 Employee Stock Purchase Plan, as amended
10.5(1) OEM Software License Agreement between the Company and Digital
Communications Associates, Inc. ("DCA"), dated as of October 5,
1993
10.6(1) Memorandum of Agreement between the Company and DCA, dated October
5, 1993
10.7(1) First Addendum to OEM Software License Agreement between the
Company and DCA, dated May 25, 1994
10.8(1) Amendment No. 1 to OEM Software License Agreement between the
Company and DCA dated March 23, 1995
10.9(1) Client/Server Software License Agreement between the Company and
Insignia Solutions Inc., dated August 4, 1995
10.10(1) Microsoft Corporation Source Code Agreement between the Company
and Microsoft Corporation ("Microsoft") dated November 15, 1989
10.11(1) Amendment No. 1 to the Source Code Agreement between the Company
and Microsoft dated October 1, 1992
10.12(1) License Agreement for Microsoft OS/2 Version Releases 1.x, 2.x
between the Company and Microsoft dated August 15, 1990
10.13(1) Amendment No. 1 to the License Agreement between the Company and
Microsoft dated August 15, 1990, Contract No. 5198-0228 dated May
6, 1991
10.14(1) Amendment No. 2 to License Agreement between the Company and
Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x, dated
October 1, 1992
10.15(1) Amendment No. 3 to the License Agreement between the Company and
Microsoft dated August 15, 1990, Contract No. 5198-0228 dated
January 1, 1994
10.16(1) Amendment No. 4 to the License Agreement between the Company and
Microsoft dated August 15, 1990, dated January 31, 1995
10.17(1) Strategic Alliance Agreement between the Company and Microsoft
dated December 12, 1991
10.18(1) Software Development and License Agreement between the Company and
Novell, Inc. ("Novell"), dated June 15, 1992
10.19(1) Software Development and License Agreement between the Company and
Novell, dated July 1, 1993
10.20(1) First Amendment to the Software Development and License Agreement
between the Company and Novell, dated March 7, 1995
10.21(1) NetWare Client License Agreement between the Company and Novell,
dated June 14, 1995
21
EXHIBIT NO. DESCRIPTION
----------- -----------
10.22(1) Software License Agreement between the Company and Tektronix,
Inc., dated September 23, 1994
10.23(1) Client Software License Agreement between the Company and Wyse
Technology dated June 15, 1995
10.24(1) Client/Server Software License Agreement between the Company and
Zenith Data Systems Corporation dated June 21, 1995
10.25(1) Form of Indemnification Agreement
10.26(2) Lease Agreement between Halmos Trading and Investment Company and
the Company dated June 6, 1996
10.27(3) License, Development and Marketing Agreement dated July 19, 1996
between the Company and Microsoft Corporation
11.1** Statement re computation of earnings per share
21.1** List of Subsidiaries
23.1** Consent of Ernst & Young LLP
24.1** Power of Attorney (Included in signature page)
27.1** Financial Data Schedule
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(2) Incorporated herein by reference to Exhibit 10 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(3) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith.
(B) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 1996.
(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. The Commission maintains a Web site that
contains reports, proxy and information statements and other information that
can be reviewed at http://www.sec.gov.
(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.
22
CITRIX SYSTEMS, INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Citrix Systems, Inc. are
included in Item 8:
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Operations--Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Redeemable Convertible Preferred Stock and
Common Shareholders' Equity (Deficit)--Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows--Years ended December 31, 1996, 1995
and 1994
Notes to Consolidated Financial Statements--December 31, 1996
The following consolidated financial statement schedule of Citrix Systems,
Inc. is included in Item 14(d):
Schedule II Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Citrix Systems, Inc.
We have audited the accompanying consolidated balance sheets of Citrix
Systems, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, redeemable convertible preferred stock and common
shareholders (deficit) equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Citrix Systems, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
West Palm Beach, Florida
January 15, 1997, except for paragraph 21 of Note 2 and Note 16,
as to which the dates are February 26, 1997 and March 19, 1997, respectively
F-2
CITRIX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------
1996 1995
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 99,135,049 $ 43,471,491
Short-term investments........................... 38,206,495 --
Accounts receivable, net of allowances of
$2,552,039 and $1,008,425 at December 31, 1996
and 1995, respectively.......................... 5,525,315 2,328,512
Inventories...................................... 696,336 194,023
Prepaid expenses................................. 765,818 230,313
Deferred tax assets.............................. 3,168,964 --
Note receivable from officer, including accrued
interest of $28,910 at
December 31, 1995............................... -- 128,910
------------ ------------
Total current assets........................... 147,497,977 46,353,249
Property and equipment:
Computer equipment under capital leases.......... 365,725 365,725
Computer equipment and software.................. 1,099,012 146,745
Office equipment and furniture................... 354,640 66,534
Leasehold improvements........................... 739,111 16,640
------------ ------------
2,558,488 595,644
Less accumulated depreciation and amortization... (476,929) (293,648)
------------ ------------
2,081,559 301,996
Other assets....................................... -- 59,941
------------ ------------
$149,579,536 $ 46,715,186
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 755,908 $ 546,266
Accrued royalties and other accounts payable to
shareholder..................................... 1,524,126 521,517
Other accrued expenses........................... 3,283,197 1,137,478
Deferred revenue................................. 2,074,670 1,221,767
Current portion of capital lease obligations pay-
able............................................ 82,434 144,976
Income taxes payable............................. -- 93,100
------------ ------------
Total current liabilities...................... 7,720,335 3,665,104
Long-term portion of capital lease obligations pay-
able.............................................. 8,217 88,379
------------ ------------
Total liabilities.............................. 7,728,552 3,753,483
Commitments and contingencies
Shareholders' equity:
Preferred stock at $.01 par value: 5,000,000
shares authorized, none issued and outstanding.. -- --
Common stock at $.001 par value: 60,000,000 and
30,000,000 shares authorized; and 26,680,236 and
23,650,916 issued and outstanding at 1996 and
1995, respectively.............................. 26,680 23,651
Additional paid-in capital....................... 135,123,455 54,938,583
Retained earnings (accumulated deficit).......... 6,700,849 (12,000,531)
------------ ------------
Total shareholders' equity..................... 141,850,984 42,961,703
------------ ------------
$149,579,536 $ 46,715,186
============ ============
See accompanying notes.
