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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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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 33309
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 267-3000
Not Applicable
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Former Name, Former Address and Former Fiscal Year if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- -----
As of July 30, 1999 there were 87,831,844 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
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CITRIX SYSTEMS, INC.
Form 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
CONTENTS
Page Number
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PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations:
Three Months and Six Months ended June 30, 1999
and 1998 5
Condensed Consolidated Statements of Cash Flows:
Six Months Ended June 30, 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 11
Item 3. Qualitative & Quantitative Disclosure about Market Risk 26
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
Exhibit 3,4 30
Exhibit 27 32
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
1999 1998
------------------------------
(IN THOUSANDS)
Assets
Current assets:
Cash and cash equivalents $234,853 $127,546
Short-term investments 87,342 56,934
Accounts receivable, net of allowances of $9,075 and $6,234
at June 30, 1999 and December 31, 1998, respectively 44,039 32,798
Inventories 7,544 4,071
Prepaid expenses 3,273 6,745
Other current assets 4,744 3,037
Current portion of deferred tax assets 26,286 12,885
------------------------------
Total current assets 408,081 244,016
Long-term investments 334,944 97,108
Property and equipment, net 16,700 14,183
Deferred tax assets 33,127 29,183
Other assets, net 15,306 91
Intangible assets, net 39,259 46,799
------------------------------
$847,417 $431,380
==============================
Continued on following page.
3
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
JUNE 30, DECEMBER 31,
1999 1998
------------------------------------
(IN THOUSANDS, EXCEPT PAR VALUE)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 44,042 $ 29,735
Accrued royalties and other accounts payable to stockholder 2,660 2,891
Deferred revenue 19,633 10,107
Current portion of deferred revenues on contract with
stockholder 39,898 39,830
Income taxes payable 12,782 2,553
------------------------------------
Total current liabilities 119,015 85,116
Deferred revenues on contract with stockholder 43,929 48,810
Convertible subordinated debentures 305,851 -
Stockholders' equity:
Common stock at $.001 par value--400,000 shares authorized at
June 30, 1999; and 87,803 and 85,923 issued and outstanding at
June 30, 1999 and December 31, 1998, respectively 88 86
Additional paid-in capital 217,317 188,207
Accumulated other comprehensive loss (1,497) -
Retained earnings 162,714 109,161
------------------------------------
Total stockholders' equity 378,622 297,454
------------------------------------
$847,417 $431,380
====================================
See accompanying notes.
4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------
1999 1998 1999 1998
------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Revenues:
Net revenues - unrelated parties $84,475 $48,236 $159,641 $ 93,788
Net revenues - stockholder 9,940 7,968 19,813 11,718
------------------------------------------------
Net revenues 94,415 56,204 179,454 105,506
Cost of revenues:
Cost of revenues - unrelated parties 2,897 3,629 7,176 7,302
Cost of revenues - stockholder 204 1,052 446 2,228
------------------------------------------------
Total cost of revenues 3,101 4,681 7,622 9,530
------------------------------------------------
Gross margin 91,314 51,523 171,832 95,976
Operating expenses:
Research and development 8,913 4,211 17,121 7,488
Sales, marketing and support 29,291 18,583 53,938 33,471
General and administrative 8,226 4,101 14,957 7,807
Amortization of intangible assets 3,764 1,446 7,542 2,220
In-process research and development - 10,700 - 15,984
------------------------------------------------
Total operating expenses 50,194 39,041 93,558 66,970
------------------------------------------------
Income from operations 41,120 12,482 78,274 29,006
Interest income 6,375 2,550 9,888 5,210
Interest expense (4,081) - (4,485) -
------------------------------------------------
Income before income taxes 43,414 15,032 83,677 34,216
Income taxes 15,629 5,412 30,124 12,318
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Net income $27,785 $ 9,620 $ 53,553 $ 21,898
================================================
Earnings per common share:
Basic earnings per share $ 0.32 $ 0.11 $ 0.62 $ 0.26
================================================
Weighted-average shares outstanding 87,541 83,741 87,019 83,497
================================================
Earnings per common share - assuming dilution:
Diluted earnings per share $ 0.29 $ 0.11 $ 0.57 $ 0.24
================================================
Weighted-average shares outstanding 94,490 90,837 94,089 90,214
================================================
See accompanying notes.
