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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C536 . 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________.
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2275152
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6400 N. W. 6TH WAY
FORT LAUDERDALE, FLORIDA
(Address of principal executive offices) 33309
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000
210 University Drive, Suite 700 - Coral Springs, FL 33071
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No ___
---
As of May 1, 1997 there were 27,112,051 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
Total Number of Pages: 20
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1
CITRIX SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
CONTENTS
Page Number
-----------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations:
Three Months ended March 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
Exhibit 11 19
Exhibit 27 20
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, DECEMBER 31,
1997 1996
------------------------------
ASSETS
Current assets:
Cash and cash equivalents $110,445,354 $ 99,135,049
Short-term investments 37,706,740 38,206,495
Accounts receivable, net of allowances of $2,742,384 and
$2,552,039 at March 31, 1997 and December 31, 1996, respectively 6,651,800 5,525,315
Inventories 755,057 696,336
Prepaid expenses 427,031 765,818
Deferred tax assets 3,514,344 3,168,964
-----------------------------
Total current assets 159,500,326 147,497,977
Property and equipment, net 3,515,056 2,081,559
-----------------------------
$163,015,382 $149,579,536
=============================
Continued on following page.
3
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
MARCH 31, DECEMBER 31,
1997 1996
-----------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 678,092 $ 755,908
Accrued royalties and other accounts payable to stockholder 1,997,148 1,524,126
Other accrued expenses 4,353,253 3,283,197
Deferred revenue 2,328,921 2,074,670
Current portion of capital lease obligations payable 62,721 82,434
Income taxes payable 3,103,615 -
-----------------------------
Total current liabilities 12,523,750 7,720,335
Long-term portion of capital lease obligations payable 2,890 8,217
-----------------------------
Total liabilities 12,526,640 7,728,552
Contingencies
Stockholders' equity:
Preferred stock at $.01 par value--5,000,000 shares authorized, none issued and outstanding
at March 31, 1997 and December 31, 1996 - -
Common stock at $.001 par value--60,000,000 shares authorized; and 27,109,328 and
26,680,236 issued and outstanding at March 31, 1997 and December 31,
1996, respectively 27,109 26,680
Additional paid-in capital 136,268,030 135,123,455
Retained earnings 14,193,603 6,700,849
-----------------------------
Total stockholders' equity 150,488,742 141,850,984
-----------------------------
$163,015,382 $149,579,536
=============================
See accompanying notes.
4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1997 1996
----------------------------------
Net revenues $21,520,606 $ 7,771,663
Cost of goods sold 2,193,831 979,943
----------------------------------
Gross margin 19,326,775 6,791,720
Operating expenses:
Research and development 1,513,230 903,829
Sales, marketing and support 6,198,068 2,486,911
General and administrative 1,482,665 860,726
----------------------------------
Total operating expenses 9,193,963 4,251,466
----------------------------------
Income from operations 10,132,812 2,540,254
Interest income, net 1,574,616 561,325
----------------------------------
Net income before income taxes 11,707,428 3,101,579
Income taxes 4,214,674 248,146
----------------------------------
Net income $ 7,492,754 $ 2,853,433
==================================
Net income per share $0.26 $0.11
==================================
Weighted average shares outstanding 28,409,242 25,954,440
==================================
See accompanying notes.