F-3
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
----------- ----------- -----------
Net revenues............................. $44,527,082 $14,567,922 $10,085,562
Cost of goods sold....................... 5,098,975 1,955,838 2,137,589
----------- ----------- -----------
Gross margin............................. 39,428,107 12,612,084 7,947,973
Operating expenses:
Research and development............... 3,843,162 2,343,313 1,912,362
Sales, marketing and support........... 13,741,474 6,669,560 4,443,472
General and administrative............. 4,125,760 1,784,011 1,395,343
----------- ----------- -----------
Total operating expenses................. 21,710,396 10,796,884 7,751,177
----------- ----------- -----------
Income from operations................... 17,717,711 1,815,200 196,796
Interest income, net..................... 4,545,176 172,915 44,935
----------- ----------- -----------
Income before income taxes............... 22,262,887 1,988,115 241,731
Income taxes............................. 3,561,507 93,100 --
----------- ----------- -----------
Net income............................... 18,701,380 1,895,015 241,731
Less redeemable convertible preferred
stock accretion......................... -- -- (716,441)
----------- ----------- -----------
Net income (loss) attributable to common
shares.................................. $18,701,380 $ 1,895,015 $ (474,710)
=========== =========== ===========
Historical:
Net income per share................... $ .68 $ .09
=========== ===========
Weighted average shares outstanding.... 27,303,144 20,403,230
=========== ===========
Pro forma:
Net income per share................... $ .01
===========
Weighted average shares outstanding.... 20,193,694
===========
See accompanying notes.
F-4
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-5
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND COMMON SHAREHOLDERS EQUITY (DEFICIT)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------------------
SERIES A SERIES B SERIES C
----------------------- ---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ---------- ---------- ---------- -----------
Balance at December 31,
1993................... 3,039,000 $ 4,132,354 2,431,200 $3,560,095 3,455,173 $ 5,400,237
Exercise of stock
options...............
Issuance of Series D
redeemable convertible
preferred stock for
cash and conversion of
notes payable.........
Accretion to redemption
value................. 311,806 196,486 208,149
Net income.............
---------- ----------- ---------- ---------- ---------- -----------
Balance at December 31,
1994................... 3,039,000 4,444,160 2,431,200 3,756,581 3,455,173 5,608,386
Exercise of stock
options...............
Repurchase and
cancellation of common
stock previously
issued................
Accretion to redemption
value................. 10,275,789 7,788,333 10,303,373
Restoration of previous
accretion............. (11,680,949) (8,505,914) (10,901,759)
Exercise of warrants... 66,661 450
Issuance of common
stock through public
offering (net of
offering costs of
$4,237,717)...........
Conversion of preferred
stock to common
stock................. (3,039,000) (3,039,000) (2,431,200) (3,039,000) (3,521,834) (5,010,450)
Net income.............
---------- ----------- ---------- ---------- ---------- -----------
Balance at December 31,
1995................... -- -- -- -- -- --
Exercise of stock
options...............
Exercise of warrants...
Common stock issued
under employee stock
purchase plan.........
Issuance of common
stock through public
offering (net of
offering costs of
$4,148,056)...........
Tax benefit from
employer stock plans..
Net income.............
---------- ----------- ---------- ---------- ---------- -----------
Balance at December 31,
1996................... -- $ -- -- $ -- -- $ --
========== =========== ========== ========== ========== ===========
See accompanying notes.
F-6
COMMON SHAREHOLDERS' EQUITY (DEFICIT)
- ------------------------ --------------------------------------------------------
SERIES D COMMON STOCK ADDITIONAL
- ------------------------ ------------------- PAID-IN RETAINED EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (ACCUMULATED DEFICIT)
- ----------- ----------- ---------- ------- ------------ ---------------------
1,912,040 $ 3,537,276 1,151,976 $ 1,152 $ -- $ (16,104,474)
1,022,390 1,022 103,532
682,128 1,261,937
(103,532) (612,909)
241,731
- ----------- ----------- ---------- ------- ------------ -------------
2,594,168 4,799,213 2,174,366 2,174 -- (16,475,652)
313,276 313 48,636
(35,000) (35) (4,821)
6,167,449 (29,360) (34,505,584)
(6,167,449) 170,381 37,085,690
5,750,000 5,750 38,881,533
(2,594,168) (4,799,213) 15,448,274 15,449 15,872,214
1,895,015
- ----------- ----------- ---------- ------- ------------ -------------
-- -- 23,650,916 23,651 54,938,583 (12,000,531)
546,203 546 332,565
96,704 97
21,525 21 224,683
2,364,888 2,365 73,299,661
6,327,963
18,701,380
- ----------- ----------- ---------- ------- ------------ -------------
-- $ -- 26,680,236 $26,680 $135,123,455 $ 6,700,849
=========== =========== ========== ======= ============ =============
F-7
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
------------ ----------- ----------
OPERATING ACTIVITIES
Net income.............................. $ 18,701,380 $ 1,895,015 $ 241,731
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 375,720 185,157 55,368
Tax benefit related to the exercise of
non-statutory stock options and
disqualified dispositions of
incentive stock options.............. 6,327,963 -- --
Deferred tax assets................... (3,168,964) -- --
Provision for doubtful accounts....... 624,427 241,253 61,000
Provision for product returns......... 1,318,869 311,469 67,497
Changes in operating assets and
liabilities:
Accounts receivable................. (5,140,099) (1,425,755) (558,829)
Inventories......................... (502,313) (65,176) (90,161)
Prepaid expenses.................... (535,503) (130,003) (85,345)
Other assets........................ 59,941 (59,941) (361)
Interest on note receivable from
officer............................ 28,910 (8,090) (7,294)
Deferred revenue.................... 852,902 813,647 308,120
Accounts payable.................... 209,642 256,087 (49,042)
Accrued royalties and other accounts
payable to shareholder............. 1,002,609 165,077 356,440
Income taxes payable................ (93,100) 93,100 --
Other accrued expenses.............. 2,145,719 526,970 178,761
------------ ----------- ----------
Net cash provided by operating
activities............................. 22,208,103 2,798,810 477,885
INVESTING ACTIVITIES
Purchases of short-term investments..... (38,206,495) -- --
Purchases of property and equipment..... (2,155,284) (62,282) (87,827)
Proceeds from note receivable from
officer................................ 100,000 -- --
Proceeds from sale of property and
equipment.............................. -- -- 21,092
------------ ----------- ----------