5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1999 1998
---------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 53,553 $ 21,898
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 11,068 4,081
Provision for (recovery of) doubtful accounts 40 (12)
Provision for product returns 2,990 37
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options 9,490 5,531
Accretion of original issue discount 4,485 -
In-process research and development - 15,984
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (14,270) (13,150)
Account receivable from stockholder - (10,000)
Inventories (3,473) (1,099)
Prepaid expenses 2,621 (397)
Other assets (7,165) -
Deferred tax assets (17,345) (13,142)
Deferred revenue 9,526 1,327
Deferred revenue on contract with stockholder (4,813) (1,718)
Accounts payable and other accrued expenses 14,876 1,019
Accrued royalties and other accounts payable to stockholder (231) 100
Income taxes payable 10,229 16,025
-------------------------------
Net cash provided by operating activities 71,581 26,484
INVESTING ACTIVITIES
Purchases of investments (352,859) (108,680)
Proceeds from sale of investments 83,118 118,202
Cash paid for acquisitions - (16,952)
Cash paid for licensing agreement (500) (2,125)
Purchases of property and equipment (6,044) (6,975)
-------------------------------
Net cash used in investing activities (276,285) (16,530)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 19,622 2,745
Net proceeds from issuance of convertible subordinated debentures 292,458 -
Other (69) 32
-------------------------------
Net cash provided by financing activities 312,011 2,777
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Increase in cash and cash equivalents 107,307 12,731
Cash and cash equivalents at beginning of period 127,546 140,081
-------------------------------
Cash and cash equivalents at end of period $ 234,853 $ 152,812
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See accompanying notes.
6
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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
7
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 operations.
4. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
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1999 1998 1999 1998
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(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Numerator:
Net income $27,785 $ 9,620 $53,553 $21,898
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share
-weighted-average shares 87,541 83,741 87,019 83,497
Effect of dilutive securities:
Employee stock options 6,949 7,096 7,070 6,717
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Dilutive potential common shares 6,949 7,096 7,070 6,717
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Denominator for diluted earnings per share
-weighted-average shares 94,490 90,837 94,089 90,214
======= ======= ======= =======
Basic earnings per share $ 0.32 $ 0.11 $ 0.62 $ 0.26
======= ======= ======= =======
Diluted earnings per share $ 0.29 $ 0.11 $ 0.57 $ 0.24
======= ======= ======= =======
8
5. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting
and displaying comprehensive income and its components and requires the
classification of changes in the balances of items that are reported directly
in a separate component of stockholders' equity on the consolidated balance
sheets. The components of comprehensive income, net of related tax, for the
three and six month periods ended June 30, 1999 and 1998 are as follows:
THREE MONTHS ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
----------------------------------------------
(IN THOUSANDS)
Net income
$27,785 $9,620 $53,553 $21,898
Unrealized loss on available-for-sale securities, net (1,497) - (1,497) -
------- ------ ------- -------
Comprehensive income
$26,288 $9,620 $52,056 $21,898
======= ====== ======= =======
6. 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.
7. STOCK REPURCHASE PROGRAM
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. As of June 30, 1999, none of the Company's
outstanding common stock has been repurchased under this program.
8. RECLASSIFICATIONS
Certain reclassifications have been made for consistent presentation.
9. SUBSEQUENT EVENTS
On July 27, 1999, the Company completed its acquisition of certain in-process
software technologies and assets of ViewSoft, Inc., a firm specializing in
software for multi-tier and Web-based application development and deployment,
for approximately $33.6 million. A portion of the purchase price is expected
to be allocated to in-process research and
9
development for which the Company expects to incur a one-time charge to
its operations, amounting to approximately $2.3 million in the quarter
ending September 30, 1999.