5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1997 1996
-----------------------------
OPERATING ACTIVITIES
Net income $ 7,492,754 $ 2,853,433
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 257,630 57,907
Provision for doubtful accounts 223,998 222,393
Tax benefit related to the exercise of non-statutory stock options and disqualified dispositions
of incentive stock options 913,511 -
Deferred tax assets (345,380) -
Changes in operating assets and liabilities:
Accounts receivable (1,350,483) (1,423,404)
Inventories (58,721) (132,214)
Prepaid expenses 338,787 (56,144)
Other assets - (188,205)
Accounts payable (77,817) 46,341
Accrued royalties and other accounts payable to stockholder 473,022 162,788
Other accrued expenses 1,070,056 513,956
Deferred revenue 254,251 526,102
Income taxes payable 3,103,615 401,292
----------------------------
Net cash provided by operating activities 12,295,223 2,984,245
INVESTING ACTIVITIES
Purchases of short-term investments (11,100,245) -
Proceeds from sale of short-term investments 11,600,000 -
Purchases of property and equipment (1,691,126) (21,911)
-----------------------------
Net cash used in investing activities (1,191,371) (21,911)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 231,493 62,063
Payments on capital lease obligations payable (25,040) (19,534)
-----------------------------
Net cash provided by financing activities 206,453 42,529
-----------------------------
Increase in cash and cash equivalents 11,310,305 3,004,863
Cash and cash equivalents at beginning of period 99,135,049 43,471,491
-----------------------------
Cash and cash equivalents at end of period $110,445,354 $46,476,354
=============================
See accompanying notes.
6
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
adjustments which, in the opinion of management, are considered necessary for a
fair presentation of the results of operations for the periods shown are of a
normal recurring nature and have been reflected in the unaudited condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the full
fiscal year or for any future period. The information included in these
unaudited condensed consolidated financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements and
accompanying notes included in the Citrix Systems, Inc. ("the Company") Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated financial statements
and accompanying notes. While the Company believes that such estimates are fair
when considered in conjunction with the condensed consolidated financial
position and results of operations taken as a whole, the actual amount of such
estimates, when known, may vary from these estimates.
3. 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. Common and common equivalent shares include dilutive common stock
equivalents which consist of warrants and stock options calculated using the
treasury stock method. All common share and per share data have been
retroactively adjusted to reflect the two-for-one stock split in the form of a
stock dividend of the Company's Common Stock effective June 4, 1996.
4. INCOME TAXES
The income taxes recorded in the three months ended March 31, 1997 and 1996 were
computed based upon the Company's estimated annual effective tax rate for the
fiscal years ended December 31, 1997 and 1996, giving effect in 1996 to the
utilization of substantially all of the Company's income tax net operating loss
carryforwards and tax credit carryforwards from prior periods.
5. LEGAL MATTERS
In March and April 1997, three different 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
7
misrepresented the Company's strategic relationship with a stockholder. 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.
6. RECENT DEVELOPMENTS IN RISKS AND UNCERTAINTIES
During negotiations regarding cross licensing of certain of the Company's
technology a stockholder informed the Company on February 25, 1997, that it
intended to release a product which would include certain features contained in
the Company's existing product offerings. This stockholder also indicated that
it planned to obtain the technology related to these features either by
development internally, from the Company or from a third party. These
negotiations continued until May 9, 1997, when the Company and this stockholder
entered into a License, Development and Marketing Agreement (the "Hydrix
Development Agreement") pursuant to which the Company and the stockholder agreed
that the stockholder will license the Company's technology and the Company will
license certain of this stockholder's technology and the companies will engage
in a joint development effort to develop Hydrix 4.x and Hydrix 5.x, new multi-
user enabled versions of Windows NT. The Hydrix Development Agreement provides
for the licensing to the stockholder of certain Citrix multi-user software
enhancements to the stockholder's Windows NT Server and for the cooperation
between the parties to develop their own Hydrix "plug-ins", which implement full
multi-user systems. Under the terms of the Hydrix Development Agreement, Citrix
will receive within 30 days of the effective date a payment of an aggregate of
$75,000,000 as a non-refundable royalty payment and for engineering and support
services to be rendered by Citrix, and throughout the term of the Hydrix
Development Agreement will be eligible to receive royalty payments of up to an
additional $100,000,000 based on the stockholder's release of Hydrix 4.x and
Hydrix 5.x products. In addition, the stockholder and Citrix have agreed to
engage in certain joint marketing efforts to promote use of Windows NT Server-
based multi-user software and Citrix's ICA(R) protocol. Further, Citrix shall
be entitled to license versions of its WinFrame technology based on Windows NT
v.3.51 until September 30, 2001.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports innovative client and
application server software that enables effective and efficient deployment of
enterprise applications that are designed for Windows operating systems. The
Company was incorporated in April 1989, and shipped its initial products in
1991.
