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, 1999
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 33309
Fort Lauderdale, Florida (Zip Code)
(Address of principal executive offices)
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 April 30, 1999 there were 87,269,955 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
CITRIX SYSTEMS, INC.
Form 10-Q
For the Quarter Ended March 31, 1999
CONTENTS
Page Number
-----------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income:
Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Qualitative & Quantitative Disclosures About Market Risk 24
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
Exhibit 1.1
Exhibit 4.1, 10.1
Exhibit 4.2
Exhibit 4.3, 10.2
Exhibit 27.1
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Citrix Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
1999 1998
---------------------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $413,104 $127,546
Short-term investments 43,375 56,934
Accounts receivable, net of allowances of
$6,171 and $6,234 at March 31, 1999 and
December 31, 1998, respectively 43,774 32,798
Inventories 4,761 4,071
Prepaid expenses 2,751 6,745
Other current assets 3,746 3,037
Current portion of deferred tax assets 25,148 12,885
-------- --------
Total current assets 536,659 244,016
Long-term investments 162,771 97,108
Property and equipment, net 15,252 14,183
Long-term portion of deferred tax assets 31,501 29,183
Other assets 16,041 91
Intangible assets, net 43,021 46,799
-------- --------
$805,245 $431,380
======== ========
Continued on following page.
3
Citrix Systems, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
March 31, December 31,
1999 1998
---------------------------------------
(in thousands, except par value)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other accrued expenses $ 44,333 $ 29,735
Accrued royalties and other accounts payable
to stockholder 3,198 2,891
Deferred revenue 14,868 10,107
Current portion of deferred revenues on
contract with stockholder 39,898 39,830
Income taxes payable 19,347 2,553
-------- --------
Total current liabilities 121,644 85,116
Long-term liabilities:
Deferred revenues on contract with stockholder 38,870 48,810
Convertible subordinated debentures 301,894 --
-------- --------
Total long-term liabilities 340,764 48,810
Stockholders' equity:
Common stock at $.001 par value--150,000 shares
authorized; and 87,254 and 85,923 issued and
outstanding at March 31, 1999 and
December 31, 1998, respectively 87 86
Additional paid-in capital 207,821 188,207
Retained earnings 134,929 109,161
-------- --------
Total stockholders' equity 342,837 297,454
-------- --------
$805,245 $431,380
======== ========
See accompanying notes.
4
Citrix Systems, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
------------------------------------------
1999 1998
------------------------------------------
(in thousands, except per share information)
Revenues:
Net revenues--unrelated parties $75,166 $45,552
Net revenues--stockholder 9,873 3,750
------- -------
Net revenues 85,039 49,302
Cost of revenues:
Cost of revenues--unrelated parties 4,280 3,673
Cost of revenues--stockholder 242 1,176
------- -------
Total cost of revenues 4,522 4,849
------- -------
Gross margin 80,517 44,453
Operating expenses:
Research and development 8,406 3,278
Sales, marketing and support 24,769 14,888
General and administrative 6,410 3,705
Amortization of intangible assets 3,778 774
In-process research and development -- 5,284
------- -------
Total operating expenses 43,363 27,929
------- -------
Income from operations 37,154 16,524
Interest income, net 3,513 2,659
Interest expense (404) --
------- -------
Income before income taxes 40,263 19,183
Income taxes 14,495 6,906
------- -------
Net income $25,768 $12,277
======= =======
Earnings per common share:
Basic earnings per share $0.30 $0.15
======= =======
Weighted average shares outstanding 86,492 83,248
======= =======
Earnings per common share--assuming dilution:
Diluted earnings per share $0.28 $0.14
======= =======
Weighted average shares outstanding 93,682 89,616
======= =======
See accompanying notes.
5
Citrix Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
----------------------------------------
1999 1998
----------------------------------------
(in thousands)
Operating activities
Net income $ 25,768 $ 12,277
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 5,400 1,586
(Recovery of) provision for doubtful accounts (63) 555
Recovery of product returns -- (824)
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options 7,860 4,078
Accretion of original issue discount 391 --
In-process research and development -- 5,284
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (10,913) (7,755)
Inventories (690) (2)
Prepaid expenses 3,994 (518)
Other current assets (709) --
Other assets (6,904) --
Deferred tax assets (14,581) 1,508
Deferred revenue 4,761 865
Deferred revenue on contract with stockholder (9,872) (3,750)
Accounts payable and other accrued expenses 14,861 776
Accrued royalties and other accounts payable to stockholder 307 185
Income taxes payable 16,794 252
-------- --------
Net cash provided by operating activities 36,404 14,517
Investing activities
Purchases of investments (102,411) (33,442)
Proceeds from sale of investments 50,308 19,785
Cash paid for acquisitions -- (17,500)
Cash paid for licensing agreement (250) (2,125)
Purchases of property and equipment (2,691) (4,184)
-------- --------
Net cash used in investing activities (55,044) (37,466)
Financing activities
Net proceeds from issuance of common stock 11,755 1,849
Net proceeds from issuance of convertible subordinated debentures 292,458 --
Payments on capital lease obligations (15) 35
-------- --------
Net cash provided by financing activities 304,198 1,884
-------- --------
Increase (decrease) in cash and cash equivalents 285,558 (21,065)
Cash and cash equivalents at beginning of period 127,546 140,081
-------- --------
Cash and cash equivalents at end of period $413,104 $119,016
======== ========
See accompanying notes.
6
Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
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 contained in this report 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,
1998.
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, will vary from these estimates.
3. Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with the American Institute of Certified Public Accountants
Statement of Position ("SOP") 97-2 (as amended by SOP 98-4 and SOP 98-9),
"Software Revenue Recognition". Product revenues are recognized upon shipment of
the software product only if no significant Company obligations remain, the fee
is fixed or determinable, and collection of the resulting receivable is deemed
probable. In the case of non-cancelable product licensing arrangements under
which certain Original Equipment Manufacturers ("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. Revenue from packaged
product sales to distributors and resellers is recorded when related products
are shipped. In software arrangements that include rights to multiple software
products, post-contract customer support, and/or other services, the Company
allocates the total arrangement fee among each deliverable based on the relative
fair value of each of the deliverables determined based on vendor-specific
objective evidence. Product returns and sales allowances, including stock
rotations, are estimated and provided for at the time of sale. Revenues from
training and consulting are recognized when the services are performed. Service
and subscription revenues from customer maintenance fees for ongoing customer
support and product updates and upgrades are based on the price charged or
derived value of the undelivered elements and 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 statement of income.