10
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
server-based computing software that enables effective and efficient deployment
of enterprise applications that are designed for Microsoft Windows(R) operating
systems. The Company's MetaFrame(TM) and WinFrame(R) product lines permit
organizations to deploy Windows applications without regard to location, network
connection, or type of client hardware platforms. The Company began shipping
its WinFrame product in the third quarter of 1995 and its MetaFrame product in
the second quarter of 1998.
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 $100 million in quarterly payments, $70 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 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 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. As of June 30, 1999, none of the Company's outstanding
common stock has been repurchased under this program.
On July 27, 1999, the Company completed its acquisition of certain in-process
software technologies and assets of ViewSoft, Inc., a firm specializing in
software for multi-tier and Web-based application development and deployment,
for approximately $33.6 million. The Company will leverage this technology to
build its leadership in the rapidly growing market for deploying and managing
Web-based applications. A portion of the purchase price is expected to be
allocated to in-process research and development for which the Company expects
to incur a one-time charge to its operations, amounting to approximately $2.3
million in the quarter ending September 30, 1999.
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.
11
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 CHANGE FROM SIX
MONTHS ENDED MONTHS ENDED
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1999 JUNE 30, 1999
JUNE 30, JUNE 30, VS. VS.
-------------------- --------------------
1999 1998 1999 1998 JUNE 30, 1998 JUNE 30, 1998
---------------------------------------------------------------------------------
Net revenues................................. 100.0% 100.0% 100.0% 100.0% 68.0% 70.1%
Cost of revenues............................. 3.3 8.3 4.3 9.0 (33.7) (20.0)
----- ----- ----- -----
Gross margin................................. 96.7 91.7 95.7 91.0 77.2 79.0
Operating expenses:
Research and development.................... 9.4 7.5 9.5 7.1 111.6 128.6
Sales, marketing and support................ 31.0 33.1 30.2 31.7 57.6 61.7
General and administrative.................. 8.7 7.3 8.2 7.4 100.6 89.0
Amortization of intangible assets........... 4.0 2.6 4.2 2.1 160.3 *
In-process research and development......... - 19.0 - 15.1 (100.0) (100.0)
----- ----- ----- -----
Total operating expenses................... 53.1 69.5 52.1 63.5 28.6 39.7
----- ----- ----- -----
Income from operations....................... 43.6 22.2 43.6 27.5 229.4 169.9
Interest income.............................. 6.8 4.5 5.5 4.9 150.0 89.8
Interest expense............................. (4.3) - (2.5) - * *
----- ----- ----- -----
Income before income taxes................... 46.1 26.7 46.6 32.4 188.8 144.6
Income taxes................................. 16.6 9.6 16.8 11.7 188.8 144.6
----- ----- ----- -----
Net income................................... 29.5% 17.1% 29.8% 20.7% 188.8% 144.6%
===== ===== ===== =====
* Not meaningful.
Net Revenues. The increase in net revenues in the second quarter of 1999
compared to the second quarter of 1998 and the respective six month periods then
ended were primarily attributable to increases in the volume of shipments of the
Company's Windows Application Servers, consisting of MetaFrame and WinFrame
products, subscriptions and additional user licenses, and, to a lesser extent,
increases in the volume of shipments of Management Services Products, consisting
of system option products such as Load Balancing Services, Resource Management
Services and other options, which are applicable to both the MetaFrame and
WinFrame product lines. Within the Windows Application Servers product group,
demand for the Company's MetaFrame product, which began shipping in June 1998,
resulted in increased sales of the MetaFrame product line and additional user
licenses while sales of the WinFrame product line and additional user licenses
decreased. The increase in the Management Services Products group was primarily
due to an increase in sales of the Load Balancing Services product as end users
continue to implement larger scale MetaFrame solutions. The volume of licensing
of Computing Appliances Products to original equipment manufacturers ("OEM")
decreased for the stated periods.
