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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 June 30, 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
Not Applicable
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Former Name, Former Address and Former Fiscal Year if Changed Since Last Report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of August 1, 1997 there were 27,338,011 shares of the registrant's
Common Stock, $.001 par value per share, outstanding.
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CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarter Ended June 30, 1997
CONTENTS
Page Number
-----------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations:
Three Months and Six Months ended June 30, 1997
and 1996 5
Condensed Consolidated Statements of Cash Flows:
Six Months Ended June 30, 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 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
Exhibit 11 21
Exhibit 27 22
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Citrix Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
1997 1996
------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 172,531,872 $ 99,135,049
Short-term investments 56,412,533 38,206,495
Accounts receivable, net of allowances of $2,948,241 and
$2,552,039 at June 30, 1997 and December 31, 1996,
respectively 7,342,063 5,525,315
Inventories 822,282 696,336
Prepaid expenses 990,767 765,818
Current portion of deferred tax assets 4,244,794 3,168,964
------------------------------------------
Total current assets 242,344,311 147,497,977
Property and equipment, net 3,878,437 2,081,559
Long-term portion of deferred tax assets 22,571,250 -
------------------------------------------
$ 268,793,998 $ 149,579,536
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Continued on following page.
3
Citrix Systems, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
June 30, December 31,
1997 1996
---------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 500,171 $755,908
Accrued royalties and other accounts payable to stockholder 2,074,374 1,524,126
Other accrued expenses 5,585,704 3,283,197
Deferred revenue 3,058,319 2,074,670
Current-portion of deferred revenues on contract with stockholder 15,000,000 -
Current portion of capital lease obligations payable 41,301 82,434
Income taxes payable 22,931,372 -
---------------------------------------------
Total current liabilities 49,191,241 7,720,335
Long-term liabilities:
Capital lease obligations payable - 8,217
Deferred revenues on contract with stockholder 57,875,000 -
---------------------------------------------
Total long-term liabilities 57,875,000 8,217
Contingencies
Stockholders' equity:
Preferred stock at $.01 par value--5,000,000 shares authorized, none issued
and outstanding at June 30, 1997 and December 31, 1996 - -
Common stock at $.001 par value--60,000,000 shares authorized; and 27,308,781
and 26,680,236 issued and outstanding at June 30, 1997 and
December 31, 1996, respectively 27,309 26,680
Additional paid-in capital 139,207,962 135,123,455
Retained earnings 22,492,486 6,700,849
---------------------------------------------
Total stockholders' equity 161,727,757 141,850,984
---------------------------------------------
$268,793,998 $149,579,536
=============================================
See accompanying notes.
4
Citrix Systems, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------------------------------------------------------------------------
Revenues:
Net revenues from unrelated parties $22,392,149 $ 9,501,193 $43,912,754 $ 17,272,856
Net revenues attributable to a stockholder 2,125,000 - 2,125,000 -
---------------------------------------------------------------------------
Net revenues 24,517,149 9,501,193 46,037,754 17,272,856
Cost of goods sold 2,290,551 1,233,582 4,484,381 2,213,525
---------------------------------------------------------------------------
Gross margin 22,226,598 8,267,611 41,553,373 15,059,331
Operating expenses:
Research and development 1,622,147 960,249 3,135,377 1,864,078
Sales, marketing and support 7,480,411 2,848,519 13,678,479 5,335,430
General and administrative 2,425,602 747,631 3,908,269 1,608,357
---------------------------------------------------------------------------
Total operating expenses 11,528,160 4,556,399 20,722,125 8,807,865
---------------------------------------------------------------------------
Income from operations 10,698,438 3,711,212 20,831,248 6,251,466
Interest income, net 2,268,568 911,798 3,843,184 1,473,123
---------------------------------------------------------------------------
Income before income taxes 12,967,006 4,623,010 24,674,432 7,724,589
Income taxes 4,668,121 1,006,023 8,882,795 1,254,169
---------------------------------------------------------------------------
Net income $ 8,298,885 $ 3,616,987 $15,791,637 $ 6,470,420
===========================================================================
Net income per share $ 0.29 $ 0.14 $ 0.55 $ 0.25
===========================================================================
Weighted average shares outstanding 29,078,793 26,257,711 28,851,515 26,128,124
===========================================================================
See accompanying notes.