7
4. Convertible Subordinated Debentures
In March 1999, the Company sold $850.0 million principal amount at maturity of
its zero coupon convertible subordinated debentures (the "debentures") due March
22, 2019 in a private placement. The debentures were priced with a yield to
maturity of 5.25% and resulted in net proceeds to the Company of approximately
$292.5 million (net of original issue discount and debt issuance costs). Except
under limited circumstances, no interest will be paid on the debentures prior to
maturity. The debentures are convertible at the option of the security holder at
any time on or before the maturity date at a conversion rate of 7.0306 shares of
the Company's common stock for each $1,000 principal amount at maturity of
debentures, subject to adjustment in certain events. The Company may redeem the
debentures on or after March 22, 2004. Holders may require the Company to
repurchase the debentures, at set redemption prices (equal to the issue price
plus accrued original issue discount) beginning on March 22, 2004.
5. Earnings per Share
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and dilutive common share
equivalents outstanding during the period. Dilutive common share equivalents
consist of shares issuable upon the exercise of stock options. Convertible
shares related to the convertible subordinated debentures were excluded from the
computation of diluted earnings per share because of their antidilutive effect.
All share and per share data has been retroactively adjusted to reflect the two-
for-one stock split in the form of a stock dividend paid on March 25, 1999 to
stockholders of record as of March 17, 1999.
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
March 31,
--------------------------------------
1999 1998
--------------------------------------
Numerator:
Net income $25,768 $12,277
======= =======
Denominator:
Denominator for basic earnings per share --
weighted-average shares outstanding 86,492 83,248
Effect of dilutive securities:
Employee stock options 7,190 6,368
------- -------
Denominator for diluted earnings per share --
adjusted weighted-average shares outstanding 93,682 89,616
======= =======
Basic earnings per share $ 0.30 $ 0.15
======= =======
Diluted earnings per share $ 0.28 $ 0.14
======= =======
6. Reclassifications
Certain reclassifications have been made for consistent presentation.
7. Recent Accounting Pronouncements
In March 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The Company has adopted the SOP during the current
quarter. The SOP requires the capitalization of certain costs incurred after the
date of adoption in connection with
8
developing or obtaining software for internal use. The Company does not expect
the adoption of the SOP to have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
In December 1998, the Accounting Standards Board issued Statement of Position
("SOP") 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions". The SOP addresses software revenue recognition
as it applies to certain multiple-element arrangements. SOP 98-9 also amends SOP
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2", to extend the
deferral of application of certain passages of SOP 97-2 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. The Company will comply with the requirements of this SOP as they
become effective, which the Company does not expect to have a material effect on
the Company's consolidated financial position, results of operations or cash
flows.
8. Subsequent Events
On April 15, 1999, the Board of Directors approved a stock repurchase program
authorizing the repurchase of up to $200 million of the Company's common stock.
Purchases will be made from time to time in the open market and paid out of
general corporate funds.
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
serverbased computing software that enables effective and efficient deployment
of enterprise applications that are designed for Microsoft Windows operating
systems. The Company began shipping its WinFrame product in final form in the
third quarter of 1995 and its MetaFrame product in the second quarter of 1998.
These products, together with their related options, have comprised the largest
source of the Company's revenue.
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, Terminal Server Edition ("NT Terminal Server").
Under the terms of the Development Agreement, as amended, the Company is
entitled to receive payments of $100 million, in quarterly payments, $55 million
of which has already been received.
As a result of the Development Agreement, the Company will continue to support
the Microsoft Windows NT platform, but the MetaFrame products and later releases
will no longer directly incorporate Windows NT technology. The Company plans to
continue developing enhancements to its MetaFrame product line and expects that
this product, WinFrame products and associated options and royalties derived
under the terms of the Development Agreement will constitute a majority of its
revenues for the foreseeable future.
The Company's revenue recognition policies are in compliance with the American
Institute of Certified Public Accountants Statement of Position ("SOP") 97-2 (as
amended by SOP 98-4 and SOP 98-9), "Software Revenue Recognition" as described
in Note 3 of the Notes to Condensed Consolidated Financial Statements included
in this report.
On March 22, 1999, the Company completed a private placement of zero coupon
convertible subordinated debentures due March 22, 2019 (the "debentures") which
resulted in net proceeds to the Company of approximately $292.5 million (net of
original issue discount and debt issuance costs). The debentures were offered
at an issue price to investors equal to the principal amount at maturity of each
debenture less original issue discount. The debentures are general unsecured
obligations of the Company and are subordinated to all existing and future
senior indebtedness of the Company. The debentures were priced with a yield to
maturity of 5.25%. Except under limited circumstances, no interest will be paid
on the debentures prior to maturity. The Company intends to use the net proceeds
of the offering for working capital and other general corporate purposes. The
debentures are convertible, unless previously redeemed or purchased, at any time
on or before the maturity date at a conversion rate of 7.0306 shares of the
Company's common stock for each $1,000 principal amount at maturity of
debentures, subject to adjustment in certain events. The Company may redeem the
debentures on or after March 22, 2004. In the event of a redemption, the
debentures will be purchased for cash at a price equal to the issue price of the
debentures plus accrued original issue discount through the date of redemption.
Holders may also require the Company to repurchase the debentures upon a change
in control. In the event of a change in control, debentures will be purchased
for cash at a price equal to the issue price of the debentures plus accrued
original issue discount through the date of purchase. The Company has agreed
to file with the Securities and Exchange Commission a registration statement in
respect of the resale of the debentures and the Common Stock issuable upon
conversion of the debentures. The Company will be required to pay additional
interest on the debentures if it fails to comply with certain obligations under
the registration rights agreement.
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, may impact the Company's future performance and financial position.
10
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, 1999
--------------------- vs.
1999 1998 March 31, 1998
--------------------------------------------
Net revenues...................................................... 100.0% 100.0% 72.4%
Cost of revenues.................................................. 5.3 9.8 (6.7)
----- -----
Gross margin...................................................... 94.7 90.2 81.1
Operating expenses:
Research and development......................................... 9.9 6.6 156.4
Sales, marketing and support..................................... 29.1 30.2 66.4
General and administrative....................................... 7.5 7.5 73.0
Amortization of intangible assets................................ 4.4 1.6 *
In-process research and development.............................. -- 10.7 *
----- -----
Total operating expenses........................................ 50.9 56.6 55.3
----- -----
Income from operations............................................ 43.8 33.6 124.8
Interest income, net.............................................. 4.1 5.4 32.1
Interest expense.................................................. (0.5) -- *
----- -----
Income before income taxes........................................ 47.4 39.0 109.9
Income taxes...................................................... 17.0 14.0 109.9
----- -----
Net income........................................................ 30.4% 25.0% 109.9%
===== =====
* Not meaningful.
