================================================================================
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 March 31, 1998
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
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
---- ----
As of May 4, 1998 there were 41,823,111 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
Total Number of Pages: 22
================================================================================
CITRIX SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
CONTENTS
Page Number
-----------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income:
Three Months ended March 31, 1998
and 1997 5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
Exhibit 27.1 21
Exhibit 27.2 22
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, DECEMBER 31,
1998 1997
----------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $119,015,968 $140,080,550
Short-term investments 102,768,101 89,111,093
Accounts receivable, net of allowances of $6,029,242 and $6,297,986 at
March 31, 1998 and December 31, 1997, respectively
20,655,147 12,631,413
Inventories 2,274,994 2,273,196
Prepaid expenses 4,016,231 3,497,890
Current portion of deferred tax assets 17,602,360 10,767,437
------------ ------------
Total current assets 266,332,801 258,361,579
Property and equipment, net 10,450,050 6,678,253
Long-term portion of deferred tax assets 14,877,811 16,763,680
Other assets, net 1,970,457 864,513
------------ ------------
$293,631,119 $282,668,025
============ ============
Continued on following page.
3
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
MARCH 31, DECEMBER 31,
1998 1997
------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 941,857 $ 984,463
Accrued royalties and other accounts payable to stockholder 3,228,717 3,043,836
Other accrued expenses 19,718,545 13,024,947
Deferred revenue 4,011,744 3,147,220
Current-portion of deferred revenues on contract with stockholder
15,000,000 15,000,000
Current portion of capital lease obligations payable 18,893 8,396
Income taxes payable 488,376 236,410
------------- -----------
Total current liabilities 43,408,132 35,445,272
Long-term liabilities:
Capital lease obligations payable 24,500 --
Deferred revenues on contract with stockholder 46,625,000 50,375,000
------------- -----------
Total long-term liabilities 46,649,500 50,375,000
Stockholders' equity:
Preferred stock at $.01 par value--5,000,000 shares authorized, none
issued and outstanding at March 31, 1998 and December 31, 1997 - -
Common stock at $.001 par value--60,000,000 shares authorized; and
41,809,353 and 41,473,088 issued and outstanding at March 31, 1998
and December 31, 1997, respectively 41,809 41,473
Additional paid-in capital 154,674,425 148,747,326
Retained earnings 48,857,253 48,058,954
------------- -----------
Total stockholders' equity 203,573,487 196,847,753
------------- -----------
$293,631,119 $282,668,025
============= ============
See accompanying notes.
4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
------------------------------------------
1998 1997
------------------------------------------
Revenues:
Net revenues $45,551,922 $21,520,606
Net revenues attributable to a stockholder 3,750,000 --
------------- ------------
Net revenues 49,301,922 21,520,606
Cost of goods sold:
Cost of goods sold 3,673,608 2,193,831
Cost of goods sold on contract with stockholder 1,175,829 --
------------- ------------
Total cost of goods sold 4,849,437 2,193,831
------------- ------------
Gross margin 44,452,485 19,326,775
Operating expenses:
Research and development 3,397,704 1,513,230
Sales, marketing and support 14,901,027 6,198,068
General and administrative 3,766,118 1,482,665
In-process research and development 23,800,000 --
------------- ------------
Total operating expenses 45,864,849 9,193,963
------------- ------------
Income (loss) from operations (1,412,364) 10,132,812
Interest income, net 2,659,708 1,574,616
------------- ------------
Income before income taxes 1,247,344 11,707,428
Income taxes 449,045 4,214,674
Net income $ 798,299 $ 7,492,754
============ ============
Earnings per common share:
Basic earnings per share $0.02 $0.19
============ ============
Weighted average shares outstanding 41,623,760 40,289,909
============ ============
Earnings per common share assuming dilution:
Diluted earnings per share $0.02 $0.18
============ ============
Weighted average shares outstanding 44,807,910 42,613,863
============ ============
See accompanying notes.