From its introduction in the second quarter of 1993 through the second quarter
of 1995, the Company's WinView product represented the largest source of the
Company's revenues. The Company began shipping its current principal product
WinFrame in final form in the third quarter of 1995 and since then it has been
the largest source of the Company's revenue.
The Company anticipates that the WinFrame product line will constitute a
majority of its revenues for the foreseeable future. The Company anticipates
that revenues from the WinView product will continue to decline over time as the
Company's distribution channels and customer base transition to WinFrame
products. Revenues from WinFrame and WinView products result primarily from
license fees for "shrink wrapped" product sold to distributors and resellers.
The Company also derives revenue from initial license fees and associated
quarterly royalties from original equipment manufacturers ("OEMs"), non-
recurring engineering fees and training, consulting and service revenue.
Product revenues are recognized upon shipment only if no significant Company
obligations remain and collection of the resulting receivable is deemed
probable. In the case of non-cancelable product licensing arrangements under
which certain OEMs have software reproduction rights, recognition of revenue
also requires delivery and customer acceptance of the product master or first
copy. Product returns and sales allowances, including stock rotations, are
estimated and provided for at the time of sale. Non-recurring engineering fees
are recognized ratably as the work is performed. Revenues from training and
consulting are recognized when the services are performed. Service revenues from
customer maintenance fees for ongoing customer support and product updates are
recognized ratably over the term of the contract, which is typically twelve
months. Service revenues, which are immaterial when compared to net revenues,
are included in net revenues on the face of the income statement.
During negotiations regarding cross licensing of certain of the Company's
technology Microsoft Corporation ("Microsoft") informed the Company on February
25, 1997, that it intended to release a product which would include certain
features contained in the Company's existing product offerings. Microsoft also
indicated that it planned to obtain the technology related to these features
either by development internally, from the Company or from a third party. These
negotiations continued until May 9, 1997, when the Company and Microsoft entered
into a License, Development and Marketing Agreement pursuant to which the
Company and Microsoft agreed that Microsoft will license the Company's
technology and the Company will license certain of Microsoft's technology and
the companies will engage in a joint development effort to develop Hydrix 4.x
and Hydrix 5.x, a Microsoft Windows NT-based product providing for multi-user
functionality. The Hydrix Development Agreement provides for the licensing to
Microsoft of certain Citrix multi-user software enhancements to Microsoft's
Windows NT Server and for the cooperation between the parties for the
development of certain enhancements or "plug-ins" for Hydrix 4.x and Hydrix 5.x.
Such enhancements or "plug-ins" will provide access to the Hydrix base platform
from a wide variety of computing devices. Under the terms of the Hydrix
Development Agreement, Citrix will receive within 30 days of the effective date
a payment of an aggregate of $75,000,000 as a non-refundable royalty payment and
for engineering and support services to be rendered by Citrix, and throughout
the term of the Hydrix Development Agreement will be eligible to receive royalty
payments of up to an additional $100,000,000 based on Microsoft's release of
Hydrix 4.x and Hydrix 5.x products. In addition, Microsoft and Citrix have
agreed to engage in certain joint marketing efforts to promote use of Windows NT
Server-based multi-user software and Citrix's ICA protocol. Additionally, for a
period of at least two and one-half years, Microsoft has agreed to endorse only
Citrix's ICA protocol as the preferred way to provide multi-user Windows access
for devices other than Windows clients. While Microsoft will sell future
versions of the Windows NT Server that include multi-user capability, Citrix
will market its ICA-based WinFrame thin-client/server that will run on the new
platform. Further, Citrix shall be entitled to license versions of its WinFrame
technology based on Windows NT v.3.51 until September 30, 2001.
9
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.