Net Revenues. The increases in net revenues in the first quarter of 1999
compared to the first quarter of 1998 were primarily attributable to an increase
in volume of shipments of the Company's MetaFrame and system options products
and, to a lesser extent, an increase in revenue related to the Development
Agreement with Microsoft. System option products include additional user
licenses as well as other options, which are applicable to both the MetaFrame
and WinFrame product lines. The overall increase in net revenues was offset by
a decrease in the volume of shipments of the WinFrame product and decreased
volume in licensing of OEM products.
An analysis of Company net revenue is detailed in the table below. Net
revenue is segregated into six categories: WinFrame-based products, MetaFrame-
based products, system options products, OEM revenue, Microsoft royalties and
other revenue. The Company's WinFrame, MetaFrame, system options products and
OEM revenues represent product license fees based upon the Company's multi-user
NT-based technology. The OEM revenue consists of license fees and royalties from
third party manufacturers who are granted a license to incorporate and/or market
the Company's multi-user technologies in their own product offerings. Microsoft
royalties represent fees recognized in connection with the Development
Agreement.
Revenue Growth for
Three Months Ended the Three Months Ended
March 31, March 31, 1999
---------------------------------------- vs.
1999 1998 March 31, 1998
------------------ -------------------- ----------------------
WinFrame-based products...................... 8% 53% (75%)
MetaFrame-based products..................... 46 - *
System options products...................... 30 18 177
OEM revenue.................................. 2 16 (73)
Microsoft royalties.......................... 12 8 163
Other revenue................................ 3 5 (4)
---- ---- ---
Net revenues................................. 100% 100% 114%
* Not meaningful.
11
International. International revenues (sales outside of the United States)
accounted for approximately 39% and 28% of net revenues for the three months
ended March 31, 1999 and 1998, respectively. The Company expects international
revenue to account for a larger percentage of total revenue in 1999 than in
1998.
The Company will continue investing in international markets and expanding its
international operations by establishing additional foreign operations, hiring
personnel, expanding its international direct sales force and adding third party
channel partners. International revenues may fluctuate in future periods as a
result of difficulties in staffing, dependence on an independent distribution
channel, competition, variability of foreign economic and political conditions
and changing restrictions imposed by regulatory requirements, localized product
release timing and marketing such products in foreign countries.
Cost of Revenues. Cost of revenues 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 revenues 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 revenues.
Gross Margin. Gross margin increased from 90.2% in the first quarter of 1998
to 94.7% in the first quarter of 1999 primarily due to the introduction of the
MetaFrame product line and an increase in system options products. The MetaFrame
product line began shipping in June 1998 and has a relatively high gross margin
contribution compared to the WinFrame product line as the MetaFrame product
line bears no royalties. The increase in gross margin as a percentage of revenue
related to the Development Agreement also increased due to an increase in
revenue related to the Development Agreement and a decrease in related
development costs. The increase in gross margin was partially offset by an
increase in inventory reserves.
Research and Development Expenses. Research and development expenses
consisted primarily of personnel-related costs. To date, all internal software
development costs have been expensed as incurred. 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. All development costs included in the research and development of
software products and enhancements to existing products have been expensed as
incurred except for certain intangible assets related to the acquisitions and
licensing arrangement described herein.
Sales, Marketing and Support Expenses. The increase in sales, marketing and
support expenses resulted primarily from increased efforts in promotional and
advertising activities related to specific product lines and corporate branding.
Promotional activities include co-op advertising programs and other promotional
activities such as those directed at resellers, training programs, trade shows
and other direct mail programs. Sales, marketing and support staff and
associated salaries, commissions and related expenses also increased due to
efforts to increase the Company's international sales force and marketing
programs.
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. The increase in
general and administrative expenses was partially offset by lower bad debt
expenses as compared to the same quarter of 1998.
Amortization of Intangible Assets. The increase in amortization of goodwill
and identifiable intangible assets is primarily due to the APM Ltd. and VDOnet
Corporation Ltd. acquisitions. The Company acquired APM Ltd. for approximately
$40.4 million in June 1998 and acquired VDOnet Corporation Ltd. for
approximately $8.0 million in July 1998.
In-Process Research and Development Expenses. During 1998, the Company
completed certain acquisitions and licensing arrangement. Since the respective
dates of acquisition and licensing, the Company has used the acquired in-process
technology to develop new product offerings and enhancements, which have or will
become part of the Company's suite of products when completed. Functionality
included in products using the acquired in-process technology have been
introduced at various times following the respective transaction dates of the
acquired assets and licensing, and the Company currently expects to complete
12
the development of the remaining projects at various dates between 1999 and
2000. Upon completion, the Company has offered and intends to offer the related
products to its customers.
The nature of the efforts required to develop and integrate the acquired
in-process technology into commercially viable products or features and
functionalities within the Citrix suite of existing products principally relate
to the completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet design
requirements, including functions, features and technical performance
requirements. The Company currently expects that products utilizing the acquired
in-process technology will be successfully developed, but there can be no
assurance that commercial viability of any of these products will be achieved.
Furthermore, future developments in the software industry, particularly the
server-based computing environment, changes in technology, changes in other
products and offerings or other developments may cause the Company to alter or
abandon product plans. Failure to complete the development of these projects in
their entirety, or in a timely manner, could have a material, adverse impact on
the Company's financial condition and results of operations.
A description of the in-process research and development and the estimates
made by the Company for EPiCON, Insignia, APM and VDOnet is summarized below.
All of the acquired projects are targeted for the server-based computing market.
After the acquisition or license of each technology, the Company has continued
the development of these in-process projects.
EPiCON
In January 1998, the Company licensed certain in-process software technology
from EPiCON, Inc. The in-process research and development acquired in the
license of EPiCON technology consisted of one significant research and
development project, termed Application Installation Services. This project
involved the development of software to enable an application to be installed
once on a server and then replicated to all other servers in a server farm
configuration. As of March 31, 1999, the Company has completed this project and
has incurred expenses totaling approximately $1.1 million since the date of
licensing.