5
Citrix Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1997 1996
------------------------------------------
Operating activities
Net income $ 15,791,637 $ 6,470,420
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 599,877 173,746
Provision for doubtful accounts and product returns 396,201 397,692
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options 3,406,613 1,624,696
Deferred tax assets (23,647,080) -
Changes in operating assets and liabilities:
Accounts receivable (2,212,950) (1,147,517)
Inventories (125,946) (275,513)
Prepaid expenses (224,949) (43,465)
Other assets - (410,373)
Interest on note receivable from officer - 28,910
Deferred revenue 983,649 279,007
Deferred revenue on contract with stockholder 72,875,000 -
Accounts payable (255,737) (192,313)
Accrued royalties and other accounts payable to stockholder 550,248 472,993
Income taxes payable 22,931,372 4,787
Other accrued expenses 2,302,508 977,378
------------------------------------------
Net cash provided by operating activities 93,370,443 8,342,448
Investing activities
Purchases of short-term investments (48,171,073) (2,951,518)
Proceeds from sale of short-term investments 29,965,035 -
Proceeds from note from officer - 100,000
Purchases of property and equipment (2,396,754) (340,876)
------------------------------------------
Net cash used in investing activities (20,602,792) (3,192,394)
Financing activities
Net proceeds from issuance of common stock 679,424 73,499,513
Repurchase of common stock previously issued (902) -
Payments on capital lease obligations (49,350) (72,703)
------------------------------------------
Net cash provided by financing activities 629,172 73,426,810
------------------------------------------
Increase in cash and cash equivalents 73,396,823 78,576,864
Cash and cash equivalents at beginning of period 99,135,049 43,471,491
------------------------------------------
Cash and cash equivalents at end of period $172,531,872 $ 122,048,355
==========================================
See accompanying notes.
6
Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 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
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 and six months ended June 30,
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.
7
5. Reclassifications
Certain reclassifications have been made for consistent presentation.
6. 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 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.
7. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact is expected to result in an increase in primary
earnings per share for the second quarter ended June 30, 1997 and 1996
of $0.02 and $0.01 per share, respectively. For the six months ended
June 30, 1997 and 1996, the impact is expected to be an increase of
$0.03 and $0.02 per share, respectively. The impact of Statement No. 128
on the calculation of fully diluted earnings per share for these
quarters is not expected to be material.
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.
As a result of the Development Agreement (defined below), the Company will
not offer product lines built on future versions of the Microsoft NT technology.
Future WinFrame products based upon the NT v.3.51 kernel will continue to be
offered under the terms of the Development Agreement. Provisions in the
Development Agreement relating to the Company's ability to ship current and
future products based upon the NT v.3.51 kernel expire on September 30, 2001. In
June 1997, the Company announced a product (code-named "pICAsso") which, when
combined with the Microsoft multi-user version of NT technology, will provide
capabilities similar to those currently offered in the WinFrame product line.
The Company plans to continue development enhancements to its pICAsso product
and expects that this product, existing and future enhanced WinFrame products
and the royalties derived under the terms of the Development Agreement 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. The initial fee of $75 million relating to the Development Agreement
is being recognized ratably over the term of the contract, which is five years.
In the case of non-cancelable product licensing arrangements under which certain
OEMs have software reproduction rights, initial recognition of revenue also
requires delivery and customer acceptance of the product master or first copy.
Subsequent recognition of revenues is based upon reported royalties from the
OEMs as well as estimation of royalties due through the Company's reporting
date. Product returns and sales allowances, including stock rotations, are
estimated and provided for at the time of sale. Non-recurring engineering fees
are recognized ratably as the work is performed. Revenues from training and
consulting are recognized when the services are performed. Service revenues from
customer maintenance fees for ongoing customer support and product updates are
recognized ratably over the term of the contract, which is typically twelve
months. Service revenues, which are immaterial when compared to net revenues,
are included in net revenues on the face of the income statement.