An analysis of the Company's net revenue is detailed in the table below. Net
revenue is segregated into five categories: Windows Application Servers,
Computing Appliances Products, Management Services Products, Microsoft royalties
and other revenue. Windows Application Servers revenue represents fees related
to the licensing of the Company's MetaFrame and WinFrame products, subscriptions
and additional user licenses. Computing Appliances Products revenue consists of
license fees and royalties from OEMs who are granted a license to incorporate
and/or market the Company's multi-user technologies in their own product
offerings. Management Services Products consist of system option products such
as Load Balancing Services, Resource Management Services and other options,
which are applicable to both the MetaFrame and WinFrame product lines.
Microsoft royalties represent fees recognized in connection with the Development
Agreement.
12
THREE MONTHS ENDED SIX MONTHS ENDED INCREASE/(DECREASE) FOR
JUNE 30, JUNE 30, THREE MONTHS ENDED SIX MONTHS ENDED
------------------- ------------------- JUNE 30, 1999 VS. JUNE 30, 1998 VS.
1999 1998 1999 1998 JUNE 30, 1998 JUNE 30, 1998
---- ---- ---- ---- ------------- -------------
Windows Application Servers.................. 73% 69% 75% 69% 77% 84%
Computing Appliances Products................ 2 10 2 12 (58) (67)
Management Services Products................. 10 3 8 4 410 289
Microsoft royalties.......................... 11 14 11 11 25 69
Other revenue................................ 4 4 4 4 83 61
---- ---- ---- ----
Net revenues................................. 100% 100% 100% 100% 68% 70%
International. International revenues (sales outside of the United States)
accounted for approximately 39% and 27% of net revenues for the three months
ended June 30, 1999 and 1998, respectively. International revenues accounted for
approximately 39% and 27% of net revenues for the six months ended June 30, 1999
and 1998, respectively.
Cost of Revenues. Cost of revenues consist 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 91.7% in the second quarter of
1998 to 96.7% in the second quarter of 1999, and from 91.0% in the first half of
1998 to 95.8% in the first half of 1999 due to increases in sales of the
MetaFrame product and related user licenses. The MetaFrame product line has a
relatively high gross margin contribution compared to the WinFrame product line
as the MetaFrame product line bears no royalties. Additionally, the increase in
gross margin contribution is partly due to an adjustment to royalties payable
associated with higher than expected additional user licenses deployed with
MetaFrame products. 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 overall increase in gross margin as a percentage of net
revenues 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
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
as well as marketing programs directed at customer and business partner
acquisition and retention. 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 and consulting fees
necessary to support
13
overall increases in the scope of the Company's operations including additional
expenditures for information systems.
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. The Company expects to incur
additional amortization expense due to the acquisition of ViewSoft, Inc. as
discussed in Note 9 to the Notes to the Condensed Consolidated Financial
Statements.
In-Process Research and Development Expenses. During 1998, the Company
completed certain acquisitions. Since the respective dates of acquisition, the
Company has used the acquired in-process technology to develop new product
offerings, 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. The Company currently expects to
complete the development of the remaining projects at various dates between 1999
and 2000. Upon completion, the Company will 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 Insignia, APM and VDOnet is summarized below. All of
the acquired projects are targeted for the server-based computing market. After
the acquisition of each technology, the Company has continued the development of
these in-process projects.
INSIGNIA
On February 5, 1998, the Company completed its acquisition of certain in-
process software technologies and assets of Insignia Solutions, plc
("Insignia"). 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(R) in MetaFrame and WinFrame software.
As of June 30, 1999, the Company has completed this project and has incurred
expenses totaling approximately $1.2 million since the date of acquisition.
APM
On June 30, 1998, the Company completed its acquisition of APM Ltd ("APM").
The in-process research and development acquired in the APM acquisition
consisted primarily of one significant research and development project. The
14
project is an application server for Java, which is similar to WinFrame
software, but runs Java applications. As of June 30, 1999, expenses totaling
approximately $3.1 million had been incurred since the date of acquisition. The
Company estimates approximately $1.9 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
environment, 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 ("VDOnet"). 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 June 30,
1999, expenses totaling approximately $2.7 million had been incurred since the
date of acquisition. The Company estimates approximately $1.7 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.