Insignia
On February 5, 1998, the Company completed its acquisition of certain in-
process software technologies and assets of Insignia Solutions, plc. The in-
process research and development acquired in the Insignia acquisition consisted
primarily of one significant research and development project, Keoke, a video
display protocol designed to add performance and bandwidth management
enhancements to ICA in WinFrame and MetaFrame software. As of March 31, 1999,
expenses totaling approximately $1.0 million had been incurred since the date of
acquisition. The Company estimates approximately $800,000 will be required
to complete the remaining research and development project and it is expected to
be completed by the end of 1999. The remaining efforts to complete the project
are primarily the utilization of performance enhancements and algorithmic
methodologies of the Keoke protocol to create similar improvements in the
Company's ICA protocol. The research and development risks associated with this
project primarily relate to the integration of key performance features of Keoke
into the Company's ICA protocol.
APM
On June 30, 1998, the Company completed its acquisition of APM Ltd. The in-
process research and development acquired in the APM acquisition consisted
primarily of one significant research and development project. The project is a
Windows NT-based application server for Java, which is similar to WinFrame
software, but runs Java applications. As of March 31, 1999, expenses totaling
approximately $2.5 million had been incurred since the date of acquisition. The
Company estimates approximately $2.3 million will be required to complete the
remaining research and development project and it is expected to be completed in
2000. The remaining effort to complete the project is primarily the utilization
of acquired technology to develop an application server for Java that would
operate in a MetaFrame and WinFrame server environment. The research and
development risks associated with this project relate primarily to updating the
acquired technology to be compatible with Sun Microsystems' Java 2.0
application, integrating and porting such technology into a variety of server-
based computing architectures.
VDOnet
In July 1998, the Company completed its acquisition of VDOnet Corporation,
Ltd. The in-process research and development acquired in the VDOnet acquisition
consisted primarily of one significant research and development project, ICA
Video Services. This project allows video applications and applications
containing video to be viewed on an ICA client. As of
13
March 31, 1999, expenses totaling approximately $1.8 million had been incurred
since the date of acquisition. The Company estimates approximately $2.4 million
will be required to complete the remaining research and development project and
it is expected to be completed in 2000. The remaining effort to complete the
project is primarily the utilization of acquired technology to develop a video
server that will provide video applications to an ICA client. The research and
development risks associated with this project relate primarily to integrating
this product into a server-based computing environment.
There can be no assurance that the Company will not incur additional charges
in subsequent periods to reflect costs associated with these transactions or
that the Company will be successful in its efforts to integrate and further
develop these technologies.
Interest Income, Net. The increase in interest income, net, for the three
months ended March 31, 1999 was primarily due to interest income earned on cash
generated from operations and additional cash obtained from the issuance of the
zero coupon convertible subordinated debentures in March 1999.
Interest Expense. The increase in interest expense for the three months ended
March 31, 1999 was due to the issuance of the zero coupon convertible
subordinated debentures in March 1999.
Income Taxes. The Company's effective tax rate amounted to 36% for the three
months ended March 31, 1999 and 1998.
Liquidity and capital resources
During the three months ended March 31, 1999, the Company generated positive
operating cash flows of approximately $36.4 million. Cash provided by operating
activities relate primarily to net income as adjusted for tax benefits related
to the exercise of non-statutory stock options and disqualified dispositions of
incentive stock options of $7.9 million and a $14.6 million increase in deferred
tax assets. Accounts receivable increased $10.9 million due to higher revenue
levels. Accounts payable and other accrued expenses increased $14.9 million due
to accrued royalty fees and increased expenses resulting from higher levels of
operating activity. Income tax payable increased $16.8 million due to greater
profitability generated from higher revenue levels. Cash used in investing
activities of $55.0 million related primarily to the use of a portion of the
proceeds from the issuance of convertible subordinated debentures to purchase
longer maturity investments. This cash outflow was partially offset by cash
inflows from the sale of investments of approximately $50.3 million. Cash
provided by financing activities of $304.2 million related primarily to $292.5
million of net proceeds from the issuance of convertible subordinated debentures
and $11.8 million from the issuance of common stock under the Company's stock
option plan.
As of March 31, 1999, the Company had approximately $619.3 million in cash and
investments and $415.0 million of working capital. The net proceeds from the
issuance of convertible subordinated debentures have been invested in cash
equivalents and investments. The Company intends to use the net proceeds for
working capital and other general corporate purposes. The Company's cash and
cash equivalents are invested in investment grade, highly liquid securities to
minimize interest rate risk and allow for flexibility in the event of immediate
cash needs. At March 31, 1999, the Company had approximately $43.8 million in
accounts receivable, net of allowances, and $93.6 million of deferred revenues,
of which the Company anticipates $54.8 million will be earned over the next
twelve months.
On April 15, 1999, the Board of Directors approved a stock repurchase program
authorizing the repurchase of up to $200 million of the Company's common stock.
Purchases will be made from time to time in the open market and paid out of
general corporate funds.
The Company believes existing cash and investments together with cash flow
from operations, if any, will be sufficient to meet operating and capital
expenditures requirements for at least the next twelve months. The Company may
also from time to time seek to raise additional funds through public or private
financings.
Year 2000 readiness disclosure
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. The
14
consequences of this issue may include systems failures and business
process interruption to the extent companies fail to upgrade, replace or
otherwise address year 2000 problems. The year 2000 problem may also result in
additional business and competitive differentiation. Aside from the well-known
calculation problems with the use of 2-digit date formats as the year changes
from 1999 to 2000, the year 2000 is a special case leap year. As a result,
significant uncertainty exists in the software industry concerning the potential
impact of the year 2000 problem.
The Company believes that it has four general areas of potential exposure with
respect to the year 2000 problem: (i) its own software products; (ii) its
internal information systems; (iii) computer hardware and other equipment
related systems; and (iv) the effects of third party compliance efforts.
The Company's existing principal software product lines consist of WinFrame
and MetaFrame software. The Company's WinFrame product line is an authorized
extension to Microsoft Windows NT, 3.51. The Company's MetaFrame product line
adds additional functionality to NT Terminal Server. Customers can obtain
current information about the year 2000 compliance of the Company's products
from the Company's web site. Information on the Company's web site is provided
to customers for the sole purpose of assisting in planning for the transition to
the year 2000. Such information is the most currently available concerning the
behavior of the Company's products in the next century and is provided "as is"
without warranty of any kind.
