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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 November 3, 1997 there were 27,576,126 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
Total Number of Pages: 22
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CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarter Ended September 30, 1997
CONTENTS
Page Number
-----------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations:
Three Months and Nine Months ended
September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 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 2 Changes in Securities and Use of Proceeds 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)
September 30, December 31,
1997 1996
------------------------------
Assets
Current assets:
Cash and cash equivalents $149,054,531 $ 99,135,049
Short-term investments 71,814,436 38,206,495
Accounts receivable, net of allowances of $6,729,811 and
$2,552,039 at September 30, 1997 and December 31, 1996,
respectively 8,560,992 5,525,315
Inventories 1,357,867 696,336
Prepaid expenses 1,054,740 765,818
Current portion of deferred tax assets 10,213,184 3,168,964
------------------------------
Total current assets 242,055,750 147,497,977
Property and equipment, net 4,533,883 2,081,559
Long-term portion of deferred tax assets 18,261,113 -
------------------------------
$264,850,746 $149,579,536
==============================
Continued on following page.
3
Citrix Systems, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
September 30, December 31,
1997 1996
-----------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 580,065 $ 755,908
Accrued royalties and other accounts payable to stockholder 2,833,603 1,524,126
Other accrued expenses 7,900,864 3,283,197
Deferred revenue 2,937,763 2,074,670
Current-portion of deferred revenues on contract with stockholder 15,000,000 -
Current portion of capital lease obligations payable 15,361 82,434
Income taxes payable 6,520,870 -
-----------------------------
Total current liabilities 35,788,526 7,720,335
Long-term liabilities:
Capital lease obligations payable - 8,217
Deferred revenues on contract with stockholder 54,125,000 -
-----------------------------
Total long-term liabilities 54,125,000 8,217
Stockholders' equity:
Preferred stock at $.01 par value--5,000,000 shares
authorized, none issued and outstanding at
September 30, 1997 and December 31, 1996 - -
Common stock at $.001 par value--60,000,000 shares
authorized; and 27,354,977 and 26,680,236 issued
and outstanding at September 30, 1997 and
December 31, 1996, respectively 27,355 26,680
Additional paid-in capital 139,344,051 135,123,455
Retained earnings 35,565,814 6,700,849
-----------------------------
Total stockholders' equity 174,937,220 141,850,984
-----------------------------
$264,850,746 $149,579,536
=============================
See accompanying notes.
4
Citrix Systems, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------------------------------------------------------
Revenues:
Net revenues from unrelated parties $31,191,160 $11,685,801 $75,103,914 $28,958,658
Net revenues attributable to a stockholder 3,750,000 - 5,875,000 -
--------------------------------------------------------
Net revenues 34,941,160 11,685,801 80,978,914 28,958,658
Cost of goods sold 3,441,412 1,240,597 7,925,792 3,454,252
--------------------------------------------------------
Gross margin 31,499,748 10,445,204 73,053,122 25,504,406
Operating expenses:
Research and development 1,656,414 904,168 4,791,791 2,768,253
Sales, marketing and support 9,515,451 3,698,135 23,193,930 9,033,432
General and administrative 3,035,646 1,095,097 6,943,914 2,703,455
--------------------------------------------------------
Total operating expenses 14,207,511 5,697,400 34,929,635 14,505,140
--------------------------------------------------------
Income from operations 17,292,237 4,747,804 38,123,487 10,999,266
Interest income, net 3,134,839 1,556,158 6,978,021 3,029,284
--------------------------------------------------------
Income before income taxes 20,427,076 6,303,962 45,101,508 14,028,550
Income taxes 7,353,748 990,004 16,236,543 2,244,173
--------------------------------------------------------
Net income $13,073,328 $ 5,313,958 $28,864,965 $11,784,377
========================================================
Net income per share $ 0.44 $ 0.19 $ 0.99 $ 0.44
========================================================
Weighted average shares outstanding 29,398,351 28,337,303 29,112,191 26,969,901
========================================================
See accompanying notes.