THREE MONTHS ENDED 1997
MARCH 31, COMPARED TO
---------------------------
1997 1996 1996
------------------------------------------------
Net revenues............................... 100.0% 100.0% 176.9%
Cost of goods sold......................... 10.2 12.6 123.9
----- ----- -----
Gross margin............................... 89.8 87.4 184.6
----- ----- -----
Operating expenses:
Research and development.................. 7.0 11.6 67.4
Sales, marketing and support.............. 28.8 32.0 149.2
General and administrative................ 6.9 11.1 72.3
----- ----- -----
Total operating expenses................ 42.7 54.7 116.3
----- ----- -----
Income from operations..................... 47.1 32.7 298.9
Other income, net.......................... 7.3 7.2 180.5
----- ----- -----
Income before income taxes................ 54.4 39.9 277.5
Income taxes............................... 19.6 3.2 *
----- ----- -----
Net income................................. 34.8% 36.7% 162.6%
===== ===== =====
* Not meaningful.
The discussion below relating to the individual financial statement captions,
the Company's overall financing performance, operations and financial position
should be read in conjunction with the factors and events described in
"-Overview" and in "-Certain Factors Which May Effect Future Results" which, it
is anticipated, will impact the Company's future performance and financial
position.
Net Revenues. Net revenues were approximately $21.5 million and $7.8 million
for the three months ended March 31, 1997 and 1996, respectively, representing
an increase of 176.9%. The increase in net revenues was primarily attributable
to an increase in volume of shipments of the Company's WinFrame products
including revenue attributable to a major end user customer and, to a lesser
extent, increased volume in licensing of OEM products. The increase in net
revenues was partially offset by a decline in the shipments of the Company's
WinView products.
WinFrame and OEM revenues approximated 66.7% and 27.7% of revenues,
respectively, in the three months ended March 31, 1997. Both the Company's
WinFrame and OEM revenues represent product license fees based upon the
Company's multi-user NT-based technology.
Cost of Goods Sold. Cost of goods sold consists primarily of the cost of
royalties, product media and duplication, manuals, packaging materials and
shipping expense. Cost of OEM revenues included in cost of goods sold primarily
consists of cost of royalties, except where the OEM elects to purchase shrink
wrapped products in which case such costs are as described above. Costs
associated with non-recurring engineering fees are included in research and
development expenses and are not separately identifiable. All development costs
included in the research and development of software products and enhancements
to existing products have been expensed as incurred. Consequently, there is no
amortization of capitalized research and development costs included in cost of
goods sold.
Gross Margin. Gross margin increased from 87.4% in the first quarter of
fiscal 1996 to 89.8% in the first quarter of fiscal 1997. The increase in gross
margin was primarily attributable to changes in product mix, representing
changes in the mix of OEM revenues versus product sold to distributors and
resellers, and different products within the WinFrame product line.
Research and Development Expenses. Research and development expenses were
approximately $1.5 million and $900,000 for the three months ended March 31,
1997 and 1996, respectively. Increases in research and development expenses in
the first quarter of 1997 compared to the first quarter of 1996 resulted
primarily from additional staffing, associated salaries and related expenses
required to expand and enhance the Company's product lines.
Sales, Marketing and Support Expenses. Sales, marketing and support expenses
approximated $6.2 million and $2.5 million for the three months ended March 31,
1997 and 1996, respectively. The increase resulted primarily from increases in
promotional activities, such as distributor programs, advertising literature
production and distribution, and trade shows. Sales, Marketing and Support
staff and associated salaries and related expenses as well as commissions also
increased, resulting from efforts to expand the Company's distribution channels.
10
General and Administrative Expenses. General and administrative expenses were
approximately $1.5 million and $860,000 for the three months ended March 31,
1997 and 1996, respectively. The increase in general and administrative
expenses is primarily due to expenditures associated with being a public company
such as increased legal fees and associated regulatory filings and expenses as
well as expenses associated with investor relations, and increased staff,
associated salaries and related expenses necessary to support overall increases
in the scope of the Company's operations.