While the Company believes that the current versions of its WinFrame and
MetaFrame products are capable of storing four-digit year data, allowing
applications to differentiate between dates from the 1900s and the year 2000 and
beyond, the potential incompatibility with two-digit application programs may
limit the Company's sales of product in those situations. Further,
notwithstanding the operating system's ability to store 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-year 2000
compliant software or other products which may malfunction and 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 the Company believes that
many 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, and in such cases 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. If any of the Company's licensees experience year 2000
problems, such licensees could assert claims for damages against the Company.
With respect to internal information systems, the Company has commenced, but
has not yet completed, a testing and compliance program to identify any year
2000 problems. An audit has been conducted to identify all business critical
applications and responses sought from vendors as to whether the application is
compliant or not and what plans they have in place to ensure compliance before
December 31, 1999. The Company expects to complete this portion of its
compliance plan by the end of the third quarter of 1999.
The third type of potential year 2000 exposure relates to the Company's
computer hardware and other equipment related systems including such equipment
as the Company's workstations, phone systems, security systems and elevator
systems. The Company is in the final stages of identifying and evaluating such
systems' year 2000 exposure. At this point, the Company has not discovered any
significant potential year 2000 exposure regarding its computer hardware and
other equipment related systems. The Company expects to complete this portion
of its compliance plan by the end of the second quarter of 1999. The Company
does not expect costs incurred to have a material adverse effect on its
financial condition.
The fourth aspect of the Company's year 2000 analysis involves evaluating the
year 2000 efforts of third parties, including critical suppliers and other
partners with whom the Company has strategic relationships. The Company has
contacted critical suppliers and other parties through written and/or telephone
inquiries. Substantially all suppliers and other parties that have responded to
the Company's inquires have indicated they are compliant or will be compliant
before December 31, 1999. The Company will continue to follow up with suppliers
and other parties that have not yet responded or have indicated a current status
of noncompliance. If the Company determines that the year 2000 exposure of any
critical suppliers or other strategic relationships could result in material
disruptions to their respective businesses, the Company may develop appropriate
contingency plans. Further, if certain critical third party providers, such as
those supplying outsourced manufacturing,
15
electricity, water, or telecommunications services, experience difficulties
resulting in a material interruption of services to the Company, such
interruption would likely result in a material adverse effect on the Company's
business, results of operations and financial condition.
To date, the Company has not incurred any material expenditure in connection
with identifying or evaluating year 2000 compliance issues. The Company
estimates it will not incur any material levels of expenditure on this issue
during 1999 to support its compliance initiatives. The Company believes that it
is unlikely to experience a material adverse impact on its financial condition
or results of operations due to the Company's internal year 2000 compliance
issues. However, since the assessment process is ongoing, year 2000
complications are not fully known, and potential liability issues are not clear,
the full potential impact of the year 2000 on the Company is not known at this
time.
As the Company has recently replaced its fundamental financial and accounting
software, no significant problems are anticipated which would result in either
the delay or the inability to process accounting and financial data. If the
audit of the other software applications used by Company lead to the discovery
of further year 2000 compliance issues, the Company intends to evaluate the need
for one or more contingency plans relating to such issues.
The Company's expectations as to the extent and timeliness of modifications
required in order to achieve year 2000 compliance is a forward-looking statement
subject to risks and uncertainties. Actual results may vary materially as a
result of a number of factors, including, among others, those described in this
paragraph. There can be no assurance however, that the Company will be able to
successfully modify on a timely basis such products, services and systems to
comply with year 2000 requirements, which failure could have a material adverse
effect on the Company's operating results. Further, while the Company believes
that its year 2000 compliance efforts will be completed on a timely basis, and
in advance of the year 2000 date transition, there can be no assurance that
unexpected delays or problems, including the failure to ensure year 2000
compliance by systems or products supplied to the Company by a third party, will
not have an adverse effect on the Company, its financial performance, or the
competitiveness or customer acceptance of its products. Further, the Company's
current understanding of expected costs is subject to change as the project
progresses and does not include potential costs related to actual customer
claims, or the cost of internal software and hardware replaced in the normal
course of business unless such installation has been accelerated to provide
solutions to year 2000 compliance issues.
Certain factors which may affect future results
We do not provide financial performance forecasts. Our 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 in this report, 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. Such
factors, among others, may have a material adverse effect upon our business,
results of operations and financial condition.
Our success is substantially dependent upon our strategic relationship with
Microsoft
Microsoft is the leading provider of desktop operating systems. We depend
upon the license of key technology from Microsoft, including certain source and
object code licenses, and technical support. We also depend upon our strategic
alliance agreement with Microsoft pursuant to which Citrix and Microsoft have
agreed to cooperate to develop advanced operating systems and promote Windows
application program interfaces. Our relationship with Microsoft is subject to
the following risks and uncertainties:
. Competition with Microsoft. NT Terminal Server is, and future product
offerings by Microsoft may be,
16
competitive with our current WinFrame and MetaFrame products, and any future
product offerings by Citrix.
. Termination of Microsoft's Endorsement of the ICA Protocol. Microsoft has
agreed to endorse only our 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, or before November 1999 if
certain events occur as provided in our development agreement with Microsoft,
it is possible that Microsoft will market or endorse other methods to provide
non-Windows client devices multi-user Windows access.
. Dependence on Microsoft for Commercialization. Our ability to successfully
commercialize our MetaFrame product depends on Microsoft's ability to market
NT Terminal Server products. We do not have control over Microsoft's
distributors and resellers and, to our knowledge, Microsoft's distributors and
resellers are not obligated to purchase products from Microsoft.
. Product Release Delays. There may be delays in the release and shipment of
future versions of NT Terminal Server.
If our relationship with Microsoft were terminated or adversely affected for
any reason, our business, operating results and financial condition would be
materially adversely affected.