Net cash used in investing activities... (40,261,779) (62,282) (66,735)
FINANCING ACTIVITIES
Net proceeds from issuance of common
stock.................................. 73,859,938 38,936,681 104,554
Repurchase of common stock previously
issued................................. -- (4,856) --
Net proceeds from issuance of preferred
stock.................................. -- -- 353,667
Proceeds from line of credit............ -- 600,000 25,000
Payment on line of credit............... -- (600,000) (25,000)
Payments on capital lease obligations... (142,704) (109,643) (22,727)
------------ ----------- ----------
Net cash provided by financing
activities............................. 73,717,234 38,822,182 435,494
------------ ----------- ----------
Increase in cash and cash equivalents... 55,663,558 41,558,710 846,644
Cash and cash equivalents at beginning
of year................................ 43,471,491 1,912,781 1,066,137
------------ ----------- ----------
Cash and cash equivalents at end of
year................................... $ 99,135,049 $43,471,491 $1,912,781
============ =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid interest of approximately $19,000, $36,000 and $13,000
during the years ended December 31, 1996, 1995 and 1994, respectively.
YEAR ENDED DECEMBER 31
-------------------------------------
1996 1995 1994
------------ ----------- ----------
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property and equipment acquired under
capital lease.......................... $ -- $ 211,338 $ 154,387
============ =========== ==========
Conversion of notes payable to Series D
redeemable convertible preferred
stock.................................. $ -- $ -- $ 908,270
============ =========== ==========
See accompanying notes.
F-8
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION
Citrix Systems, Inc. (the Company), a Delaware corporation, was founded on
April 17, 1989 for the purpose of designing, developing and selling personal
computer-based operating system software. Customers for the Company's products
span a broad range of industries. The Company markets its products through
multiple indirect channels such as distributors, value-added resellers and
original equipment manufacturers, primarily in the United States and in
Europe.
The Company has formed wholly-owned subsidiaries, primarily in Europe, for
the purpose of expanding its international presence.
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements of the Company include the accounts of
its five wholly-owned subsidiaries. All significant transactions between the
Company and its subsidiaries have been eliminated in consolidation.
Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, cash and cash
equivalents include marketable securities which are primarily government
securities, corporate notes, bonds and paper and money market funds consisting
of various instruments with contractual maturities of three months or less.
The Company minimizes its credit risk associated with cash and cash
equivalents by using high quality credit instruments.
Short-Term Investments
Short-term investments at December 31, 1996 primarily consist of various
government securities. The Company follows the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115). SFAS 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 average contractual maturity of the Company's short-term
investments does not exceed four months. Substantially all of the Company's
short-term investments had a contractual maturity of less than 12 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 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 finished goods, are stated at the lower
of cost (determined by the first-in, first-out method) or market.
F-9
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which is
approximately three years for computer equipment, software, office equipment
and furniture, and approximately five years for leasehold improvements. Assets
under capital lease are amortized over the shorter of the asset life or the
remaining lease term which is approximately 30 months. Amortization of assets
under capital lease is included in depreciation expense. Accumulated
amortization of computer equipment under capital leases approximated $280,000
and $135,000 at December 31, 1996 and 1995, respectively.
Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
(SOP) 91-1, "Software Revenue Recognition," issued by the American Institute
of Certified Public Accountants (AICPA).
Revenue from product sales is recognized upon product shipment only if no
significant Company obligations remain and collection of the resulting
receivable is deemed probable. Revenue from advance payments of license
revenue and fees from products licensed to original equipment manufacturers is
recognized when all significant obligations of performance under the terms of
the license agreement have been completed and any amounts received are no
longer refundable; in the event that advance payments are not received,
revenue is recognized when collectibility is reasonably assured. Revenue from
fees representing charges to third parties to incorporate the Company's
products into their systems, and fees for research and development services
integral to facilitating licensing arrangements are recognized as development
efforts are completed or contract milestones are achieved.
The Company provides most of its distributors and resellers with product
return rights for stock balancing and price protection rights. Stock balancing
rights permit distributors and resellers to return products to the Company for
credit within specified limits and subject to ordering an equal amount of the
Company's products. Price protection rights require that the Company grant
retroactive price adjustments for inventories of the Company's products held
by distributors or resellers if the Company lowers its prices for such
products. Allowances for product returns amounted to approximately $1,928,000
and $609,000 at December 31, 1996 and 1995, 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, 1996 and 1995.
Revenue from training programs and software maintenance, service and support
arrangements totaling $1,474,106, $591,368 and $283,365 for the years ended
December 31, 1996, 1995 and 1994, respectively, is recognized when the
services are provided. Such items are included in net revenue. The costs of
providing training and services are included in sales, marketing and support
expenses.
Royalty Expense
The Company is a party to licensing agreements with various entities which
require no minimum payment commitment and give the Company the right to use
certain software object code in the development of its products in exchange
for the payment of certain amounts based upon the sales of the related
products. The licensing agreements have terms ranging from one to five years,
and include renewal options. Royalty expense related to these agreements is
included in cost of goods sold.