5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1998 1997
-----------------------------------------
OPERATING ACTIVITIES
Net income $ 798,299 $ 7,492,754
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,006,040 257,630
Provision for doubtful accounts 554,819 69,460
Provision for product returns (823,564) 154,538
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options 4,078,482 913,511
Stock purchase plan compensation expense 37,000 --
Deferred tax assets (4,949,054) (345,380)
In-process research and development 23,800,000 --
Changes in operating assets and liabilities:
Accounts receivable (7,754,989) (1,350,483)
Inventories (1,798) (58,721)
Prepaid expenses (518,341) 338,787
Deferred revenue 864,524 254,251
Deferred revenue on contract with stockholder (3,750,000) --
Accounts payable (42,606) (77,817)
Accrued royalties and other accounts payable to stockholder 184,881 473,022
Income taxes payable 251,966 3,103,615
Other accrued expenses 818,598 1,070,056
------------ ------------
Net cash provided by operating activities 14,554,257 12,295,223
INVESTING ACTIVITIES
Purchases of short-term investments (33,441,932) (11,100,245)
Proceeds from sale of short-term investments 19,784,924 11,600,000
Cash paid for acquisition (17,500,000) --
Cash paid for licensing agreement (2,125,000) --
Purchases of property and equipment (4,140,991) (1,691,126)
------------ ------------
Net cash used in investing activities (37,422,999) (1,191,371)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,811,953 231,493
Payments on capital lease obligations (7,793) (25,040)
------------ ------------
Net cash provided by financing activities 1,804,160 206,453
------------ ------------
Increase (decrease) in cash and cash equivalents (21,064,582) 11,310,305
Cash and cash equivalents at beginning of period 140,080,550 99,135,049
============ ============
Cash and cash equivalents at end of period $119,015,968 $110,445,354
============ ============
See accompanying notes.
6
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
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, 1997.
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. REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue
Recognition," which the Company has adopted for transactions entered during
the year beginning January 1, 1998. SOP 97-2 provides guidance for
recognizing revenue on software transactions and supersedes SOP 91-1,
"Software Revenue Recognition." In March 1998, the AICPA issued SOP 98-4,
"Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition." SOP 98-4 defers, for one year, the application of certain
passages in SOP 97-2 which limit what is considered vendor-specific objective
evidence necessary to recognize revenue for software licenses in multiple-
element arrangements when undelivered elements exist. Additional guidance is
expected to be provided prior to adoption of the deferred provision of SOP
97-2. The Company will determine the impact, if any, the additional guidance
will have on current revenue recognition practices when issued. Adoption of
the remaining provisions of SOP 97-2 did not have a material impact on
revenue recognition during the first quarter of 1998.
4. ACQUISITION
On February 5, 1998, the Company completed its acquisition of certain in-
process software technologies and assets of Insignia Solutions, plc for
approximately $17.5 million. Based on appraised value, a portion of the
purchase price was allocated to in-process research and development which had
not reached technological feasibility and had no alternative
7
future use. The allocation resulted in a pre-tax charge of approximately
$16.0 million to the Company's operations in the first quarter of 1998.
5. LICENSED TECHNOLOGY
In January 1998, the Company licensed certain in-process software technology
from EPiCON, Inc. for approximately $8.0 million. A portion of the licensing
fee was allocated to in-process research and development which had no
alternative future use. The allocation resulted in a pre-tax charge of
approximately $7.9 million to the Company's operations in the first quarter
of 1998.
6. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated
to conform to the Statement 128 requirements. All common share and per share
data have been retroactively adjusted to reflect the three-for-two stock
split in the form of a stock dividend paid on February 20, 1998, which stock
dividend was paid to stockholders of record as of February 12, 1998.
The following table sets forth the computation of basic and diluted earnings
per share:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
1998 1997
-----------------------------------------
Numerator:
Net income $ 798,299 $ 7,492,754
=========== ===========
Denominator:
Denominator for basic earnings per share - weighted average shares 41,623,760 40,289,909
Effect of dilutive securities:
Employee stock options 3,184,150 2,323,954
=========== ===========
Dilutive potential common shares 3,184,150 2,323,954
=========== ===========
Denominator for diluted earnings per share - adjusted weighted-average
shares 44,807,910 42,613,863
=========== ===========
Basic earnings per share $ 0.02 $ 0.19
=========== ===========
Diluted earnings per share $ 0.02 $ 0.18
=========== ===========
7. RECLASSIFICATIONS
Certain reclassifications have been made for consistent
presentation.