Interest Income, Net. Interest income, net, amounted to approximately $1.6
million and $560,000 for the three months ended March 31, 1997 and 1996,
respectively. The increase is primarily due to interest income generated from
the net proceeds of the Company's second public offering completed in June 1996.
Income Taxes. The Company's effective tax rate amounted to 36% and 8% for the
three months ended March 31, 1997 and 1996, respectively. The increase in
estimated effective annual tax rate is primarily due to the Company's increased
profitability and lack of net operating loss carryforwards to offset taxable
income in the current year. Such net operating loss carryforwards were included
in the computation of the effective tax rate utilized in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The discussion below relating to the individual financial statement captions,
the Company's overall financing performance, operations and financial position
should be read in conjunction with the factors and events described in
"-Overview" and in "-Certain Factors Which May Effect Future Results" which, it
is anticipated, will impact the Company's future performance and financial
position.
During the three months ended March 31, 1997, the Company generated positive
operating cash flows primarily from increased profitability. In addition, the
increases in income taxes payable and other accrued expenses, which were
partially offset by an increase in accounts receivable, also contributed to the
Company's positive operating cash flows. During the same period, the Company
recognized tax benefits from the exercise of non-statutory stock options and
disqualifying dispositions of incentive stock options of approximately $914,000.
The Company also generated positive operating cash flows in the three months
ended March 31, 1996, primarily due to increased profitability during that
period.
The Company utilized approximately $1.7 million during the three months ended
March 31, 1997 for purchases of leasehold improvements and equipment. Most of
these capital expenditures were associated with the Company's relocation and
expansion in its new facilities.
At March 31, 1997, the Company had approximately $110.4 million in cash and
cash equivalents, $37.7 million in short-term investments and $147.0 million of
working capital. The Company's cash and cash equivalents and short-term
investments are invested in investment grade, interest bearing securities to
minimize interest rate risk and allow for flexibility in the event of immediate
cash needs. On such date, the Company had approximately $6.7 million in
accounts receivable, net of allowances, and $2.3 million of deferred revenues,
most of which the Company anticipates will be earned over the next twelve
months.
The Company believes existing cash and cash equivalents and short-term
investments, will be sufficient to meet operating and capital expenditures
requirements for at least the next twelve months.
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.
Reliance Upon Strategic Relationship with Microsoft. Microsoft Corporation
("Microsoft") is the leading provider of desktop operating systems. The Company
is dependent upon the license of certain key technology from Microsoft,
including certain source and object code licenses, technical support and other
materials. The Company is also dependent on its strategic alliance agreement
with Microsoft which provides for cooperation in the development of
technologies for advanced operating systems, and the promotion of advanced
Windows application program interfaces. During negotiations regarding cross
licensing of certain of the Company's technology Microsoft informed the Company
on February 25, 1997, that it intended to release a product which would include
certain features contained in the Company's existing product offerings.
Microsoft also indicated that
11
it planned to obtain the technology related to these features either by
development internally, from the Company or from a third party. These
negotiations have continued until May 9, 1997, when the Company and Microsoft
entered into the Hydrix Development Agreement pursuant to which the Company and
Microsoft agreed that Microsoft will license the Company's technology and the
Company will license certain of Microsoft's technology and will engage in a
joint development effort to develop Hydrix 4.x and Hydrix 5.x, a Microsoft
Windows NT-based product providing for multi-user functionality. The Hydrix
Development Agreement provides for the licensing to Microsoft of certain Citrix
multi-user software enhancements to Microsoft's Windows NT Server and for the
cooperation between the parties for the development of certain enhancements or
"plug-ins" for Hydrix 4.x and Hydrix 5.x.
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 Independent Computing Architecture ("ICA") protocol a de
facto standard for supporting distributed Windows applications, thereby creating
demand for its server products.
Dependence Upon Strategic Relationships. In addition to its relationship with
Microsoft, the Company has relationships with a number of strategic partners.