On May 9, 1997, the Company and Microsoft Corporation ("Microsoft")
entered into a License, Development and Marketing Agreement (the "Development
Agreement") which provides for the licensing to Microsoft of certain of the
Company's multi-user software enhancements to Microsoft's Windows NT Server and
for the cooperation between the parties for the development of future multi-user
versions of Microsoft Windows NT Server, code-named Hydrix 4.x and Hydrix 5.x.
The Development Agreement also provides for each party to develop its own
enhancements or "plug-ins" to the jointly developed products which may provide
access to the Hydrix base platform from a wide variety of computing devices,
such as a Company developed plug-in that implements the ICA protocol on the new
platform, code-named pICAsso. Pursuant to the terms of the Development
Agreement, the Company received an aggregate of $75 million as a non-refundable
royalty payment and for engineering and support services to be rendered by the
Company. Under the terms of the Development Agreement, the Company will be
eligible to receive royalty payments of up to an additional $100 million based
on Microsoft's release and shipment of Hydrix 4.x and Hydrix 5.x products. In
addition, Microsoft and the Company have agreed to engage in certain joint
marketing efforts to promote use of Windows NT Server-based multi-user software
and the Company's ICA protocol. Additionally, for a period of at least two and
one-half years, Microsoft has agreed to endorse only the Company's ICA protocol
as the preferred way to provide multi-user Windows access for devices other than
Windows client devices. Further, subject to the terms of the Development
Agreement, the Company shall be entitled to license versions of its WinFrame
technology based on Windows NT v.3.51 until at least September 30, 2001.
9
The discussion below relating to the individual financial statement captions,
the Company's overall financial performance, operations and financial position
should be read in conjunction with the factors and events described in
"Overview" and "Certain Factors Which May Affect Future Results" which, it is
anticipated, will impact the Company's future performance and financial
position.
Results of Operations
The following table sets forth statement of operations data of the Company
expressed as a percentage of net revenues and as a percentage of change from
period-to-period for the periods indicated.
Change from Change from
Three Months Six Months
Three Months Ended Six Months Ended Ended Ended
June 30, June 30, June 30, 1997 June 30, 1997
-------------------- ---------------------- vs. vs.
1997 1996 1997 1996 1996 1996
------------------------------------------------------------------------------
Net revenues....................................... 100.0% 100.0% 100.0% 100.0% 158.0% 166.5%
Cost of goods sold................................. 9.3 13.0 9.7 12.8 85.7 102.6
----- ----- ----- ----- ----- -----
Gross margin....................................... 90.7 87.0 90.3 87.2 168.8 175.9
Operating expenses:
Research and development........................ 6.6 10.1 6.8 10.8 68.9 68.2
Sales, marketing and support.................... 30.6 30.0 29.7 30.9 162.6 156.4
General and administrative...................... 9.9 7.9 8.5 9.3 224.4 143.0
----- ----- ----- ----- ----- -----
Total operating expenses..................... 47.1 48.0 45.0 51.0 153.0 135.3
----- ----- ----- ----- ----- -----
Income from operations............................ 43.6 39.0 45.3 36.2 188.3 233.2
Other income, net.................................. 9.2 9.6 8.3 8.5 148.8 160.9
----- ----- ----- ----- ----- -----
Income before income taxes........................ 52.8 48.6 53.6 44.7 180.5 219.4
Income taxes....................................... 19.0 10.6 19.3 7.3 364.0 *
----- ----- ----- ----- ----- -----
Net income ........................................ 33.8% 38.0% 34.3% 37.4% 129.4% 144.1%
===== ===== ===== ===== ===== =====
* Not meaningful.
Net Revenues. Net revenues were approximately $24.5 million and $9.5
million for the three months ended June 30, 1997 and 1996, respectively,
representing an increase of 158.0%. For the six months ended June 30, 1997 and
1996, net revenues were $46.0 million and $17.3 million, respectively, an
increase of 166.5%. The increases in net revenues in the second quarter of 1997
compared to the second quarter of 1996 and the respective six month periods then
ended were primarily attributable to an increase in volume of shipments of the
Company's WinFrame products and, to a lesser extent, increased volume in
licensing of OEM products as well as the initial recognition of revenue on the
Development Agreement with Microsoft. The increases in net revenues in both
periods were partially offset by a decline in the shipments of the Company's
WinView products.