8. LEGAL MATTERS
The Company received a letter dated February 25, 1998 from a third party
alleging that certain technology incorporated in the Company's WinFrame
product line may infringe a patent held by the third party, and requesting
that the Company contact the third party to discuss a licensing arrangement
for such patent. The Company believes that its existing products
8
do not infringe the patent held by the third party. There can be no assurance
that the Company would prevail in the defense of an infringement claim, if
made, or that the Company could obtain a license to the patent on a
reasonable basis, if at all. Any patent dispute or litigation, or any
royalty-bearing license, could have a material adverse effect on the
Company's business, financial condition or results of operations.
9. SUBSEQUENT EVENT
On April 17, 1998 the Company entered into an amendment to its May 1997
agreement with Microsoft Corporation. Under the terms of the amendment,
assuming certain milestones are reached by Citrix with respect to Microsoft's
release to manufacturing of the Windows NT 4.0 Terminal Server Edition(TM)
product, Citrix's right to receive royalties on future sales of the NT
Terminal Server Edition product releases 4.0 and 5.0 under the 1997 agreement
would be amended to require payment of the full $100.0 million amount in
quarterly payments. Further among other matters, Microsoft would commit to
make commercially reasonable efforts to include NT Terminal Server
functionality in its base Windows NT Server product. In the event that the
milestones were not achieved, the existing royalties in the 1997 agreement of
up to $100.0 million on sales of Windows NT Terminal Server Edition product
would continue to apply.
9
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 is designed for Microsoft 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
continue to support the Microsoft NT platform but will no longer incorporate
Windows NT source code directly into the Company's future offerings. However,
future WinFrame products based upon the Windows NT v.3.51 kernel may continue to
be offered under the terms of the Development Agreement until at least September
30, 2001. In June 1997, the Company announced the development of MetaFrame(TM)
(formerly code-named "pICAsso"), a product 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 MetaFrame 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.
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, as amended (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, called Windows NT
Server, Terminal Server Edition (formerly referred to as "Hydrix"). 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 Windows NT Server, Terminal Server Edition base platform from
a wide variety of computing devices, such as a Company developed plug-in that
implements the Independent Computer Architecture (ICA) protocol on the new
platform, MetaFrame. 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 is entitled
to receive payments of an additional $100 million based on Microsoft's release
and shipment of Windows NT Server, Terminal Server Edition. 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, until at least November 1999, 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 has recently acquired or licensed technology that is related to
its strategy. 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. Additionally, on February 5, 1998, the
Company completed its acquisition of certain in-process
10
software technologies and assets of Insignia Solutions, plc for approximately
$17.5 million. Also, in January 1998, the Company licensed certain in-process
software technology from EPiCON, Inc. for approximately $8.0 million.
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 THREE
THREE MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31, 1998
------------------ VS.
1998 1997 1997
-----------------------------------------------
Net revenues...................................................... 100.0% 100.0% 129.1%
Cost of goods sold................................................ 9.8 10.2 121.0
----- ----- ------
Gross margin...................................................... 90.2 89.8 130.0
Operating expenses:
Research and development......................................... 6.9 7.0 124.5
Sales, marketing and support..................................... 30.2 28.8 140.4
General and administrative....................................... 7.6 6.9 154.0
In-process research and development.............................. 48.3 - *
----- ----- --
Total operating expenses........................................ 93.0 42.7 398.9
----- ----- ------
Income (loss) from operations..................................... (2.8) 47.1 (113.9)
Interest income, net.............................................. 5.3 7.3 68.9
----- ----- ------
Income before income taxes....................................... 2.5 54.4 (89.3)
Income taxes...................................................... 0.9 19.6 (89.3)
----- ----- ------
Net income........................................................ 1.6% 34.8% (89.3)%
===== ===== ======
* Not meaningful.