Our continued growth depends upon broad-based acceptance of our ICA protocol
We believe that our success in the markets in which we compete will depend
upon our ability to make the ICA protocol a widely accepted standard for
supporting Windows applications. Microsoft includes as a component of NT
Terminal Server its Remote Desktop Protocol (RDP) which has certain of the
capabilities of our ICA protocol, and may offer customers a competitive
solution. We believe that our success is dependent on our ability to enhance
and differentiate our ICA protocol, and foster broad acceptance of the ICA
protocol based on its performance, scalability, reliability and enhanced
features. In addition, our ability to win broad market acceptance of our ICA
protocol will depend upon the degree of success achieved by our strategic
partners in marketing their respective product offerings, product pricing and
customers' assessment of our technical, managerial, service and support
expertise. If another standard emerges or if we otherwise fail to achieve wide
acceptance of the ICA protocol as a standard for supporting Windows
applications, our business, operating results and financial condition could be
materially adversely affected.
The success of our business also depends upon our strategic relationships with
parties other than Microsoft
In addition to our relationship with Microsoft, we have strategic
relationships with IBM, Compaq, Wyse and others. We depend upon our strategic
partners to successfully market and promote the use of the Company's products
and incorporate our technology into their products and to market and sell such
products. If we are unable to maintain our current strategic relationships or
develop additional strategic relationships, or if any of our key strategic
partners are unsuccessful in incorporating our technology into their products or
marketing or selling such products, our business, operating results and
financial condition could be materially adversely affected.
We face significant competition from other technology companies
The markets in which we compete are intensely competitive. Most of our
competitors and potential competitors, including Microsoft, have significantly
greater financial, technical, sales, marketing and other resources. The
announcement of the release and the actual release of products competitive with
our existing and future product lines, such as NT Terminal Server and related
enhancements by Microsoft or third parties, could cause our existing and
potential customers to postpone or cancel plans to license our product lines.
This would adversely impact our business, operating results and financial
condition. Further, our
17
ability to market MetaFrame and other future product offerings may be affected
by Microsoft's licensing and pricing scheme for client devices implementing our
product offerings which attach to NT Terminal Server.
In addition, alternative products exist for Internet commerce that directly or
indirectly compete with our products. Existing or new products that extend
web site software to provide database access or interactive computing could
materially impact our ability to sell our products in this market. As markets
for our products continue to develop, additional companies, including companies
with significant market presence in the computer hardware, software and
networking industries, may enter the markets in which we compete and further
intensify competition. Finally, although we believe that price has historically
been a less significant competitive factor than product performance, reliability
and functionality, we believe that price competition may become more significant
in the future. We may not be able to maintain our historic prices, and any
inability to do so could adversely affect our business, results of operations
and financial condition.
As a result of these and other factors, we may not be able to compete
effectively with current or future competitors, which would have a material
adverse effect on our business, operating results and financial condition.
Our reliance on a few products for a majority of our revenue could adversely
affect our business
We anticipate that our MetaFrame and WinFrame product lines and related
enhancements will constitute the majority of our revenue for the foreseeable
future. The MetaFrame product, when combined with NT Terminal Server, provides
capabilities similar to those offered in the WinFrame technology line.
Therefore, our ability to generate revenue from our MetaFrame product will
depend upon market acceptance of NT Terminal Server products. We expect that
revenue from MetaFrame-based products will constitute an increasing percentage
of total revenue in the near future and that revenue from WinFrame-based
products will decrease over time as a percentage of total revenue. We may
experience declines in demand for our products as a result of new competitive
product releases, price competition, lack of success of our strategic partners,
technological change or other factors. In addition, the introduction of
products based on MetaFrame technology may create competition with our WinFrame
product line and may delay or replace orders of either product line. If we are
unable to successfully sell our MetaFrame and WinFrame product lines and related
enhancements, our business, operating results and financial condition would be
materially adversely affected.
Failure to properly manage our growth could adversely affect our business
We have recently experienced rapid growth in the scope of our operations, the
number of our employees and the geographic area of our operations. In addition,
we have completed certain international acquisitions since October 1997. Such
growth and assimilation of operations and personnel of such acquired companies
has placed and may continue to place a significant strain on our managerial,
operational and financial resources. To manage our growth effectively, we must
continue to implement and improve additional management and financial systems
and controls. Our systems, procedures or controls may not be adequate to
support our current or future operations. In addition, we may not be able to
effectively manage this expansion and still achieve the rapid execution
necessary to fully exploit the market opportunity for our products and services
in a timely and cost-effective manner. Our future operating results will also
depend on our ability to manage our expanding product line, expand our sales and
marketing organizations and expand our support organization commensurate with
the increasing base of our installed product. Our failure to properly manage
our growth could adversely affect our business, operating results and financial
condition.
We plan to increase our professional staff during 1999 as we implement sales,
marketing and support and product developments efforts, as well as associated
administrative systems, to support planned growth. As a result of this planned
growth in the size of our staff, we believe that we will require additional
facilities during 1999. Although we believe that the cost
18
of such additional facilities will not significantly impact our financial
position or results of operations, we anticipate that operating expenses will
increase during 1999 as a result of our planned growth in staff. Such an
increase in operating expenses may reduce our income from operations and cash
flows from operating activities in 1999.
Loss of key personnel could materially affect our business
Our future success depends, in large part, upon the services of a number of
key employees. Any officer or employee can terminate his relationship at any
time. The effective management of our anticipated growth will depend, in large
part, upon our ability to retain our highly skilled technical, managerial and
marketing personnel, and attract and maintain replacements for and additions to
such personnel in the future. Competition for such personnel is intense and may
affect our ability to successfully attract, assimilate or retain sufficiently
qualified personnel. The loss of one or more of our key personnel could have a
material adverse affect on our business, operating results and financial
condition.
Our success depends upon our ability to protect our proprietary technology
We rely primarily on a combination of copyright, trademark and trade secret
laws, as well as confidentiality procedures and contractual provisions, to
protect our proprietary rights. Our efforts to protect our proprietary
technology rights may not be successful. The loss of any material trade secret,
trademark, trade name or copyright could have a material adverse effect on us.
Despite our precautions, it may be possible for unauthorized third parties to
copy certain portions of our products or to obtain and use information regarded
as proprietary. Substantially all of our sales are derived from the licensing
of our products under "shrink wrap" license agreements that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, our ability to protect our proprietary rights may
be affected by the following:
. Differences in International Law. The laws of some foreign countries do not
protect our intellectual property to the same extent as do the laws of the
United States and Canada.
. Third Party Infringement Claims. Third parties may assert infringement
claims against us in the future. This may result in costly litigation or
require us to obtain a license to intellectual property rights of such third
parties. Such licenses may not be available on reasonable terms or at all.
As a result of these and other factors, we may not be able to compete
effectively with current or future competitors, which would have a material
adverse effect on our business, operating results and financial condition.