WinFrame, OEM and Development Agreement revenues approximated 65.1%, 20.5%
and 8.5% of revenues, respectively, in the three months ended June 30, 1997, and
65.8%, 23.9% and 4.5% of revenues, respectively, in the six months ended June
30, 1997. Both the Company's WinFrame and OEM revenues represent product license
fees based upon the Company's multi-user NT-based technology. Additionally, in
the second quarter of 1997, the Company initiated revenue recognition
attributable to the initial fee under the terms of the Development Agreement
with Microsoft.
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. All
development costs incurred in connection with Hydrix will be expensed as
incurred as a component of cost of goods sold. The costs incurred in the period
ended June 30, 1997 relating to the Development Agreement were immaterial and
are included in research and development expenses. 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.
10
Gross Margin. Gross margin increased from 87.0% in the second quarter of
1996 to 90.7% in the second quarter of 1997, and from 87.2% in the first half of
1996 to 90.3% in the first half of 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. Additionally, the Company
recognized revenues related to Hydrix, for which the associated cost of sales
were not material during the period ended June 30, 1997.
Research and Development Expenses. Research and development expenses were
approximately $1.6 million and $1.0 million for the three months ended June 30,
1997 and 1996, respectively, and $3.1 million and $1.9 million for the six
months ended June 30, 1997 and 1996, respectively. The increases in research and
development expenses for both periods resulted primarily from additional
staffing, associated salaries and related expenses required to expand and
enhance the Company's products.
Sales, Marketing and Support Expenses. Sales, marketing and support
expenses approximated $7.5 million and $2.8 million for the three months ended
June 30, 1997 and 1996, respectively, and $13.7 million and $5.3 million for the
six months ended June 30, 1997 and 1996, respectively. The increases in both
periods resulted primarily from increases in promotional activities, such as
advertising literature production and distribution, distributor programs and
trade shows. Sales staff and associated salaries and related expenses as well as
commissions also increased. The overall increases in these expenses were a
result of the Company's efforts to expand its distribution channels.
General and Administrative Expenses. General and administrative expenses
were approximately $2.4 million and $750,000 for the three months ended June 30,
1997 and 1996, respectively, and $3.9 million and $1.6 million for the six
months ended June 30, 1997 and 1996, respectively. The increases in general and
administrative expenses for both periods are primarily due to increased legal
fees as well as expenses associated with increased staff, associated salaries
and related expenses necessary to support overall increases in the scope of the
Company's operations. The increases in general and administrative expenses for
both periods are also partially due to increases in the provision for doubtful
accounts resulting from the higher credit risk associated with an increased
level of accounts receivable attributable to each period's respective increase
in sales.
Interest Income, Net. Interest income, net, amounted to approximately
$2.3 million and $900,000 for the three months ended June 30, 1997 and 1996,
respectively, and $3.8 million and $1.5 million for the six months ended June
30, 1997 and 1996, respectively. The increases in both periods are primarily due
to interest income generated from the net proceeds of the Company's second
public offering completed in June 1996 as well as cash generated from operating
activities. To the extent the Company is able to effectively invest its funds,
including the initial license fee received in connection with the Development
Agreement, in interest bearing securities and such funds are not alternatively
utilized, interest income will increase.
Income Taxes. The Company's effective tax rate amounted to 36% and 22% for
the three months ended June 30, 1997 and 1996, respectively, and 36% and 16% for
the six months ended June 30, 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
During the six months ended June 30, 1997, the Company generated positive
operating cash flows primarily from the receipt of an initial license fee of $75
million related to the Development Agreement. The revenues from this Development
Agreement are being recognized ratably over the contract period of five years,
which caused a substantial increase in deferred revenues relating to the
Development Agreement. Additionally, the Company increased profitability during
the same period. Also during the period, the Company recorded additional income
taxes payable, along with a corresponding increase in deferred tax assets, which
were both caused primarily by the initial fee received under the terms of the
Development Agreement. The Company also recognized tax benefits from the
exercise of non-statutory stock options and disqualifying dispositions of
incentive stock options of approximately $3.4 million. Positive operating cash
flows in the six months ended June 30, 1996, were primarily due to increased
profitability during that period.