The Company is dependent on its strategic partners to successfully incorporate
the Company's technology into their products and to successfully market and sell
such products.
Competition. The markets in which the Company competes are intensely
competitive. Most of the competitors and potential competitors, including
Microsoft, have significantly greater financial, technical, sales and marketing
and other resources than the Company. The Company and Microsoft recently agreed
to work together to develop Hydrix 4.x and Hydrix 5.x, a Microsoft Windows NT-
based product providing multi-user capability. The resulting Hydrix base
platform will allow Microsoft to create plug-in products that could become
competitive with at least some of the Company's current WinFrame products and
future Hydrix-related plug-in product offerings. To the extent Microsoft or
another competitor or potential competitor releases such competitive products,
the Company's net revenues, cash flows from operating activities and financial
condition may decrease.
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 WinFrame, one of its
product technologies, future derivative products and product lines based upon
this technology, if any, will constitute a majority of its revenue for the
foreseeable future. Additionally,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. Additionally, the Company anticipates
that WinView revenues will continue to decline as a percentage of the Company's
net revenues in future periods.
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 the current year 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 the current year. 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
12
facilities will not significantly impact its financial position or results of
operations, the Company anticipates that operating expenses will increase during
the current year 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 the current year.
Dependence on Key Personnel. The Company's success will depend, in large part,
upon the services of a number of key employees. The effective management of the
Company's anticipated growth will depend, in large part, upon the Company's
ability to retain its highly skilled technical, managerial and marketing
personnel as well as its ability to attract and maintain replacements for and
additions to such personnel in the future.
New Products and Technological Change. The markets for the Company's products
are relatively new and are characterized by rapid technological change, evolving
industry standards, changes in end-user requirements and frequent new product
introductions and enhancements, including enhancements to certain key technology
licensed from Microsoft. The Company believes it will incur additional costs and
royalties associated with the development, licensing, or acquisition of new
technologies or enhancements to existing products which will increase the
Company's cost of goods sold and operating expenses. 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. On May 9, 1997, the Company and Microsoft agreed
that Microsoft will license the Company's technology and the Company will
license certain of Microsoft's technology and the companies will engage in a
joint development effort to develop Hydrix 4.x and Hydrix 5.x, a Microsoft
Windows NT-based product providing for multi-user functionality. The Hydrix
Development Agreement provides for the licensing to Microsoft of certain Citrix
multi-user software enhancements to Microsoft's Windows NT Server and for the
cooperation between the parties for the development of certain enhancements or
"plug-ins" for Hydrix 4.x and Hydrix 5.x. While Microsoft will sell future
versions of the Windows NT Server that include multi-user capability, Citrix
will market its ICA-based WinFrame thin-client/server that will run on the new
platform. Further, Citrix shall be entitled to license versions of its WinFrame
technology based on Windows NT v.3.51 until September 30, 2001. The Company
cannot currently quantify the potential impact that Hydrix 4.x, Hydrix 5.x or
any other product will have 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 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.
13
Product Returns and Price Reductions. The Company provides most of its
distributors and resellers with product return rights for stock balancing or
limited product evaluation. The Company also provides most of its distributors
and resellers with price protection rights. The Company has established
reserves for each of these circumstances where appropriate, based on historical
trends and evaluation of current circumstances.
International Operations. The Company's continued growth and profitability
will require expansion of its international operations. To successfully expand
international sales, the Company will need to establish additional foreign
operations, hire additional personnel and recruit additional international
resellers. Such international operations are subject to certain risks, such as
difficulties in staffing and managing foreign operations, dependence on
independent relicensors, fluctuations in foreign currency exchange rates,
compliance with foreign regulatory and market requirements, variability of
foreign economic conditions and changing restrictions imposed by regulatory
requirements, tariffs or other trade barriers or by United States export laws,
costs of localizing products and marketing such products in foreign countries,
longer accounts receivable payment cycles, potentially adverse tax consequences,
including restrictions on repatriation of earnings and the burdens of complying
with a wide variety of foreign laws.