F-10
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Advertising Expense
Effective January 1, 1995, the Company adopted SOP 93-7, "Reporting on
Advertising Costs," issued by the AICPA. Adoption of SOP 93-7 had no effect on
the consolidated financial statements.
The Company expenses advertising costs as incurred. The Company recognized
advertising expenses of $1,733,000, $576,000 and $300,000 during the years
ended December 31, 1996, 1995 and 1994, respectively. These amounts are
included in sales, marketing and support expenses. The Company did not incur
any direct response advertising cost, as defined by SOP 93-7, during 1996 and
1995.
Income Taxes
Deferred income tax assets and liabilities are determined based upon
differences between the financial statement and income tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Software Development Costs
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.
Risks and Uncertainties
The Company's operating results and financial condition have varied and may
in the future vary significantly depending on a number of factors. The
following factors may have a material adverse effect upon the Company's
business, results of operations and financial condition.
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 shareholder is the leading provider of desktop operating systems. The
Company is dependent upon the license of certain key technology from this
shareholder including certain source and object code licenses, technical
support and other materials. The Company is also dependent on its strategic
alliance agreement with this shareholder which provides for cooperation in the
development of technologies for advanced operating systems, and the promotion
of advanced application program interfaces.
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.
F-11
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
New Product Enhancements and Technical Changes
The market for the Company's products is relatively new and is characterized
by rapid technological change, evolving industry standards, changes in end-
user requirements and frequent new product introductions and enhancements,
including enhancements to certain key technology licensed from a shareholder.
The Company believes it will incur additional costs and royalties associated
with the development, licensing, or acquisition of new technologies or
enhancements to existing products which will increase the Company's cost of
good sold and operating expenses. The Company cannot currently quantify the
additional costs described above.
Recent Developments in Risks and Uncertainties
The Company and the aforementioned shareholder are currently negotiating the
cross-licensing of certain of their key technologies. On February 25, 1997,
this shareholder informed the Company that it intends to release a product
which the Company believes will include features contained in the Company's
existing product offerings. In the event that the shareholder determines to
develop the technology internally or to pursue alternative sources of the
technology, the Company believes that such determination will have a material
adverse effect on the Company's business, results of operations and financial
condition. Although the Company is pursuing negotiations with the shareholder
regarding the cross-license of such technologies, there are no assurances that
these negotiations will be successful. Additionally, as a result of these
discussions with the shareholder and if the Company is able to secure the
licensing of the shareholder's key technology, the Company believes that
royalties payable to the shareholder associated with such licensing will
increase from current levels. If the Company and the shareholder are unable to
agree upon the terms of such cross-licensing or, if the terms of such cross-
licensing are less favorable to the Company, the Company believes that such
outcome will have a material adverse effect on the Company's business and
results of operations and financial condition. The Company cannot currently
quantify the impact on its business results of operations and financial
condition.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," became effective January 1, 1996. The new standard
defines a fair value method of accounting for issuance of stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB Opinion 25) but would be required to disclose
in a note to the consolidated financial statements pro forma net income and
per share amounts as if the Company had applied the new method of accounting.
The Company applies APB Opinion 25 and Related Interpretations in Accounting
for its plans and has complied with the disclosure requirements of SFAS No.
123.
Net Income Per Share
Historical net income per share is calculated using the weighted average
number of common and common equivalent shares outstanding during the
respective periods. Pro forma net income per share is computed in the same
manner as historical net income per share adjusted to give effect to the
conversion of the Redeemable Convertible Preferred Stock (described in Note 7)
into an aggregate of 15,359,388 shares of Common Stock as though it occurred
at the beginning of 1994. Pursuant to the requirements of the Securities and
Exchange
F-12
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
Commission, common shares and common equivalent shares issued at prices below
the Company's initial public offering price during the 12 months immediately
preceding the date of the initial filing of the Registration Statement have
been included in the calculation of pro forma 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 in 1996 and 1995 and the modified
treasury stock method in 1994). All common share and per share data, except
par value per share, have been retroactively adjusted to reflect the two-for-
one stock split of the Company's Common Stock effective June 4, 1996 and the
two-for-three stock split of the Company's Common Stock effective December 7,
1995, which are further discussed in Note 15.
For 1994, the historical net loss per common share, which does not give
effect to the pro forma conversion of the Redeemable Convertible Preferred
Stock described above, is as follows (in thousands, except per share data):
Net income......................................................... $ 242
Less Redeemable Convertible Preferred Stock accretion (See Note
7)................................................................ (716)
------
Net loss attributable to common shares............................. $ (474)
======
Net loss per common and common equivalent share.................... $(0.16)
======
Weighted average shares outstanding................................ 3,041
======
Reclassifications
Certain reclassifications have been made for consistent presentation.
3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The summary of cash and cash equivalents and short-term investments consist
of the following:
DECEMBER 31
-----------------------
1996 1995
----------- -----------
Cash and cash equivalents:
Cash.............................................. $ 9,065,924 $ 3,112,537
Treasury bills.................................... -- 40,358,954
Commercial paper.................................. 3,997,100 --
Money market funds................................ 7,162,420 --
Certificates of deposit........................... 600,000 --
Government securities............................. 63,409,605 --
Corporate notes, bonds and paper.................. 14,900,000 --
----------- -----------
Cash and cash equivalents....................... $99,135,049 $43,471,491
=========== ===========
Short-term investments:
Commercial paper.................................. $ 3,461,450 $ --
Corporate notes, bonds and paper.................. 3,655,731 --
Government securities............................. 31,089,314 --
----------- -----------
Short-term investments.......................... $38,206,495 $ --
=========== ===========
The carrying value of each marketable security including cash and cash
equivalents and short-term investments approximate their fair value. The fair
values of cash and cash equivalents and short-term investments are based
primarily on quoted market prices for such financial instruments.
