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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 September 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 ___________.
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 November 5, 1999 there were 89,610,613 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 September 30, 1999
CONTENTS
Page Number
-----------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations:
Three Months and Nine Months ended
September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows:
Nine Months ended September 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 10
Item 3. Qualitative & Quantitative Disclosure about Market Risk 26
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Citrix Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1999 1998
--------------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents $179,938 $127,546
Short-term investments 137,251 56,934
Accounts receivable, net of allowances of $7,657 and $6,234
at September 30, 1999 and December 31, 1998, respectively 47,427 32,798
Inventories 8,473 4,071
Prepaid expenses 7,641 6,745
Other current assets 4,918 3,037
Current portion of deferred tax assets 26,640 12,885
--------------------------------
Total current assets 412,288 244,016
Long-term investments 376,721 97,108
Property and equipment, net 21,483 14,183
Deferred tax assets 33,423 29,183
Other assets, net 14,949 91
Intangible assets, net 65,211 46,799
--------------------------------
$924,075 $431,380
================================
Continued on following page.
3
Citrix Systems, Inc.
Condensed Consolidated Balance Sheets (continued)
(Unaudited)
September 30, December 31,
1999 1998
------------------------------------
(in thousands, except par value)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other accrued expenses $ 50,218 $ 29,735
Accrued royalties and other accounts payable to stockholder 935 2,891
Deferred revenue 23,140 10,107
Current portion of deferred revenues on contract with
stockholder 39,898 39,830
Income taxes payable 1,882 2,553
------------------------------------
Total current liabilities 116,073 85,116
Long-term liabilities
Deferred revenues on contract with stockholder 48,921 48,810
Convertible subordinated debentures 309,819 --
------------------------------------
Total long-term liabilities 358,740 48,810
Stockholders' equity:
Common stock at $.001 par value--400,000 shares authorized at
September 30, 1999; and 89,159 and 85,923 issued and
outstanding at September 30, 1999 and December 31, 1998, respectively 89 86
Additional paid-in capital 258,711 188,207
Accumulated other comprehensive loss (1,597) --
Retained earnings 192,059 109,161
------------------------------------
Total stockholders' equity 449,262 297,454
------------------------------------
$924,075 $431,380
====================================
See accompanying notes.
4
Citrix Systems, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------
(in thousands, except per share information)
Revenues:
Net revenues - unrelated parties $ 95,771 $ 57,613 $ 255,412 $ 151,401
Net revenues - stockholder 10,009 10,008 29,821 21,726
---------------------------------------------------
Net revenues 105,780 67,621 285,233 173,127
Cost of revenues:
Cost of revenues - unrelated parties 3,098 3,288 10,274 10,591
Cost of revenues - stockholder 205 620 651 2,848
---------------------------------------------------
Total cost of revenues 3,303 3,908 10,925 13,439
---------------------------------------------------
Gross margin 102,477 63,713 274,308 159,688
Operating expenses:
Research and development 9,524 7,939 26,644 15,427
Sales, marketing and support 31,214 19,868 85,352 53,339
General and administrative 11,169 5,327 25,927 13,133
Amortization of intangible assets 5,235 4,168 12,776 6,388
In-process research and development 2,300 2,432 2,300 18,416
---------------------------------------------------
Total operating expenses 59,442 39,734 152,999 106,703
---------------------------------------------------
Income from operations 43,035 23,979 121,309 52,985
Interest income 6,793 2,424 16,681 7,634
Interest expense (3,975) -- (8,460) --
---------------------------------------------------
Income before income taxes 45,853 26,403 129,530 60,619
Income taxes 16,507 9,505 46,631 21,823
---------------------------------------------------
Net income $ 29,346 $ 16,898 $ 82,899 $ 38,796
===================================================
Earnings per common share:
Basic earnings per share $ 0.33 $ 0.20 $ 0.95 $ 0.46
===================================================
Weighted-average shares outstanding 88,542 84,438 87,533 83,814
===================================================
Earnings per common share - assuming dilution:
Diluted earnings per share $ 0.30 $ 0.18 $ 0.87 $ 0.43
===================================================
Weighted-average shares outstanding 96,568 91,818 94,918 90,725
===================================================
See accompanying notes.