Net Revenues. Net revenues were approximately $49.3 million and $21.5 million
for the three months ended March 31, 1998 and 1997, respectively, representing
an increase of 129.1%. The increases in net revenues in the first quarter of
1998 compared to the first quarter of 1997 were primarily attributable to an
increase in volume of shipments of the Company's WinFrame products and, to a
lesser extent, the initial recognition of revenue on the Development Agreement
with Microsoft, as well as increased volume in licensing of OEM products.
WinFrame, OEM and Development Agreement revenues approximated 71.4 %, 16.0 %
and 7.6 % of revenues, respectively, in the three months ended March 31, 1998
and 66.7%, 27.7% and 0.0% of revenues, respectively, in the three months ended
March 31, 1997. Both the Company's WinFrame and OEM revenues represent product
license fees based upon the Company's multi-user NT-based technology.
International. International revenues (sales outside of the United States)
accounted for approximately 27.6% and 15.2% of net revenues for the three months
ended March 31, 1998 and 1997, respectively.
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 in the previous
sentence. All development costs incurred in connection with the Development
Agreement are expensed as incurred as a separate 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 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.
11
Gross Margin. Gross margin increased from 89.8% in the first quarter of 1997
to 90.2% in the first quarter of 1998. 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
consisted primarily of personnel-related costs. The increase in research and
development expenses 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 goods sold for the portion
of these expenses associated with the Development Agreement revenues.
Sales, Marketing and Support Expenses. The increase in sales, marketing and
support expenses resulted primarily from increases in promotional activities,
such as advertising literature production and distribution and trade shows as
well as distributor programs. Sales, marketing and support staff and associated
salaries, commissions and related expenses also increased, resulting from
efforts to expand the Company's product distribution.
General and Administrative Expenses. The increase in general and
administrative expenses is primarily due to increased expenses associated with
additional staff, associated salaries and related expenses necessary to support
overall increases in the scope of the Company's operations, as well as an
increase in the provision for doubtful accounts resulting from the higher credit
risk associated with an increased level of accounts receivable attributable to
the period's increase in sales.
In-Process Research and Development Expenses. On February 5, 1998, the
Company completed its acquisition of certain of the assets, technology and
operations of Insignia Solutions, plc for approximately $17.5 million. This
transaction was accounted for using the purchase method of accounting with the
purchase price being principally allocated to purchased technologies and
intangible assets. Approximately $16.0 million of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use and, as
such, was recorded as a non-recurring charge for in-process research and
development. The value attributed to the in-process research and development
was determined by an independent appraisal. Additionally, the Company licensed
certain technology from EPiCON, Inc., for approximately $8.0 million.
Approximately $7.9 million of the license represents the value of research and
development that had not yet reached technological feasibility and had no
alternative future use, and as such, was recorded as a non-recurring charge for
in-process research and development.
Interest Income, Net. The increase in interest income, net, in the three
months ended March 31, 1998 was 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 ended March 31, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1998, the Company generated positive
operating cash flows of approximately $14.6 million, which is net of cash used
to purchase and license in-process research and development of $23.8 million.
These amounts were partially offset by an increase in accounts receivable during
the period. During the same period, the Company also recognized tax benefits
from the exercise of non-statutory stock options and disqualifying dispositions
of incentive stock options of approximately $4.1 million. The Company purchased
and sold short-term investments for approximately $33.4 million and $19.8
million, respectively, during the three months ended March 31, 1998.
Additionally, the Company expended approximately $4.1 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.
Positive operating cash flows in the three months ended March 31, 1997, were
primarily due to increased profitability during that period.
As of March 31, 1998, the Company had approximately $119.0 million in cash and
cash equivalents, $102.8 million in short-term investments and $222.9 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. At March 31, 1998, the Company had approximately $20.7 million in
accounts receivable, net of
12
allowances, and $65.6 million of deferred revenues, of which the Company
anticipates $19.0 million will be earned over the next twelve months.