F-13
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
4. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
DECEMBER 31
---------------------
1996 1995
---------- ----------
Accrued employee benefits........................... $1,033,000 $ 624,950
Accrued sales commissions........................... 161,489 120,391
Accrued cooperative advertising..................... 1,190,762 226,528
Other............................................... 897,946 165,609
---------- ----------
$3,283,197 $1,137,478
========== ==========
5. NOTES PAYABLE
On February 26, 1993, all of the previously issued short-term bridge notes
were converted into the Company's Series D Redeemable Convertible Preferred
Stock, at a conversion price of $1.85 per share. On November 30, 1993, the
Company issued $908,270 of short-term bridge notes due on demand with interest
at 7%. On February 28, 1994, these notes were converted into Series D
Redeemable Convertible Preferred Stock at a conversion price of $1.85 per
share.
6. WORKING CAPITAL AND LEASE CREDIT LINES
The Company has a working capital credit line aggregating $2,000,000 at
December 31, 1996. Borrowings under this line of credit are payable on demand
and are limited to a percentage of eligible receivables. The Company is
required to pay the bank a commitment fee equal to .5% per annum of the daily
average unused portion of the line of credit. The interest rate on borrowings
is computed at the greater of the bank's prime rate plus 1.5% or the overnight
federal funds rate plus 2.0%. Borrowings under the line of credit are secured
by substantially all of the Company's assets and are subject to the Company
meeting certain performance and restrictive covenants, including the
requirement that all dividend payments must be approved by the bank. During
the years ended December 31, 1996 and 1995, the Company borrowed a total of $-
0- and $600,000, respectively, on the line of credit. No borrowings under this
arrangement were outstanding at December 31, 1996 and 1995. This arrangement
expires on February 28, 1997.
The Company has available a $500,000 lease credit facility. During the years
ended December 31, 1996, 1995 and 1994, the Company leased approximately $-0-,
$211,000 and $101,000, respectively, of computer equipment and software, under
the terms of this facility. The leases are collateralized by the related
equipment. These leases have been accounted for as capitalized lease
obligations and are for a term of 30 months. An average interest rate of 9.5%
is implicit in the leases.
Future minimum lease payments under all of the Company's capitalized lease
obligations are as follows:
1997........................................................... $ 87,172
1998........................................................... 8,396
--------
95,568
Imputed interest................................................. (4,917)
--------
Present value of obligations under capital leases for financial
reporting purposes.............................................. 90,651
Less current maturities.......................................... (82,434)
--------
Long-term capital lease obligations.............................. $ 8,217
========
The related computer equipment is included in property and equipment.
F-14
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND RELATED WARRANTS
The Company issued an aggregate of 682,128 shares of Series D Redeemable
Convertible Preferred Stock during 1994. These shares were sold at $1.85 per
share in exchange for the following:
Cash............................................................. $ 353,667
Conversion of short-term bridge notes............................ 908,270
----------
$1,261,937
==========
No shares of preferred stock were issued during 1996 or 1995. Prior to
October 1995, the carrying value of the Company's Redeemable Convertible
Preferred Stock (the Preferred Stock) was equal to the original issuance
proceeds from the various series plus periodic accretions to redemption value.
In October 1995, the terms of the Preferred Stock were amended to provide that
the redemption price be equal to the original purchase price of the Preferred
Stock plus any declared Preferred Stock dividends. As a result of this
amendment, the Company restored all previously accreted amounts.
On December 7, 1995, all outstanding preferred stock was converted into the
Company's Common Stock at a ratio of three shares of preferred stock for two
shares of Common Stock.
Dividends on all series of the Preferred Stock are determined solely by the
Board of Directors and are noncumulative. No dividends have been declared as
of December 31, 1996.
The Company has issued warrants to purchase 48,000 shares of Series B
Redeemable Convertible Preferred Stock at an exercise price of $1.25 per
share, warrants to purchase 27,586, 25,966 and 51,928 shares of Series C
Redeemable Convertible Preferred Stock at an exercise price of $1.45 per
share. The warrants expire on June 7, 1998, March 13, 2000, November 2, 1997
and January 25, 1998, respectively. Upon the consummation of the Company's
initial public offering and the automatic conversion of the Redeemable
Convertible Preferred Stock, the warrants became exercisable on a four-for-
three basis into the Company's Common Stock (adjusted to reflect the stock
splits discussed in Note 15) at an exercise price of $.94 per common share for
the Series B warrants and $1.09 per common share for the Series C warrants.
The exercise price of the outstanding warrants is subject to adjustment in the
event of recapitalizations, reorganizations, stock splits and combinations and
in the event of dilutive issuances of capital stock by the Company.
On December 7, 1995, 77,914 warrants to purchase Series C Redeemable
Convertible Preferred Stock were exercised, of which 77,604 warrants were
exercised on a net basis to obtain 68,350 shares of Preferred Stock. Upon the
automatic conversion of the Preferred Stock into Common Stock, the Company
issued 88,886 shares of Common Stock to the former warrant holders.
8. SHAREHOLDERS EQUITY
Stock Compensation Plans
As of December 31, 1996, the Company has four stock-based compensation
plans, which are described below. As mentioned in Note 2, the Company applies
APB Opinion 25 and Related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
plans and its stock purchase plan. Had compensation cost for the Company's
four stock-based compensation plans been determined based on the fair value at
the grant dates for grants under those plans consistent with the method of
SFAS No.
F-15
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
1996 1995
----------- ----------
Net income
As reported........................................ $18,701,380 $1,895,015
=========== ==========
Pro forma.......................................... $16,643,951 $1,895,015
=========== ==========
Historical earnings per share
As reported........................................ $ 0.68 $ 0.09
=========== ==========
Pro forma.......................................... $ 0.63 $ 0.09
=========== ==========
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 for
grants in 1996: (1) no dividend yield; (2) expected volatility factor of 0.8;
(3) risk free interest rates of approximately 5.5%; and (4) expected lives of
five years. Substantially all of the options granted during 1995 were granted
prior to the Company's initial public offering and as such, the fair value
attributable to such options pursuant to SFAS No. 123 was determined to be
minimal. Because the determination of the fair value of all options is based
on the assumptions described in the preceding paragraph and, because
additional option grants are expected to be made each year, the above pro-
forma disclosures are not representative of pro-forma effects on reported net
income or loss for future years.