5
Citrix Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
--------------------------
1999 1998
--------------------------
(in thousands)
Operating activities
Net income $ 82,899 $ 38,796
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 18,694 10,991
Provision for (recovery of) doubtful accounts 58
Provision for product returns 1,400 633
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options 29,945 14,698
Accretion of original issue discount 8,460 --
In-process research and development 2,300 18,416
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (16,087) (20,579)
Inventories (4,401) (2,074)
Prepaid expenses (896) (440)
Other assets (7,840) --
Deferred tax assets (17,995) (12,419)
Deferred revenue 13,033 3,921
Deferred revenue on contract with stockholder 179 3,274
Accounts payable and other accrued expenses 20,484 2,404
Accrued royalties and other accounts payable to stockholder (1,956) (480)
Income taxes payable (671) 3,387
--------------------------
Net cash provided by operating activities 124,606 60,399
Investing activities
Purchases of investments (502,511) (155,128)
Proceeds from sale of investments 140,983 159,297
Cash paid for acquisitions (32,784) (63,449)
Cash paid for licensing agreement (750) (5,375)
Purchases of property and equipment (13,099) (11,238)
--------------------------
Net cash used in investing activities (408,161) (75,893)
Financing activities
Net proceeds from issuance of common stock 43,563 8,517
Net proceeds from issuance of convertible subordinated debentures 292,458 --
Other (74) 14
--------------------------
Net cash provided by financing activities 335,947 8,531
--------------------------
Increase/(decrease) in cash and cash equivalents 52,392 (6,963)
Cash and cash equivalents at beginning of period 127,546 140,081
--------------------------
Cash and cash equivalents at end of period $ 179,938 $ 133,118
==========================
See accompanying notes.
6
Citrix Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 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
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 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 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,
7
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. The 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 Nine Months Ended
September 30, September 30,
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(in thousands, except per share information)
Numerator:
Net income $ 29,346 $ 16,898 $ 82,899 $ 38,796
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share
-- weighted-average shares 88,542 84,438 87,533 83,814
Effect of dilutive securities:
Employee stock options 8,026 7,380 7,385 6,911
---------- ---------- ---------- ----------
Denominator for diluted earnings per share
-- weighted-average shares 96,568 91,818 94,818 90,725
========== ========== ========== ==========
Basic earnings per share $ 0.33 $ 0.20 $ 0.95 $ 0.46
========== ========== ========== ==========
Diluted earnings per share $ 0.30 $ 0.18 $ 0.87 $ 0.43
========== ========== ========== ==========
5. Acquisition
On July 23, 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, Web-based application development and deployment,
for approximately $33.6 million in cash and liabilities assumed. The acquisition
was accounted for under the purchase method of accounting and in accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations." The Company allocated the cost of the acquisition to the assets
acquired and the liabilities assumed based on their estimated fair values using
an external valuation study. Based on appraised value, a portion of the purchase
price was allocated to in-process research and development, which had not
reached technological feasibility and had no alternative use. The allocation
resulted in a pre-tax charge of approximately $2.3 million to the Company's
operations in the third quarter of 1999. The Company also allocated
approximately $31.2 million of the purchase price to goodwill and other
intangible assets to be amortized over periods ranging from 3 to 4 years.
8
6. 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
nine month periods ended September 30, 1999 and 1998 are as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------------------------
1999 1998 1999 1998
-------------------------------------------
(in thousands)
Net income $ 29,346 $ 16,898 $ 82,899 $ 38,796
Unrealized loss on available-for-sale securities, net (100) -- (1,597) --
-------- -------- -------- --------
Comprehensive income $ 29,246 $ 16,898 $ 81,302 $ 38,796
======== ======== ======== ========
7. 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.
8. 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 September 30, 1999, none of the Company's
outstanding common stock had been repurchased under this program.
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
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, $85 million of which
had been received as of September 30, 1999.
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 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 July 23, 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, Web-based application development
and deployment, for approximately $33.6 million in cash and liabilities assumed.