Fluctuations in Economic and Market Conditions. The demand for the Company's
products depends in part upon the general demand for computer hardware and
software, which fluctuates based on numerous factors, including capital spending
levels and general economic conditions.
Effective Income Tax Rate. During 1996, the Company 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 the current year.
Pending Litigation. Three purported class action stockholder suits have been
filed against the Company and certain of its directors and officers relating
principally to certain statements made by the Company, or certain of its
representatives, concerning the status of the Company's relationship with
Microsoft. The lawsuits are in their early stages, and no estimate of possible
loss, if any, can currently be made. There can be no assurance that these
lawsuits will ultimately be resolved on terms that are favorable to the Company
and that the resolution of these lawsuits will not have a material adverse
effect on the Company's business, results of operations and financial condition.
Growth Rate. The Company's revenue growth rate in the current year 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 cost of goods sold and certain operating expenses will increase in the
current year. Due to the fixed nature of a significant portion of such
expenses, together with the possibility of slower revenue growth, the Company's
income from operations and cash flows from operating and investing activities
may decrease in the current year.
Recent Developments in the Company's Relationship with Microsoft. On May 9,
1997, the Company and Microsoft entered into a License, Development and
Marketing Agreement (the "Hydrix Development Agreement") pursuant to which the
Company and Microsoft agreed that Microsoft will license the Company's
technology and the Company the companies will license certain of Microsoft's
technology and will engage in a joint development effort to develop Hydrix 4.x
and Hydrix 5.x, a Microsoft Windows NT-based product providing for multi-user
functionality. The Hydrix Development Agreement provides for the licensing to
Microsoft of certain Citrix multi-user software enhancements to Microsoft's
Windows NT Server and for the cooperation between the parties for the
development of certain enhancements or "plug-ins" for Hydrix 4.x and Hydrix 5.x.
Under the terms of the Hydrix Agreement, Citrix will receive within thirty days
of the effective date a payment of an aggregate of $75,000,000 as a non-
refundable royalty payment and for engineering and support services to be
rendered by Citrix, and throughout the term of the Hydrix Development Agreement
will be eligible to receive royalty payments of up to an additional $100,000,000
based on Microsoft's release of Hydrix 4.x and Hydrix 5.x products. In addition,
Microsoft and Citrix have agreed to engage in certain joint marketing efforts to
promote use of Windows NT Server-based multi-user software and Citrix's ICA
protocol. Additionally, for a period of at least two and one-half years,
Microsoft has agreed to endorse only Citrix's ICA as the preferred way to
provide multi-user Windows access for devices other than Windows clients. While
Microsoft will sell future versions of the Windows NT Server that include multi-
user capability, Citrix will market its ICA-based WinFrame thin-client/server
that will run on the new platform. Further, Citrix shall be entitled to license
versions of its WinFrame technology based on Windows NT v.3.51 until September
30, 2001. The Company cannot currently quantify the potential impact on its
business, results of operations and financial condition.
14
The Company believes that the impact of the Agreement described above will
affect the Company's business, results of operations and financial position as
follows:
Net Revenues. The Company believes revenues derived from the above
described license fees, development efforts, support and other obligations
will have a positive effect on the Company's future revenues to the extent
that they are additional to those the Company currently derives from sales,
licensing and support of its existing products. To the extent the Company
is unable to add additional staff and resources in its development efforts,
future enhancement and additional features to its existing products may be
delayed which may a material adverse effect on its net revenues, cash flows
from operating activities and financial position.
Cost of Goods Sold and Operating Expenses. Cost of goods sold, together
with operating expenses, may be impacted as a result of the Hydrix Development
Agreement described above. The Company may hire additional development,
marketing and support staff to the extent they are needed in order to fulfill
the Company's responsibilities under the terms of the Agreement. Further,
additional general and administrative expenses may be incurred in order to
support the overall increases in the scope of the Company's operations as a
result of the Agreement. However, the Company cannot currently quantify the
impact, if any, on these expenses.