Fixed Stock Options Plans
The Company's 1995 Stock Plan (the 1995 Plan) was adopted by the Board on
September 28, 1995 and approved by the Company's stockholders in October 1995.
The 1995 Plan provides for the issuance of a maximum of 6,000,000 shares of
Common Stock, plus, effective January 1, 1997 and each year thereafter, a
number of shares of Common Stock equal to 5% of the total number of shares of
Common Stock issued and outstanding as of December 31 of the preceding year,
up to a maximum of 10,000,000 shares. Under the terms of the 1995 Plan, the
Company is authorized to grant incentive stock options (ISOs) and nonqualified
stock options (NSOs), make stock awards, and provide the opportunity to
purchase stock to employees, directors and officers and consultants of the
Company. Under the 1995 Plan, ISOs may be granted at exercise prices no less
than market value at the date of grant, except for ISOs' granted to employees
who own more than 10% of the Company's combined voting power, for which the
exercise prices will be no less than 110% of the market value at the date of
grant. NSOs stock awards or stock purchases may be granted or authorized, as
applicable, at prices no less than the minimum legal consideration required.
ISOs and NSOs expire ten years from the date of grant. All options are
exercisable upon vesting. The options vest at a rate of 25.00% of the shares
underlying the option one year from the date of grant and at 2.08% monthly
thereafter.
The 1995 Non-Employee Director Stock Option Plan (the Director Option Plan)
was adopted by the Board of Directors on September 28, 1995 and approved by
the Company's stockholders in October 1995. The Director Option Plan provides
for the grant of options to purchase a maximum of 600,000 shares of Common
Stock of the Company to nonemployee directors of the Company.
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 30,000 shares of Common Stock. Options
granted under the Director Option Plan will vest as to 33.33% one year from
the date of grant and will vest as to an additional 2.78%
F-16
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
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 30,000 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 4,209,424 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. The Company does not intend to grant
options under the 1989 Plan in the foreseeable future.
A summary of the status and activity of the Company's three fixed stock
option plans is as follows:
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1996 1995 1994
------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ---------- --------
Outstanding at beginning
of year................ 2,298,484 $ 0.92 2,317,316 $0.28 2,429,334 $0.11
Granted............... 1,511,152 35.05 504,526 3.20 975,334 $0.51
Exercised............. (546,103) 0.61 (313,330) 0.16 (1,022,390) $0.10
Forfeited............. (33,495) 1.44 (210,028) 0.44 (64,962) $0.11
--------- --------- ----------
Outstanding at end of
year................... 3,230,038 2,298,484 0.92 2,317,316 $0.28
========= ========= ==========
Options exercisable at
end of year............ 1,696,388 2,298,484 2,317,316
========= ========= ==========
Weighted-average fair
value of options
granted during the
year................... $35.05 $3.20 $0.51
Information about fixed stock options outstanding as of December 31, 1996 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ---------------------------
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE EXERCISABLE
AT REMAINING WEIGHTED- AT WEIGHTED-
DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
RANGE OF EXERCISE PRICES 1996 LIFE EXERCISE PRICE 1996 EXERCISE PRICE
- ------------------------ ------------ ----------- -------------- ------------ --------------
$0.06 to $0.14.......... 867,980 5.75 $ 0.12 867,980 $0.12
$0.75 to $3.75.......... 820,908 8.21 $ 1.72 820,908 $1.72
$7.50 to $35.75......... 695,200 9.44 $30.12 7,500 $7.50
$37.50 to $44.00........ 845,950 9.73 $38.12 -- $ --
--------- ---- ------ --------- -----
3,230,038 8.21 $16.94 1,696,388 $0.93
========= =========
F-17
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
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 1,500,000 shares of Common Stock
pursuant to the exercise of nontransferable options granted to participating
employees. All employees of the Company, whose customary employment is 20
hours or more per week and more than 5 months in any calendar year and who
have completed at least 1 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 participants total cash
compensation) from his or her pay during six-month periods (each a Plan
Period), the first such period commenced upon the date of the Company's
initial public offering and to end on the last market trading day on or before
June 30, 1996. The maximum number of shares of Common Stock an employee may
purchase in any Plan Period is 1,000 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 employees rights under the 1995 Purchase Plan terminate upon
his or her voluntary withdrawal from the 1995 Purchase Plan at anytime or upon
termination of employment. Under the 1995 Purchase Plan, the Company issued
21,525 shares in 1996.
Common Stock
The Company has reserved for future issuance 6,531,225 shares of Common
Stock for the exercise of stock options outstanding or available for grant.
In December 1995, the Company issued 5,750,000 shares in connection with the
initial public offering of its Common Stock. In June 1996, the Company issued
an additional 2,364,888 shares in connection with the second public offering
of its common stock.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
$0.01 par value per share. The Company has no present plans to issue such
shares.
9. COMMITMENTS
The Company leases certain office space, equipment and software under
various noncancelable operating leases. Certain of these leases contain stated
escalation clauses while others contain renewal options.
Rental expense for the years ended December 31, 1996, 1995 and 1994 totaled
approximately $620,000, $327,000 and $416,000, respectively. Lease commitments
under these noncancelable operating leases for the years ended December 31 are
as follows:
1997............................................................. $ 610,466
1998............................................................. 713,306
1999............................................................. 758,828
2000............................................................. 774,002
2001............................................................. 607,082
----------
Total future minimum lease payments.............................. $3,463,684
==========
F-18
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
10. INCOME TAXES
Income tax expense consists of the following:
DECEMBER 31
-------------------------
1996 1995 1994
----------- ------- ----
Current federal................................. $ 5,867,621 $93,100 $--
Current state................................... 862,886 -- --
Deferred........................................ (3,169,000) -- --
----------- ------- ----
Total income tax expense...................... $ 3,561,507 $93,100 $--
=========== ======= ====
At December 31, 1996, the Company had research and development tax credits
of approximately $535,000 that expire in years 2005 through 2011. The Company
also had alternative minimum tax credit carryforwards of approximately
$72,000, which do not expire.