If we fail to introduce new products and enhance our existing products to keep
up with rapid technological change, demand for our products may decline
The markets for our products are relatively new and are characterized by:
. rapid technological change;
. evolving industry standards;
. changes in customer requirements; and
. frequent new product introductions and enhancements, including enhancements to
certain key technology licensed from Microsoft.
These market characteristics will require us to continuously enhance our
current products and develop and introduce new products to keep pace with
technological developments and respond to evolving customer requirements.
Additionally, we and
19
others may announce new products, new product enhancements or technologies that
could replace or shorten the life cycle of our existing product offerings.
We believe we will incur additional costs and royalties associated with the
development, licensing or acquisition of new technologies or enhancements to
existing products. This will increase our cost of revenues and operating
expenses. We cannot currently quantify such increase with respect to
transactions that have not occurred. We may use a substantial portion of our
cash and investments to fund these additional costs, resulting in a decrease in
interest income, unless such decrease is offset by cash flows from future
operations.
We may need to hire additional personnel to develop new products, product
enhancements and technologies. If we are unable to add staff and resources,
future enhancement and additional features to our existing or future products
may be delayed, which may have a material adverse effect on our business,
results of operations and financial condition.
If our products contain errors, they may be costly to correct, revenue may be
delayed, we could get sued and our reputation could be harmed
Despite significant testing by us and by current and potential customers, our
products may contain errors after commencement of commercial shipments. If
errors are discovered, we may not be able to successfully correct them in a
timely manner or at all. In addition, we may need to make significant
expenditures of capital resources in order to eliminate errors and failures.
Errors and failures in our products could result in loss of or delay in market
acceptance of our products and could damage our reputation. If one or more of
our products fails, a customer may assert warranty and other claims for
substantial damages against us. The occurrence or discovery of these types of
errors or failures could have a material adverse effect on our business,
operating results and financial condition.
Our success depends on our ability to expand and manage distribution channels
and major distributors
To increase our sales, we must further expand and manage our indirect
distribution channels, including OEMs, distributors, resellers, system
integrators and service providers. We rely significantly on independent
distributors and resellers for the marketing and distribution of our products.
We do not control our distributors and resellers. Additionally, our
distributors and resellers as well as our other indirect distribution channels
are not obligated to purchase products from us and may also represent other
lines of products. Our inability to expand and manage our relationship with our
partners, the inability or unwillingness of our partners to effectively market
and sell our products or the loss of existing partnerships could have a material
adverse effect on our business, operating results and financial condition. We
intend to leverage our relationships with hardware and software vendors and
systems integrators to encourage them to recommend or distribute our products.
In addition, an integral part of our strategy is to expand our direct sales
force and add third-party distributors both domestically and internationally.
We are currently investing, and intend to continue to invest, significant
resources to develop these channels, which could reduce our profits.
Our business may be affected by unexpected year 2000 problems
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. The consequences of this issue may include systems failures and business
process interruption to the extent companies fail to upgrade, replace or
otherwise address year 2000 problems. The year 2000 problem may also result in
additional business and competitive differentiation. Aside from the well-known
calculation problems with the use of 2-digit date formats as the year changes
from 1999 to 2000, the year 2000 is a special case leap year and in many
organizations using older technology, dates
20
were used for special programmatic functions. As a result, significant
uncertainty exists in the software industry concerning the potential impact of
the year 2000 problem. We believe we have four general areas of potential
exposure with respect to the year 2000 problem:
. our own software products;
. our internal information systems;
. our computer hardware and other equipment related systems; and
. the effects of compliance efforts by third parties, including our partners,
suppliers and vendors.
While we believe that the current versions of our WinFrame and MetaFrame
products are capable of storing four-digit year data allowing applications to
differentiate between dates from the 1900s and the year 2000 and beyond, the
potential incompatibility with two-digit application programs may limit our
sales of product in those situations. There can be no assurance that our
products will not be integrated by us or our customers with, or otherwise
interact with, non-year 2000 compliant software or other products which may
malfunction and expose us to warranty and other claims from our customers or
other third parties.
We have not yet completed our assessment of year 2000 compliance issues with
respect to all of these areas. Since the year 2000 complications are not fully
known, potential year 2000 problems, including changing purchasing patterns of
customers impacted by year 2000 issues, could materially adversely affect our
business, results of operations and financial condition.
If our growth rate does not continue our financial condition could be affected
Our revenue growth rate in 1999 may not approach the levels attained in 1998,
1997 and 1996. Our growth during those three years was largely attributable to
the introduction of MetaFrame in mid-1998 and WinFrame in late 1995. To the
extent our revenue growth continues, we believe that our cost of revenues and
certain operating expenses will also increase. A significant portion of our
expenses, such as employee compensation and rent, are relatively fixed in the
short term. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. Our income from operations and
cash flows from operating and investing activities may decrease as a percentage
of revenues in 1999. If we are unable to continue to manage our growth
efficiently, our business, financial condition and results of operations could
be materially adversely affected.
Our quarterly operating results may fluctuate
Our quarterly operating results have in the past varied and may in the future
vary significantly depending on a number of factors, including:
. the success of our MetaFrame products;
. the effects of acquisitions or licenses of additional technology;
. the size, timing and recognition of revenue from significant orders;
. increased competition;
. changes in our pricing policies or those of our competitors, including
Microsoft;
. new product introductions or enhancements by competitors;
. delays in the introduction of products or product enhancements by us or our
competitors;
. customer order deferrals in anticipation of upgrades and new products;
. market acceptance of new products and technologies offered by us;
. changes in operating expenses, including for the addition of personnel;
. foreign currency exchange rates; and
. general economic conditions.
21
We continually re-evaluate our programs, including specific license terms and
conditions, to market our current and future products and services. We may
implement new programs, including offering specified and unspecified
enhancements to our current and future product lines. We may recognize revenues
associated with such enhancements after the initial shipment or licensing of the
software product or over the product's life cycle. The timing of the
implementation of such programs, the timing of the release of such enhancements
and other factors will impact the timing of our recognition of revenues and
related expenses associated with our products, related enhancements and
services. As a result of these factors, we currently cannot quantify the impact
of the re-evaluation of our programs on our business, results of operations and
financial condition.