The Company purchased and sold short-term investments for approximately
$48.2 million and $30.0 million, respectively, during the six months ended June
30, 1997. Additionally, the Company expended approximately $2.4 million in the
same
11
period for the purchase of leasehold improvements and equipment. These capital
expenditures were primarily associated with the Company's relocation and
expansion in its new facilities.
The Company currently plans on occupying an additional 24,000 square feet
in the facility into which it recently relocated and anticipates that it will
occupy approximately 30,000 square feet in a nearby facility as well as
approximately 10,000 square feet for remote engineering and administrative
support centers.
At June 30, 1997, the Company had approximately $172.5 million in cash and
cash equivalents, $56.4 million in short-term investments and $193.2 million of
working capital. The Company's cash and cash equivalents and short-term
investments are invested in investment grade, interest bearing securities to
minimize interest rate risk and allow for flexibility in the event of immediate
cash needs. On such date, the Company had approximately $7.3 million in accounts
receivable, net of allowances, and $75.9 million of deferred revenues, of which
the Company anticipates $18.0 million 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 in the past 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 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. On May 9,
1997, the Company and Microsoft entered into a License, Development and
Marketing Agreement (the "Development Agreement") which provides for the
licensing to Microsoft of certain of the Company's multi-user software
enhancements to Microsoft's Windows NT Server and for the cooperation between
the parties for the development of future multi-user versions of Microsoft
Windows NT Server, code-named Hydrix 4.x and Hydrix 5.x. The Development
Agreement also provides for each party to develop its own enhancements or
"plug-ins" to the jointly developed products which may provide access to the
Hydrix base platform from a wide variety of computing devices, such as a Company
developed plug-in that implements the Independent Computing Architecture
(ICA/R/) protocol on the new platform. Pursuant to the terms of the Development
Agreement, the Company received an aggregate of $75 million as a non-refundable
royalty payment and for engineering and support services to be rendered by the
Company. Under the terms of the Development Agreement, the Company will be
eligible to receive royalty payments of up to an additional $100 million based
on Microsoft's release and shipment of Hydrix 4.x and Hydrix 5.x products. In
addition, Microsoft and the Company have agreed to engage in certain joint
marketing efforts to promote use of Windows NT Server-based multi-user software
and the Company's ICA protocol. Additionally, for a period of at least two and
one-half years, Microsoft has agreed to endorse only the Company's ICA protocol
as the preferred way to provide multi-user Windows access for devices other than
Windows client devices. Further, subject to the terms of the Development
Agreement, the Company shall be entitled to license versions of its WinFrame
technology based on Windows NT v.3.51 until at least September 30, 2001.
The Company's relationship with Microsoft is subject to certain risks and
uncertainties. First, the Hydrix-based platforms 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. Second, as stated above, Microsoft has agreed to endorse only the
Company's ICA protocol as the preferred method to provide multi-user Windows
access for devices other than Windows clients for a period of two and one-half
years. After the two and one-half year period expires, it is possible that
Microsoft will market or endorse other methods to provide non-Windows client
devices multi-user Windows access. Finally, the
12
Company's royalties pursuant to the Development Agreement rely significantly on
Microsoft's ability to market the Hydrix 4.x and 5.x products. Microsoft's
distributors and resellers are not within the control of the Company and, to the
Company's knowledge, are not obligated to purchase products from Microsoft.
Additionally, the Company may hire additional development, marketing and support
staff to the extent they are needed in order to fulfill the Company's
responsibilities under the terms of the Development Agreement. Further, if
Microsoft (1) develops competitive plug-in products, (2) endorses in the future
other methods to provide non-Windows client devices multi-user Windows access or
(3) is unable to successfully market the Hydrix-based products, the Company's
business, results of operations and financial condition could be adversely
affected.