On February 5, 1998, the Company completed its acquisition of certain in-
process software technologies and assets of Insignia Solutions, plc for
approximately $17.5 million in cash. Additionally, on January 8, 1998, the
Company has licensed certain in-process software technology from EPiCON, Inc.,
for approximately $8.0 million in cash, payable over a two-year period.
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 paid cash amounting to approximately $3,000 in lieu of fractional
shares in connection with its three-for-two stock split effected February 20,
1998. The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future.
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, as amended (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 certain future multi-user versions of
Microsoft Windows NT Server, known as the Windows NT Server, Terminal Server
Edition. 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 Windows NT Server, Terminal Server Edition 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, MetaFrame. 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 is entitled to receive
payments of an additional $100 million based on Microsoft's release of Windows
NT Server, Terminal Server Edition. 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,
until at least November 1999, 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 Windows NT Server, Terminal Server Edition based
platforms will allow Microsoft to create plug-in products that will be
competitive with at least some of the Company's current WinFrame products and,
may in the future compete with the Company's Windows NT Server, Terminal Server
Edition 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 until at least
November 1999. Subsequent to November 1999, it is possible that Microsoft will
market or endorse other methods to provide non-Windows client devices multi-user
Windows access. Third, the Company's ability to successfully commercialize its
future MetaFrame product will be dependent on Microsoft's ability to market and
sell its Windows NT Server, Terminal Server Edition products. Finally, there may
be delays in the release and shipment of Windows NT Server, Terminal Server
Edition.
13
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, (3) is unable to successfully market and sell the Windows NT
Server, Terminal Server Edition products, or (4) encounters delays in the
release and shipment of Windows NT Server, Terminal Server Edition, 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 cause broad-based acceptance of its ICA protocol as 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 NCD, Tektronix, Wyse and others.
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. Additionally, the announcement of the
release, and the actual release of products competitive to the Company's
existing and future product lines, such as Microsoft's Windows NT Server,
Terminal Server Edition and related plug-ins, could cause existing and potential
customers of the Company to postpone or cancel plans to license certain of the
Company's existing and future product offerings, which would adversely impact
its net revenues, operating results and financial condition. Further, the
Company's ability to market ICA, MetaFrame and other future product offerings
will be dependent on Microsoft's licensing and pricing scheme to allow client
devices implementing ICA, MetaFrame or any such future product offerings to
attach to the Windows NT Server, Terminal Server Edition.
Dependence on Proprietary Technology. The Company relies primarily 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. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that any such assertion will not result in costly
litigation or require the Company to obtain a license to intellectual property
rights of such third parties. In addition, there can be no assurance that such
licenses will be available on reasonable terms or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Product Concentration. The Company anticipates that one of its product
technologies and future derivative products and product lines based upon this
technology, if any, will constitute a majority of its revenues for the
foreseeable future. The Company's ability to generate revenue from its
MetaFrame product will be highly dependent on market acceptance of Windows NT
Server, Terminal Server Edition products, with which its product is intended
to be combined to provide capabilities similar to those currently offered in the
WinFrame technology 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. In addition, the introduction of
products based upon the MetaFrame technology may be competitive with its
WinFrame technology line and may delay or replace orders of either technology.
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. In addition, the
Company has completed certain international acquisitions since October 1997, and
assimilating the operations and personnel of such acquired companies has placed
and may continue to place a significant strain on the Company's managerial,
operational and financial resources. To manage its growth effectively, the
Company will be required to continue to implement and improve additional
management and financial systems and controls, and to expand, train and manage
its employee base. Although the Company believes that it has made adequate
allowances for the costs and risks associated with these expansions, there can
be no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's current or future operations or that Company
management will be able to effectively manage this expansion and still achieve
the rapid execution necessary to fully exploit the market window for the
Company's products and services in a timely and cost-effective manner. The
Company's
14
future operating results will also depend on its ability to manage its
expanding product line, expand its sales and marketing organizations, and expand
its support organization commensurate with the increasing base of its installed
products. If the Company is unable to manage growth effectively or unable to
achieve the rapid execution necessary to fully exploit the market window for the
Company's products and services in a timely and cost-effective manner, the
Company's business, results of operations and financial condition may be
materially adversely affected.