We operate with little order backlog because our software products typically
are shipped shortly after orders are received. In addition, like many systems
level software companies, we recognize a substantial portion of our 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, 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. We may also choose to reduce prices or increase spending in response
to competition or to pursue new market opportunities. New competitors,
technological advances or other factors could result in lower revenues and may
require us to incur additional expenses, which, in turn, would materially
adversely affect our operating margins in the future.
Insufficient reserves for product returns and price reductions could adversely
affect us
We provide certain of our distributors with product return rights for stock
balancing or limited product evaluation. We also provide certain of our
distributors with price protection rights. To cover these product returns and
price protection rights, we have established reserves based on our evaluation of
historical trends and current circumstances. These reserves may not prove to be
sufficient in the future, in which case our business, operating results and
financial condition could be adversely affected.
Our success depends on our ability to expand and manage our international
operations
Our continued growth and profitability will require further expansion of our
international operations. To successfully expand international sales, we must
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;
. fluctuations in foreign currency exchange rates;
. compliance with foreign regulatory and market requirements;
. variability of foreign economic and political conditions;
. 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;
. difficulties in protecting intellectual property; and
. burdens of complying with a wide variety of foreign laws.
22
Economic and market conditions may affect demand for our products
The demand for our 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. If capital
spending levels or general economic conditions are affected, our business,
financial condition and results of operations could be materially adversely
affected.
Possible volatility of our common stock price
The market price for our common stock has been volatile and has fluctuated
significantly to date. The trading price of our common stock is likely to
continue to be highly volatile and subject to wide fluctuations in response to
factors such as actual or anticipated variations in operating and financial
results, anticipated revenue or earnings growth, analyst reports or
recommendations and other events or factors, many of which are beyond our
control. In addition, the stock market in general, and The Nasdaq National
Market and the market for software companies and technology companies in
particular, have experienced extreme price and volume fluctuations. These broad
market and industry factors may materially and adversely affect the market price
of the common stock, regardless of our actual operating performance. In the
past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
such companies. Such litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on our business, financial condition and results of
operations.
A re-evaluation of our revenue recognition process could affect our future
results of operations
We continually re-evaluate our programs, including specific license terms and
conditions, to market our current and future products and services. We may
implement new programs, including offering specified and unspecified
enhancements to our current and future product lines. We may recognize revenues
associated with such enhancements after the initial shipment or licensing of the
software product or over the product's life cycle. The timing of the
implementation of such programs, the timing of the release of such enhancements
and other factors will impact the timing of our recognition of revenues and
related expenses associated with our products, related enhancements and
services. As a result of these factors, we currently cannot quantify the impact
of the re-evaluation of our programs on our business, results of operations and
financial condition.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk includes "forward-
looking statements" that involve risks and uncertainties. Actual results could
differ materially from those projected in the forward-looking statements. The
Company does not use derivative financial instruments for speculative or trading
purposes.
The Company maintains a non-trading investment portfolio of investment grade,
highly liquid, debt securities which limits the amount of credit exposure to any
one issue, issuer, or type of instrument. The securities in the Company's
investment portfolio are not leveraged and are generally classified as available
for sale and therefore are subject to interest rate risk. The Company does not
currently hedge interest rate exposure. The modeling technique used measures the
change in fair values arising from an immediate hypothetical shift in market
interest rates and assumes ending fair values include principal plus accrued
interest, dividends and reinvestment income. If market interest rates were to
increase by 100 basis points from December 31, 1998 levels, the fair value of
the portfolio would decline by approximately $1.1 million.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 22, 1999, the Company sold $850 million aggregate principal amount at
maturity of its zero coupon convertible subordinated debentures due March 22,
2019 (the "debentures") in a private placement pursuant to Section 4(2) of the
Securities Act of 1933 at a purchase price of $354.71 per $1,000 principal
amount at maturity of the debentures resulting in net proceeds to the Company of
$292.5 million. The initial purchaser, Credit Suisse First Boston Corporation,
purchased the debentures at 97% of the issue price and resold the debentures in
private resale transactions to qualified institutional buyers pursuant to Rule
144A of the Exchange Act of 1934. The debentures are convertible at the option
of the security holder at any time on or before the maturity date at a
conversion rate of 7.0306 shares of the Company's common stock for each
debenture, subject to adjustment in certain events. The Company may redeem the
debentures on or after March 22, 2004. Holders may require the Company to
repurchase the debentures at set redemption prices (issue price plus accrued
original discount) beginning on March 22, 2004 or earlier upon a change in
control of the Company. The Company will use the net proceeds for working
capital and other general corporate purposes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits, which are filed with this report as set forth on the Exhibit
Index appearing on page 27 of this report, are incorporated herein by this
reference.
(b) 1. A report on Form 8-K was filed with the Securities and Exchange
Commission on March 24, 1999 with respect to:
Item 5 -- Other Events. To disclose the private placement of $850 million
aggregate amount at maturity of zero coupon convertible subordinated
debentures due March 22, 2019 pursuant to Section 4(2) of the Securities
Act of 1933.
2. A report on Form 8-K was filed with the Securities and Exchange
Commission on March 26, 1999 with respect to:
Item 5 -- Other Events. To disclose the two-for one stock split in the
form of a one-for-one stock dividend on March 25, 1999 paid to stockholders
of record on March 17, 1999.
3. A report on Form 8-K was filed with the Securities and Exchange
Commission on April 23, 1999 with respect to:
Item 5 -- Other Events. To disclose the authorization of a stock
repurchase program to repurchase up to $200 million of the Company's common
stock.
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SIGNATURE
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 14th day of May 1999.
CITRIX SYSTEMS, INC.
By: /s/ Mark B. Templeton
--------------------------------------
Mark B. Templeton
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ James J. Felcyn, Jr.
--------------------------------------
James J. Felcyn, Jr.
Vice-President, Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
By: Marc-Andre Boisseau
--------------------------------------
Marc-Andre Boisseau
Vice-President, Controller
(Principal Accounting Officer)
26
Exhibit Index
1.1 Purchase Agreement by and between the Company and Credit Suisse
First Boston Corporation dated as of March 16, 1999.
4.1, 10.1 Indenture by and between the Company and State Street Bank and
Trust Company as Trustee dated as of March 22, 1999, including
the form of Debenture.
4.2 Form of Debenture (included in Exhibit 4.1)
4.3, 10.2 Registration Rights Agreement by and between the Company and
Credit Suisse First Boston Corporation dated as of March 22,
1999.
27.1 Financial Data Schedule
27