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 an emerging 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 have 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 be
adversely impacted.
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 its recently announced
product, code-named pICAsso, existing and future enhanced WinFrame products and
the royalties derived under the terms of the Development Agreement will
constitute a majority of its revenues for the foreseeable future. The Company's
ability to generate revenue from its pICAsso product will be highly dependent on
market acceptance of Hydrix 4.x and Hydrix 5.x products, with which pICAsso is
intended to be combined to provide capabilities similar to those currently
offered in the WinFrame product line. The Company may experience declines in
demand for products based on WinFrame technology, whether as a result of new
competitive product releases, price competition, lack of success of its
strategic partners, technological 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 currently plans
on occupying an additional 24,000 square feet in the facility into which it
recently relocated and anticipates that it will occupy approximately 30,000
square feet in a nearby facility as well as approximately 10,000 square feet for
remote engineering and administrative support centers. 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 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.
13
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, 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. The Company may hire additional development
staff to the extent they are needed in order to fulfill the Company's
responsibilities under the terms of the Development Agreement. To the extent the
Company is unable to add additional staff and resources in its development
efforts, future enhancement and additional features to its existing or future
products may be delayed, which may have a material adverse effect on the
Company's revenues, operating results and financial condition. 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 Development Agreement. However, the Company cannot currently
quantify the impact, if any, on these expenses.
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.
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.
14
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. However, to the extent the Company's
revenue growth continues, 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 operating 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.
Liquidity and Capital Resources. The initial fee payment received in
connection with the Development Agreement (see discussion in "Overview") has
added substantially to the Company's cash and short-term investments. There can
be no assurance that the Company will be able to immediately find effective uses
for these funds, in which case the funds will remain invested in interest-
bearing securities. 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 subsequent ongoing license revenues are recognized
when the amount of such licensing activity can be reasonably determined. The
Company's expense levels are based, in part, on its expectations as to future
orders and sales, and the Company may be unable to adjust spending in a timely
manner to compensate for any sales shortfall. If sales are below expectations,
operating results are likely to be adversely affected. Net income may be
disproportionately affected by a reduction in sales because a significant
portion of the Company's expenses do not vary with revenues. The 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.
15
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.
16
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 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders held May
15, 1997 (the "1997 Annual Meeting"), the Company's stockholders
took the following action:
The Company's stockholders elected Edward E. Iacobucci
and Gregory B. Maffei as Class II directors, each to serve for a
three-year term expiring at the Company's annual meeting of
stockholders in the year 2000 or until his successor has been
duly elected and qualified or until his earlier resignation or
removal. Election of the directors was determined by a plurality
of the votes cast at the 1997 Annual Meeting. With respect to
such matter, the votes were cast as follows: 16,767,925 shares
voted for the election of Mr. Iacobucci and 16,692,495 shares
voted for the election of Mr. Maffei, and 35,350 shares
17
were withheld from the election of Mr. Iacobucci and 110,780 shares
were withheld from the election of Mr. Maffei. No other persons were
nominated, or received votes, for election as directors of the
Company at the 1997 Annual Meeting. The other directors of the
Company whose term of office continued after the annual meeting were:
Kevin R. Compton, Stephen R. Dow, Roger W. Roberts, Tyrone F. Pike
and Robert N. Goldman.
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 19 of this report and are
incorporated herein by this reference.
(b) Reports on Form 8-K
May 9, 1997. Item 5 - Other Events, to disclose the consummation
of the License, Development and Marketing Agreement between the
Company and Microsoft Corporation.
18
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.
---------------------------------------
Roger W. Roberts
President, Chief Executive Officer
and Secretary
(Principal Executive Officer)
---------------------------------------
James J. Felcyn, Jr.
Vice-President of Finance and
Administration and Chief Financial Officer
(Principal Financial Officer)
---------------------------------------
Marc-Andre Boisseau
Controller
(Principal Accounting Officer)
19
Exhibit Index
Page Number
-----------
11 Computation of Earnings Per Share 21
27 Financial Data Schedule 22