5
Citrix Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1997 1996
----------------------------
Operating activities
Net income $ 28,864,965 $ 11,784,377
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,012,578 217,538
Provision for doubtful accounts and product returns 4,177,772 914,573
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options 3,406,613 3,509,763
Deferred tax assets (25,305,333) (841,565)
Changes in operating assets and liabilities:
Accounts receivable (7,213,449) (4,446,636)
Inventories (661,531) (401,092)
Prepaid expenses (288,922) 11,342
Other assets - (1,047,335)
Interest on note receivable from officer - 28,910
Deferred revenue 863,093 594,772
Deferred revenue on contract with stockholder 69,125,000 -
Accounts payable (175,842) 180,686
Accrued royalties and other accounts payable to stockholder 1,309,477 700,419
Income taxes payable 6,520,870 (93,100)
Other accrued expenses 4,617,665 1,015,643
----------------------------
Net cash provided by operating activities 86,252,956 12,128,295
Investing activities
Purchases of short-term investments (71,775,345) (31,008,459)
Proceeds from sale of short-term investments 38,167,404 -
Proceeds from note from officer - 100,000
Purchases of property and equipment (3,464,901) (566,318)
----------------------------
Net cash used in investing activities (37,072,842) (31,474,777)
Financing activities
Net proceeds from issuance of common stock 815,560 73,546,593
Repurchase of common stock previously issued (902) -
Payments on capital lease obligations (75,290) (102,673)
----------------------------
Net cash provided by financing activities 739,368 73,443,920
----------------------------
Increase in cash and cash equivalents 49,919,482 54,097,438
Cash and cash equivalents at beginning of period 99,135,049 43,471,491
----------------------------
Cash and cash equivalents at end of period $149,054,531 $ 97,568,929
============================
See accompanying notes.
6
Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 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.
4. Income Taxes
The income taxes recorded in the three and nine months ended September 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. On August 29, 1997 and November 7, 1997, orders were
entered by the court dismissing the above lawsuits without prejudice and
without the payment by the Company or any defendant of any money or other
consideration.
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 third
quarter ended September 30, 1997 and 1996 of $0.04 and $0.01 per share,
respectively. For the nine months ended September 30, 1997 and 1996, the
impact is expected to be an increase of $0.07 and $0.04 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.
The Accounting Standards Executive Committee (AcSEC) recently issued
Statement of Position (SOP) 97-2, Software Revenue Recognition, which is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. SOP 97-2 introduces a new framework whereby revenue would
be recognized for each such element in a software licensing arrangement when
certain criteria are met. The SOP also requires license fees to be allocated
to the separate elements of multiple element arrangements based on "vendor-
specific objective evidence of fair value" and provides guidance on
postcontract customer support arrangements. Management does not believe
implementation of the SOP will adversely affect the Company's operating
results or financial condition.
8. Subsequent Event
On October 2, 1997, the Company completed its acquisition of certain of the
assets, technology and operations of DataPac Australasia Pty Limited for
approximately $5.0 million. In the fourth quarter of 1997, a non-recurring
pre-tax charge of approximately $4.0 million will be recognized for in-
process research and development of technology related to this acquisition.
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 Windows NT v.3.51 kernel will continue
to be offered under the terms of the Development Agreement until September 30,
2001. In June 1997, the Company announced a product (code-named "pICAsso")
which, when combined with the Microsoft multi-user version of Windows NT
technology, will provide capabilities similar to those currently offered in the
WinFrame product line. The Company plans to continue developing 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 estimates 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 Development Agreement 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, in May 1997, 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
On October 2, 1997, the Company completed its acquisition of certain of the
assets, technology and operations of DataPac Australasia Pty Limited for
approximately $5.0 million. This acquisition significantly increases the
Company's number of employees in the Asia Pacific region to support the
Company's efforts to enhance its international distribution capabilities. A
non-recurring pre-tax charge to its operations of approximately $4.0 million
will be recognized in the fourth quarter of 1997 for in-process research and
development related to the acquisition.