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 1998 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
1998. 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 1998 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 1998.
Information System Conversion. The Company and its wholly-owned subsidiaries
all utilize separate applications to process their accounting transactions. As
a result, the Company and its subsidiaries are currently in the process of
converting a significant part of its business operations to a single accounting
application purchased from a third-party vendor. Although the Company believes
it has addressed all the significant issues related to this conversion, there
can be no assurance that unanticipated software and hardware problems will not
arise, which may result in delays in customer billings and vendor payments, as
well as extended accounts receivable payment cycles.
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. To the extent that such
transactions have not yet occurred, 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 if not offset by cash flows
from future operations. Additionally, the Company and others may announce new
products, new MetaFrame 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 business, results of operations
and financial condition.
Year 2000 Compliance. Until recently, many computer programs were written
using two digits rather than four digits to define the applicable year in the
twentieth century. Such software may recognize a date using "00" as the year
1900 rather than the year 2000. Utilizing both internal and external resources,
the Company is in the process of defining, assessing and converting, or
replacing, various programs, hardware and instrumentation systems to make them
Year 2000 compatible. The Company's Year 2000 project is comprised of two
components -- business applications and equipment. The business applications
component consists of the Company's business computer systems, as well as the
computer systems of third-party suppliers or customers whose Year 2000 problems
could potentially impact the Company. Equipment exposures consist of personal
computers, system servers, telephone equipment and elevators whose Year 2000
problems could also impact the Company. The cost of the Year 2000 initiatives
is not expected to be material to the Company's results of operations or
financial position.
The Company's main product, WinFrame, is an authorized extension to Microsoft
Windows NT v.3.51 server. While the Company believes both Windows NT v.3.51
server and WinFrame/Enterprise (versions 1.5, 1.6 and 1.7) are currently capable
of storing four-digit year data, allowing applications to differentiate between
dates from the 1900s and the year 2000 and beyond,
15
potential incompatibility with two-digit application programs may limit the
Company's sales of product in those situations. While the Company believes that
its WinFrame/Enterprise (versions 1.5, 1.6 and 1.7) are capable of storing four-
digit year data, it is typically the application's function to collect and
properly store date data. There can be no assurance that the Company's products
will not be integrated by the Company or its customers with, or otherwise
interact with non-compliant software or other products which may expose the
Company to claims from its customers or other third parties. The foregoing could
result in the loss of or delay in market acceptance of the Company's products
and services, increased service costs to the Company or payment by the Company
of compensatory or other damages. Although most Windows applications do store
four-digit year dates today, it is possible that some applications are now or
have historically only collected two-digit year data, WinFrame cannot create
four-digit year data for applications which have collected only two digits in
year fields. Further, there can be no assurance that the Company's software
products that are designed to be Year 2000 compliant contain all necessary
technology to make them Year 2000 compliant. Many companies are expending
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company, thus
potentially resulting in stalled market sales within the industry. The foregoing
could result in a material adverse effect on the Company's business, results of
operations and financial condition.
Potential for Undetected Errors. Despite significant testing by the Company
and by current and potential customers, errors may not be found in new products
until after commencement of commercial shipments. Additionally, third party
products, upon which the Company's products are dependent, may contain defects
which could reduce the performance of the Company's products or render them
useless.
Reliance Upon Indirect Distribution Channels and Major Distributors. The
Company relies significantly on independent distributors and resellers for the
marketing and distribution of its products. The Company's distributors and
resellers are not within the control of the Company, are not obligated to
purchase products from the Company, and may also represent other lines of
products.
Need to Expand Channels of Distribution. The Company intends to leverage its
relationships with hardware and software vendors and systems integrators to
encourage these parties to recommend or distribute the Company's products. In
addition, an integral part of the Company's strategy is to expand its direct
sales force and add third-party distributors both domestically and
internationally. The Company is currently investing, and intends to continue to
invest, significant resources to develop these channels, which could adversely
affect the Company's operating margins and related cash flows from operating
activities.