Interest Income. The initial payment described above is expected to add
substantially to the Company's cash and short-term investments. To the extent
the Company is able to effectively invest these funds in interest bearing
securities and such funds are not alternatively utilized, interest income will
increase.
Liquidity and Capital Resources. The initial payments, as described above,
will add substantially to the balances of the Company's cash and short-term
investments and have a positive impact on cash flows from operating activities
and financial condition, to the extent that such funds are not alternatively
utilized.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have in the past varied and may in the future vary
significantly depending on factors such as the success of the Company's WinFrame
products, the size, timing and recognition of revenue from significant orders,
increased competition, the proportion of revenues derived from distributors,
OEMs and other channels, changes in the Company's pricing policies or those of
its competitors, the financial stability of major customers, new product
introductions or enhancements by competitors and partners, delays in the
introduction of products or product enhancements by the Company or by
competitors and partners, customer order deferrals in anticipation of upgrades
and new products, market acceptance of new products, the timing and nature of
sales and marketing expenses (such as trade shows and other promotions), other
changes in operating expenses, personnel changes (including the addition of
personnel), foreign currency exchange rates and general economic conditions.
The Company operates with little order backlog because its software products
typically are shipped shortly after orders are received. In addition, like many
systems level software companies, the Company has often recognized a substantial
portion of its revenues in the last month of a quarter with these revenues
frequently concentrated in the last weeks or days of the quarter. As a result,
the product revenues in any quarter are substantially dependent on orders booked
and shipped in that quarter, and revenues for any future quarter are not
predictable with any degree of certainty. Any significant deferral of purchases
of the Company's products could have a material adverse effect on the Company's
business, results of operations and financial condition in any particular
quarter, and to the extent significant sales occur earlier than expected,
operating results for subsequent quarters may be adversely affected. Royalty
and license revenues are impacted by fluctuations in OEM licensing activity and
certain end user licensing and deployment activity from quarter to quarter
because initial license fees generally are recognized upon customer acceptance
and continuing royalty and license revenues are recognized when the amount of
such licensing activity can be reasonably determined. The Company's expense
levels are based, in part, on its expectations as to future orders and sales,
and the Company may be unable to adjust spending in a timely manner to
compensate for any sales shortfall. If sales are below expectations, operating
results are likely to be adversely affected. Net income may be
disproportionately affected by a reduction in sales because a significant
portion of the Company's expenses do not vary with revenues. The Company may
also choose to reduce prices or increase spending in response to competition or
to pursue new market opportunities. In particular, if new competitors,
technological advances by existing competitors or other competitive factors
require the Company to invest significantly greater resources in research and
development efforts, the Company's operating margins in the future may be
adversely affected.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Due to all of
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
15
PART II: OTHER INFORMATION
Item 1. 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 and 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, 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.
On April 9, 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,
James J. Felcyn, Jr., Edward E. Iacobucci, Bruce C. Chittenden,
Kevin R. Compton, and Gregory B. Maffei. 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
October 21, 1996 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 condensed 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits which are filed with the report as set forth on
the Exhibit Index appearing on Page 18 of this report and are
incorporated herein by this reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period
ended March 31, 1997.
16
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITRIX SYSTEMS, INC.
/s/ ROGER W. ROBERTS
-------------------------------------------
Roger W. Roberts
President, Chief Executive Officer
and Secretary
(Principal Executive Officer)
/s/ JAMES J. FELCYN, JR.
-------------------------------------------
James J. Felcyn, Jr.
Vice-President of Finance and
Administration and Chief Financial Officer
(Principal Financial Officer)
/s/ MARC-ANDRE BOISSEAU
-------------------------------------------
Marc-Andre Boisseau
Controller
(Principal Accounting Officer)
17
EXHIBIT INDEX
Page Number
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11 Computation of Earnings Per Share 19
27 Financial Data Schedule 20
18