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 Nine Months
Three Months Ended Nine Months Ended Ended Ended
September 30, September 30, September 30, September 30,
-------------------- ------------------- 1997 vs. 1997 vs.
1997 1996 1997 1996 1996 1996
----------------------------------------------------------------------------------
Net revenues................................. 100.0% 100.0% 100.0% 100.0% 199.0% 179.6%
Cost of goods sold........................... 9.9 10.6 9.8 11.9 177.4 129.5
--- ---- --- ---- ----- -----
Gross margin................................. 90.1 89.4 90.2 88.1 201.6 186.4
Operating expenses:
Research and development.................... 4.7 7.7 5.9 9.6 83.2 73.1
Sales, marketing and support................ 27.2 31.6 28.6 31.2 157.3 156.8
General and administrative.................. 8.7 9.4 8.6 9.3 177.2 156.9
--- --- --- --- ----- -----
Total operating expenses................... 40.6 48.7 43.1 50.1 149.4 140.8
---- ---- ---- ---- ----- -----
Income from operations...................... 49.5 40.7 47.1 38.0 264.2 246.6
Interest income, net......................... 9.0 13.3 8.6 10.5 101.4 130.4
--- ---- --- ---- ----- -----
Income before income taxes.................. 58.5 54.0 55.7 48.5 224.0 221.5
Income taxes................................. 21.1 8.5 20.0 7.7 * *
---- --- ---- --- - -
Net income................................... 37.4% 45.5% 35.7% 40.8% 146.0% 144.9%
===== ===== ===== ===== ===== =====
* Not meaningful.
Net Revenues. Net revenues were approximately $34.9 million and $11.7 million
for the three months ended September 30, 1997 and 1996, respectively,
representing an increase of 199.0%. For the nine months ended September 30,
1997 and 1996, net revenues were $81.0 million and $29.0 million, respectively,
representing an increase of 179.6%. The increases in net revenues in the third
quarter of 1997 compared to the third quarter of 1996 and the respective nine
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. Additionally, during the
third quarter of 1997, the Company introduced an upgrade to its existing
WinFrame product (version 1.7). The increases in net revenues in both periods
were partially offset by an increase in the allowance for product returns, which
primarily reflects an allowance for stock rotation of the previous version of
WinFrame and, by a lesser extent, 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 69.5%, 16.4% and
9.8% of revenues, respectively, in the three months ended September 30, 1997,
and 67.5%, 20.5% and 6.9% of revenues, respectively, in the nine months ended
September 30, 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. All
development costs incurred in connection with the Development Agreement are
expensed as incurred as a component of cost of goods sold. 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
10
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 89.4% in the third quarter of 1996
to 90.1% in the third quarter of 1997, and from 88.1% in the first nine months
of 1996 to 90.2% in the first nine months 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.
Research and Development Expenses. Research and development expenses were
approximately $1.7 million and $900,000 for the three months ended September 30,
1997 and 1996, respectively, and $4.8 million and $2.8 million for the nine
months ended September 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 product lines. These increases were partially offset
by the allocation of certain research and development expenses to cost of sales
for the portion of these expenses associated with the Development Agreement
revenues.
Sales, Marketing and Support Expenses. Sales, marketing and support expenses
approximated $9.5 million and $3.7 million for the three months ended September
30, 1997 and 1996, respectively, and $23.2 million and $9.0 million for the nine
months ended September 30, 1997 and 1996, respectively. The increases in both
periods 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,
commissions and related expenses 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 $3.0 million and $1.1 million for the three months ended September
30, 1997 and 1996, respectively, and $6.9 million and $2.7 million for the nine
months ended September 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 $3.1
million and $1.6 million for the three months ended September 30, 1997 and 1996,
respectively, and $7.0 million and $3.0 million for the nine months ended
September 30, 1997 and 1996, respectively. The increases in both periods are
primarily due to interest income earned on additional cash generated from the
receipt of an initial license fee under the terms of the Development Agreement.