Revenue Recognition Process. The Company continually re-evaluates its
programs, including specific license terms and conditions, to market its various
current and future products and services. The Company may implement new
programs which may include, among other things, specified and unspecified
enhancements to its current and future product lines. Revenues associated with
such enhancements may be recognized after the initial shipment or licensing of
the software product or may be recognized over the product's life cycle. The
timing of the implementation of such programs, the timing of the release of such
enhancements as well as factors such as determining vendor-specific objective
evidence of fair value of each element offered separately and whether upgrades
and enhancements are defined as upgrade rights pursuant to Statement of Position
(SOP) 97-2 will impact the timing of the Company's recognition of revenues and
related expenses associated with its products, related enhancements and
services. Because of the uncertainties related to the outcome of the re-
evaluation of its programs, the determination of vendor-specific objective
evidence of fair value and whether upgrades and enhancements will be defined as
upgrade rights pursuant to SOP 97-2, and its impact on revenue recognition, the
Company cannot currently quantify the impact of such re-evaluation on its
business, results of operations and financial condition.
Product Returns and Price Reductions. The Company provides most of its
distributors with product return rights for stock balancing or limited product
evaluation. The Company also provides most of its distributors 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. Although the Company believes that it has adequate
reserves to cover product returns, there can be no assurance that the Company
will not experience significant returns in the future or that such reserves will
be adequate.
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 and political conditions and changing restrictions imposed by
regulatory requirements, tariffs or other trade barriers or by United
16
States export laws, costs of localizing products and marketing such products in
foreign countries, longer accounts receivable payment cycles, potentially
adverse tax consequences, including restrictions on repatriation of earnings and
the burdens of complying with a wide variety of foreign laws.
Fluctuations in Economic and Market Conditions. The demand for the Company's
products depends in part upon the general demand for computer hardware and
software, which fluctuates based on numerous factors, including capital spending
levels and general economic conditions.
Growth Rate. The Company's revenue growth rate in the current year may not
approach the levels attained in 1997 and 1996, which were high, due primarily to
the increased market acceptance of WinFrame during that period. However, to the
extent the Company's revenue growth continues, the Company believes that its
cost of goods sold and certain operating expenses will also increase. Due to
the fixed nature of a significant portion of such expenses, together with the
possibility of slower revenue growth, the Company's income from operations and
cash flows from operating and investing activities may decrease in the current
year.
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
or future MetaFrame 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. Finally, any delay in the release and
shipment of Windows NT Server 4.0, Terminal Server Edition or MetaFrame could
adversely impact the Company's business, results of operations and financial
condition.
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.
17
PART II: OTHER INFORMATION
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 net proceeds from the offering
were $38,892,728. The Company has not utilized any of the proceeds from its
initial public offering.
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) A report on Form 8-K was filed with the Securities and Exchange
Commission on February 24, 1998 with respect to:
Item 5 - Other Events. To disclose the consummation of the
acquisition of certain software technologies and assets of Insignia
Solutions, plc by the Company and its wholly-owned subsidiary,
Citrix Systems UK Limited, on February 5, 1998.
Item 5 - Other Events. To disclose the consummation of a three-for-
two stock split in the form of a stock dividend paid on February
20, 1998, which stock dividend was paid to stockholders of record
of the Company as of February 12, 1998.
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 on this 15th day of May 1998.
CITRIX SYSTEMS, INC.
By: /s/ Roger W. Roberts
----------------------------
Roger W. Roberts
President, Chief Executive Officer
and Secretary
(Principal Executive Officer)
By: /s/ James J. Felcyn, Jr.
----------------------------
James J. Felcyn, Jr.
Vice-President of Finance and
Administration and Chief
Financial Officer
(Principal Financial Officer)
By: /s/ Marc-Andre Boisseau
----------------------------
Marc-Andre Boisseau
Controller
(Principal Accounting Officer)
19
EXHIBIT INDEX
Page Number
-----------
27.1 Financial Data Schedule 21
27.2 Financial Data Schedule 22
20