The significant components of the Company's deferred income taxes are
approximately as follows:
DECEMBER 31
----------------------
1996 1995
---------- -----------
Deferred tax assets:
Net operating loss carryforwards................. $ -- $ 3,400,000
Tax credits...................................... 607,000 589,000
Revenue deferred for book but not for tax purpos-
es.............................................. 809,000 464,000
Accounts receivable allowances................... 995,000 383,000
Other............................................ 758,000 236,000
---------- -----------
3,169,000 5,072,000
Less valuation allowance for deferred tax assets... -- (5,072,000)
---------- -----------
$3,169,000 $ --
========== ===========
The net change in the valuation allowance for the years ended December 31,
1996 and 1995 consisted of a decrease of $5,072,000 and $624,000,
respectively.
Due to the net operating loss carryforward, there is no provision for income
taxes for the year ended December 31, 1994. The differences between the
provision for income taxes and the amount which results from applying the
federal and state statutory tax rate of 39% in 1996 and 38% in 1995 and 1994,
to income (loss) before income taxes are as follows:
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994
----------- --------- --------
Federal and state income tax expense... $ 8,682,527 $ 755,484 $ 91,858
Change in valuation allowance.......... (5,072,000) (624,000) (36,262)
Other.................................. (49,020) (38,384) (55,596)
----------- --------- --------
$ 3,561,507 $ 93,100 $ --
=========== ========= ========
11. BENEFIT PLAN
The Company has a 401(k) benefit plan allowing an employee to contribute up
to a maximum of 15% of gross salary, limited to the maximum allowed by the
Internal Revenue Service. To date, the Company has made no contributions to
the Plan.
F-19
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
12. SIGNIFICANT CUSTOMERS
The Company had net revenue attributed to individual customers in excess of
10% of total net sales as follows:
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
Customer A.......................................... 22% 22% 27%
Customer B.......................................... 12% 6% 26%
13. RELATED PARTY TRANSACTIONS
An entity which held a greater than 5% interest in the Company at December
31, 1996 and 1995 is a party to one of the licensing agreements discussed in
Note 2. The Company recognized $3,461,000, $962,000 and $531,000 of royalty
expense in cost of sales and $-0-, $60,000 and $296,000 of offsetting royalty
credits in net revenue in the years ended December 31, 1996, 1995 and 1994,
respectively, and has accrued royalties and other accounts payable of
$1,524,000, $521,000 and $356,000 at December 31, 1996, 1995 and 1994,
respectively, in connection with this agreement.
During 1991 and 1992, the Company advanced an aggregate $100,000 to an
officer who is also a shareholder. This note is evidenced by a promissory note
and bears interest at 6.73% with principal and interest due in August 1996.
The note is secured by 106,667 shares of Common Stock of the Company. The
related accrued interest amounts to approximately $-0-, $29,000 and $21,000 at
December 31, 1996, 1995 and 1994, respectively. The principal and related
accrued interest on this note receivable were paid to the Company during 1996.
During 1993, the Company entered into a consulting agreement with a director
of the Company. The Company paid the director approximately $10,000 during the
years ended December 31, 1994, for management consulting services pursuant to
this agreement. At December 31, 1996 and 1995, no amounts were owed to the
director under this agreement.
14. INFORMATION RELATING TO EXPORT REVENUE
Export revenue representing shipments of finished goods and services
provided to international customers, by geographical area are as follows:
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994
---------- ---------- ----------
Europe...................................... $4,976,829 $1,678,454 $1,439,631
Pacific Rim................................. 1,342,155 637,912 552,909
Other....................................... 734,102 350,747 261,851
---------- ---------- ----------
$7,053,086 $2,667,113 $2,254,391
========== ========== ==========
15. STOCK SPLITS
In September 1995, the Board of Directors approved an increase in authorized
Common Stock from 16,750,000 shares, $0.001 par value per share to 30,000,000
shares, $0.001 par value per share. In October 1995, the Company declared a
two-for-three stock split effective December 7, 1995.
F-20
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1996
On May 17, 1996, the shareholders approved an increase in authorized Common
Stock from 30,000,000 shares, $0.001 par value per share to 60,000,000 shares,
$0.001 par value per share. On May 17, 1996, the Board of Directors declared a
two-for-one stock split in the form of a stock dividend to be paid on or about
June 4, 1996 to stockholders of record of the Company's Common Stock on May
28, 1996. 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 this stock split.
The accompanying consolidated financial statements have been retroactively
restated to reflect these stock splits.