Income Taxes. The Company's effective tax rate amounted to 36% for the three
months and nine months ended September 30, 1997 and 16% for the three months and
nine months ended September 30, 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 nine months ended September 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, during the same period, the Company
increased profitability and increased its allowance for product returns, which
primarily reflects an allowance for stock rotation of the previous version of
WinFrame. These amounts were partially offset by an increase in deferred tax
assets attributable to the taxability of the initial license fee received under
the terms of the Development Agreement. The Company also recognized tax benefits
from the exercise of non-statutory stock options and disqualifying dispositions
of incentive stock options of approximately $3.4 million. Positive operating
cash flows in the nine months ended September 30, 1996, were primarily due to
increased profitability during that period.
11
The Company purchased and sold short-term investments for approximately $71.8
million and $38.2 million, respectively, during the nine months ended September
30, 1997. Additionally, the Company expended approximately $3.5 million in the
same period for the purchase of leasehold improvements and equipment. These
capital expenditures were primarily associated with the Company's relocation and
expansion in its new facilities.
To the extent the Company continues to grow, it anticipates that it will
require additional space as staffing needs dictate in both nearby facilities and
remote locations.
At September 30, 1997, the Company had approximately $149.1 million in cash
and cash equivalents, $71.8 million in short-term investments and $206.3 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 $8.6 million in
accounts receivable, net of allowances, and $72.1 million of deferred revenues,
of which the Company anticipates $17.9 million will be earned over the next
twelve months.
On October 2, 1997, the Company completed its acquisition of certain of the
assets, technology and operations of DataPac Australasia Pty Limited for
approximately $5.0 million. In the fourth quarter of 1997, a non-recurring pre-
tax charge of approximately $4.0 million will be recognized for in-process
research and development of technology related to this acquisition.
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-
based 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.
12
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 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-based 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 its product
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. 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. To the extent the Company continues to grow, it anticipates that it
will require additional space as staffing needs dictate in both nearby
facilities and remote locations. 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
13
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. 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. However, the
Company cannot currently quantify the impact, if any, on its revenues, operating
results 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.
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.
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
15
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.
16
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In March and April 1997, three purported class action lawsuits
were filed by certain stockholders against the Company and certain of
its directors and officers relating principally to certain statements
made by the Company and certain of its representatives concerning the
status of the Company's relationship with Microsoft.
On August 1, 1997 the plaintiffs in one of such lawsuits
dismissed their action without prejudice and without the payment by
the Company or any defendant of any money or other consideration. On
August 29, 1997 an order was entered by the court dismissing that
case.
On November 6, 1997, the parties to the two other cases also
stipulated to a voluntary dismissal of those two cases without
prejudice and without the payment by the Company or any defendant of
any money or other consideration. On November 7, 1997, an order was
entered by the court dismissing both of those cases.
As a result of the above-mentioned dismissals, neither the
Company nor any officer or director of the Company is a defendant in
any federal securities litigation.
Item 2. Changes in Securities and Use of Proceeds
On December 8, 1995, the Company's registration statement on
Form S-1 (File No. 33-98542) became effective. The Company has filed
Form SR disclosing the sale of securities and the use of proceeds
through March 18, 1997. The net proceeds from the offering were
$38,892,728. The Company has not utilized any of the proceeds from its
initial public offering.
17
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits which are filed with the report as set forth on the
Exhibit Index appearing on Page 20 of this report and are
incorporated herein by this reference.
(b) No reports on Form 8-K were filed during the three month period
ended September 30, 1997.
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.
/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)
19
Exhibit Index
Page Number
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11 Computation of Earnings Per Share 21
27 Financial Data Schedule 22