The actual cost to complete the in-process and core technology acquired from
Insignia has not varied materially from the estimated cost at the time of the
valuation for Insignia. The estimated costs to complete the APM and VDOnet
projects as of June 30, 1999 have increased from the estimated cost of $4.0
million and $200,000, respectively, at the time of the valuation, due to an
increase in each of such project's scope. The completion dates of the in-process
and core technology acquired are in line with expectations for the Insignia
acquisition. The completion dates of the in-process and core technology acquired
for the APM and VDOnet acquisitions are expected to be delayed by approximately
nine months from the originally anticipated completion dates due to changes in
the development of these technologies resulting from end user feedback. The
Company is currently unable to determine the impact of such delays on its
business, future results of operations and financial condition.
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. Interest income increased during the six months ended June
30, 1999 compared to the respective period in the prior year 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. Interest expense increased during the six months ended June
30, 1999 compared to the respective period in the prior year primarily 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
and six months ended June 30, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, the Company generated positive
operating cash flows of approximately $71.6
15
million. Cash provided by operating activities relate primarily to net income of
$53.6 million as adjusted for depreciation and amortization of $11.1 million,
and tax benefits related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options of $9.5 million. Accounts
payable and other accrued expenses increased $14.9 million due to higher
expenses from increases in marketing activities and additional royalty fees. The
increases in cash provided by operating activities were partially offset by a
$17.3 million increase in deferred tax assets due to tax benefits from the
exercise of non-statutory stock options and disqualified dispositions of
incentive stock options and a $14.3 million increase in accounts receivable
primarily due to higher revenue levels. Income tax payable increased $10.2
million due to greater profitability generated from higher revenue levels. Cash
used in investing activities of $276.3 million related primarily to the use of
the proceeds from the issuance of convertible subordinated debentures in March
1999 and also cash from operations used to purchase longer maturity investments.
This cash outflow was partially offset by cash inflows from the sale of
investments of approximately $83.1 million. Cash provided by financing
activities of $312.0 million related primarily to $292.5 million of net proceeds
from the issuance of convertible subordinated debentures and $19.6 million from
the issuance of common stock under the Company's stock option plan.
As of June 30, 1999, the Company had approximately $657.1 million in cash and
investments and $289.1 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 June 30, 1999, the Company had approximately $44.0 million in
accounts receivable, net of allowances, and $103.5 million of deferred revenues,
of which the Company anticipates $59.5 million will be earned over the next
twelve months. The Company also expects to receive an additional $30.0 million
under the terms of the Development Agreement 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. As of June 30, 1999, none of the Company's outstanding
common stock has been repurchased under this program.
On July 27, 1999, the Company completed its acquisition of certain in-process
software technologies and assets of ViewSoft, Inc., a firm specializing in
software for multi-tier and Web-based application development and deployment,
for approximately $33.6 million. A portion of the purchase price is expected to
be allocated to in-process research and development for which the Company
expects to incur a one-time charge to its operations, amounting to approximately
$2.3 million in the quarter ending September 30, 1999.
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 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
16
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 the Company's products 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, such as the Company's
workstations, phone systems, security systems and elevator systems. The Company
has completed its identification and evaluation of such systems' year 2000
exposure. The Company has not discovered any significant potential year 2000
exposure regarding its computer hardware and other equipment related systems.
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,
17
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 its year 2000
compliance 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 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. We also depend upon the license
of key technology from Microsoft, including certain source and object code
licenses, and technical support. Our relationship with Microsoft is subject to
the following risks and uncertainties:
18
. Competition with Microsoft. NT Terminal Server is, and future product
offerings by Microsoft may be, 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(R) 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
19
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 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 Windows Application Servers, which consists of our
MetaFrame and WinFrame products, subscriptions and additional user licenses,
will constitute the majority of our revenue for the foreseeable future. We
further expect the MetaFrame product line will constitute the majority of our
revenue within this product group 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 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, 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,
20
operating results and financial condition.