16. LEGAL MATTERS
In March 1997, class action lawsuits were filed against the Company and
certain of its directors and officers. In their complaints, the plaintiffs
assert that the Company and certain of its directors and officers
misrepresented the Company's strategic relationship with a shareholder. The
outcome of these lawsuits cannot yet be determined. Accordingly, no provision
for any liability that may result from these matters has been recognized in
the accompanying consolidated financial statements. There can be no
assurances, however, that the outcome of these lawsuits will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
F-21
CITRIX SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- ---------- ---------- ----------
1996
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 399,459 $624,427 $ -- $ 399,682(2) $ 624,204
Allowance for re-
turns................ 608,966 -- 1,318,869(1) -- 1,927,835
Valuation allowance
for deferred tax
assets............... 5,072,000 -- -- 5,072,000(4) --
---------- -------- ---------- ---------- ----------
$6,080,425 $624,427 $1,318,869 $5,471,682 $2,552,039
========== ======== ========== ========== ==========
1995
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 164,983 $241,253 $ -- $ 6,777(2) $ 399,459
Allowance for re-
turns................ 297,497 -- 311,469(1) -- 608,966
Valuation allowance
for deferred tax
assets............... 5,694,801 -- -- 622,801(3) 5,072,000
---------- -------- ---------- ---------- ----------
$6,157,281 $241,253 $ 311,469 $ 629,578 $6,080,425
========== ======== ========== ========== ==========
1994
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ 395,000 $ 61,000 $ -- $ 291,017(2) $ 164,983
Allowance for re-
turns................ 230,000 -- 67,497(1) -- 297,497
Valuation allowance
for deferred tax
assets............... 5,731,063 -- -- 36,262(3) 5,694,801
---------- -------- ---------- ---------- ----------
$6,356,063 $ 61,000 $ 67,497 $ 327,279 $6,157,281
========== ======== ========== ========== ==========
- --------
(1) Netted against net revenues.
(2) Uncollectible accounts written off, net of recoveries.
(3) Netted against income tax expense.
(4) Recognition of deferred tax asset.
S-1
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN FORT
LAUDERDALE, FLORIDA ON THE 31ST DAY OF MARCH, 1997.
CITRIX SYSTEMS, INC.
/s/ Roger W. Roberts
By: _________________________________
ROGER W. ROBERTS PRESIDENT AND
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 31ST DAY OF MARCH,
1997.
SIGNATURE TITLE(S)
/s/ Edward E. Iacobucci Chairman of the Board of Directors
- -------------------------------------
EDWARD E. IACOBUCCI
/s/ Roger W. Roberts President, Chief Executive Officer and
- ------------------------------------- Director (Principal Executive Officer)
ROGER W. ROBERTS
/s/ James J. Felcyn, Jr. Vice President of Finance and
- ------------------------------------- Administration and Chief Financial
JAMES J. FELCYN, JR. Officer (Principal Financial Officer)
/s/ Marc-Andre Boisseau Controller (Principal Accounting
- ------------------------------------- Officer)
MARC-ANDRE BOISSEAU
/s/ Kevin R. Compton Director
- -------------------------------------
KEVIN R. COMPTON
/s/ Stephen M. Dow Director
- -------------------------------------
STEPHEN M. DOW
II-1
SIGNATURE TITLE(S)
/s/ Robert N. Goldman Director
- -------------------------------------
ROBERT N. GOLDMAN
Director
- -------------------------------------
GREGORY B. MAFFEI
/s/ Tyrone F. Pike Director
- -------------------------------------
TYRONE F. PIKE
II-2
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
3.1(1) Amended and Restated Certificate of Incorporation of the
Company
3.2(1) Amended and Restated By-laws of the Company
3.3(2) Certificate of Amendment of Amended and Restated
Certificate of Incorporation
4.1(1) Specimen certificate representing the Common Stock
10.1(1)* 1989 Stock Option Plan
10.2(1)* 1995 Stock Plan
10.3(1)* 1995 Non-Employee Director Stock Option Plan
10.4(1)* 1995 Employee Stock Purchase Plan, as amended
10.5(1) OEM Software License Agreement between the Company and
Digital Communications Associates, Inc. ("DCA"), dated as
of October 5, 1993
10.6(1) Memorandum of Agreement between the Company and DCA, dated
October 5, 1993
10.7(1) First Addendum to OEM Software License Agreement between
the Company and DCA, dated May 25, 1994
10.8(1) Amendment No. 1 to OEM Software License Agreement between
the Company and DCA dated March 23, 1995
10.9(1) Client/Server Software License Agreement between the
Company and Insignia Solutions Inc., dated August 4, 1995
10.10(1) Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.11(1) Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.12(1) License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15,
1990
10.13(1) Amendment No. 1 to the License Agreement between the
Company and Microsoft dated August 15, 1990, Contract No.
5198-0228 dated May 6, 1991
10.14(1) Amendment No. 2 to License Agreement between the Company
and Microsoft for Microsoft OS/2 Version Releases 1.x,
2.x, dated October 1, 1992
10.15(1) Amendment No. 3 to the License Agreement between the
Company and Microsoft dated August 15, 1990, Contract No.
5198-0228 dated January 1, 1994
10.16(1) Amendment No. 4 to the License Agreement between the
Company and Microsoft dated August 15, 1990, dated January
31, 1995
10.17(1) Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.18(1) Software Development and License Agreement between the
Company and Novell, Inc. ("Novell"), dated June 15, 1992
10.19(1) Software Development and License Agreement between the
Company and Novell, dated July 1, 1993
10.20(1) First Amendment to the Software Development and License
Agreement between the Company and Novell, dated March 7,
1995
10.21(1) NetWare Client License Agreement between the Company and
Novell, dated June 14, 1995
10.22(1) Software License Agreement between the Company and
Tektronix, Inc., dated September 23, 1994
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
10.23(1) Client Software License Agreement between the Company and
Wyse Technology dated June 15, 1995
10.24(1) Client/Server Software License Agreement between the
Company and Zenith Data Systems Corporation dated June 21,
1995
10.25(1) Form of Indemnification Agreement
10.26(2) Lease Agreement between Halmos Trading and Investment
Company and the Company dated June 6, 1996
10.27(3) License, Development and Marketing Agreement dated July 19,
1996 between the Company and Microsoft Corporation
11.1** Statement re computation of earnings per share
21.1** List of Subsidiaries
23.1** Consent of Ernst & Young LLP
24.1** Power of Attorney (Included in signature page)
27.1** Financial Data Schedule
- --------
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(2) Incorporated herein by reference to Exhibit 10 of the Company's
Registration Statement on Form S-1 (File No. 333-4515), as amended.
(3) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
report on Form 10-Q for the quarter ended September 30, 1996.
* Indicates a management contract or any compensatory plan, contract or
arrangement.
** Filed herewith.