We plan to increase our professional staff during 1999 as we implement sales,
marketing and support and product development 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 also require additional
facilities during 1999. Although we believe that the cost 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 patent, 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;
21
. 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 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 will need to recruit additional personnel to develop new products, product
enhancements and technologies. If we are unable to add staff and resources,
future enhancements 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, AS WELL AS ATTRACT LARGE ENTERPRISE CUSTOMERS
To increase our sales, we must further expand and manage our indirect
distribution channels, including OEMs, distributors, resellers, system
integrators and service providers and attract large enterprise customers. 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, the loss of existing
partnerships, or the inability to attract large enterprise customers 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 will increase our
operating expenses. Additionally, large enterprise customers usually request
special pricing and generally have longer sales cycles which may
22
negatively impact our revenues. Further, as we attempt to attract customers from
different market segments, and in particular large enterprise customers, we may
need to increase corporate branding activities which will increase our operating
expenses.
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 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:
23
. the success of our Windows Application Servers product group and specifically
our MetaFrame product line;
. 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.
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. We may modify our licensing
fees with certain customers to a per usage basis. We may implement a different
licensing model, in certain circumstances, which would result in the recognition
of licensing fees over a longer period which may result in decreasing revenue.
The timing of the implementation of such programs, the timing of the release of
such enhancements, the timing of the implementation of a new licensing
arrangement 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.
24
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.
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 could have
a material adverse effect on our business, financial condition and results of
operations.
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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 a 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
at December 31, 1998 would decline by approximately $1.1 million. If market
interest rates were to increase by 100 basis points from June 30, 1999 levels,
the fair value of the portfolio at June 30, 1999 would decline by approximately
$3.9 million.
26
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held May 13, 1999 ("the 1999
Annual Meeting"), the Company's stockholders took the following actions: (1)
The Company's stockholders elected Robert N. Goldman, Tyrone F. Pike and Roger
W. Roberts as Class I directors, each to serve for a three-year term expiring at
the Company's annual meeting of stockholders in 2002 or until his successor has
been duly elected and qualified or until his early resignation or removal.
Election of the directors was determined by a plurality of the votes cast at the
1999 Annual Meeting. With respect to such matter, the votes were cast as
follows: 78,905,754 shares voted for the election of Mr. Goldman; 75,863,494
shares voted for the election of Mr. Pike and 78,903,236 shares voted for the
election of Mr. Roberts; and 221,044 shares were withheld from the election of
Mr. Goldman; 3,263,304 shares were withheld from the election of Mr. Pike and
223,562 shares were withheld from the election of Mr. Roberts. No other persons
were nominated, or received votes, for election as directors of the Company at
the 1999 Annual Meeting. The other directors of the Company whose term of
office continued after the annual meeting were: Michael W. Brown, Kevin R.
Compton, Stephen M. Down, Edward E. Iacobucci, Mark B. Templeton and John W.
White; and (2) The Company's stockholders approved and adopted an amendment to
the Company's Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of the Company's Common Stock, par value $0.001 per
share, from 150,000,000 to 400,000,000 shares. With respect to such matter, the
votes were cast as follows: 68,547,488 shares voted for the proposal, 10,495,996
shares voted against the proposal and 83,314 shares abstained from voting on the
proposal.
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 29 of this report, are incorporated herein by this
reference.
(b) 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.
27
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 11th day of August 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.
Chief Financial Officer, Treasurer and
Vice-President, Finance and
Administration
(Principal Financial Officer)
By: /s/ MARC-ANDRE BOISSEAU
------------------------------------------
Marc-Andre Boisseau
Vice-President, Controller
(Principal Accounting Officer)
28
EXHIBIT INDEX
Page Number
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3,4 Certificate of Amendment to Amended and Restated
Certificate of Incorporation 30
27 Financial Data Schedule 32