The Company will leverage this technology to build its leadership in the rapidly
growing market for deploying and managing Web-based applications. This
acquisition was accounted for under the purchase method of accounting and in
accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations." The Company allocated the cost of the acquisition to the
assets acquired and the liabilities assumed based on their estimated fair values
using an external valuation study. A portion of the purchase price was allocated
to in-process research and development, which had not reached technological
feasibility and had no alternative use. The allocation resulted in a pre-tax
charge of approximately $2.3 million to the Company's operations in the third
quarter of 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
10
"Certain Factors Which May Affect Future Results" which, it is anticipated, will
impact the Company's future performance and financial position.
Results of Operations
The following table sets forth statement of operations data of the Company
expressed as a percentage of net revenues and as a percentage of change from
period-to-period for the periods indicated.
Change from Change from
Three Months Nine Months
Three Months Ended Nine Months Ended Ended Ended
September 30, September 30, September 30, September 30,
-------------------- ---------------------- 1999 vs. 1999 vs.
1999 1998 1999 1998 September 30, 1998 September 30, 1998
-------------------------------------------------------------------------------------
Net revenues ............................... 100.0% 100.0% 100.0% 100.0% 56.4% 64.8%
Cost of revenues ........................... 3.1 5.8 3.8 7.8 (15.5) (18.7)
----- ----- ----- -----
Gross margin ............................... 96.9 94.2 96.2 92.2 60.8 71.8
Operating expenses:
Research and development ................ 9.0 11.7 9.3 8.9 20.0 72.7
Sales, marketing and support ............ 29.5 29.4 29.9 30.8 57.1 60.0
General and administrative .............. 10.6 7.9 9.1 7.6 109.7 97.4
Amortization of intangible assets ....... 4.9 6.2 4.5 3.7 25.6 100.0
In-process research and development ..... 2.2 3.6 0.8 10.6 (5.4) (87.5)
----- ----- ----- -----
Total operating expenses ............. 56.2 58.8 53.6 61.6 49.6 43.4
----- ----- ----- -----
Income from operations ..................... 40.7 35.4 42.6 30.6 79.5 128.9
Interest income ............................ 6.4 3.6 5.8 4.4 180.2 118.5
Interest expense ........................... (3.8) -- (3.0) -- * *
----- ----- ----- -----
Income before income taxes ................. 43.3 39.0 45.4 35.0 73.7 113.7
Income taxes ............................... 15.6 14.1 16.3 12.6 73.7 113.7
----- ----- ----- -----
Net income ................................. 27.7% 24.9% 29.1% 22.4% 73.7% 113.7%
===== ===== ===== =====
* Not meaningful.
Net Revenues. Net revenues 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 original
equipment manufacturers ("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.
The increase in net revenues in the third quarter of 1999 compared to the
third quarter of 1998 and the respective nine month periods then ended was
primarily attributable to increases in the volume of shipments of the Company's
Windows Application Servers. 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 associated
additional user licenses while sales of the WinFrame product line and associated
additional user licenses decreased. To a lesser extent, the increase in net
revenues was due to increases in the volume of shipments of Management Services
Products, primarily due to higher sales levels of the Load Balancing Services
product as end users continue to implement larger scale MetaFrame solutions. Net
revenues of Computing Appliances Products declined for the stated periods due to
decreased volume of licensing to OEMs.
11
An analysis of the Company's net revenues is detailed in the table below.
Increase/(Decrease) for
Three Months Nine Months
Three Months Ended Nine Months Ended Ended Ended
September 30, September 30, September 30, September 30,
----------------------- ----------------------- 1999 vs. 1999 vs.
1999 1998 1999 1998 September 30, 1998 September 30, 1998
---- ---- ---- ---- ------------------ ------------------
Windows Application Servers ......... 74.0% 65.6% 73.9% 67.1% 76.5% 81.5%
Computing Appliances Products ....... 2.7 10.0 2.5 11.8 (58.5) (65.2)
Management Services Products ........ 9.9 5.3 9.3 4.4 190.7 249.0
Microsoft royalties ................. 9.4 14.8 10.4 12.5 0.0 37.3
Other revenue ....................... 4.0 4.3 3.9 4.2 45.9 55.3
----- ----- ----- -----
Net revenues ........................ 100.0% 100.0% 100.0% 100.0% 56.4% 64.8%
International. International revenues (sales outside of the United States)
accounted for approximately 36% and 27% of net revenues for the three months
ended September 30, 1999 and 1998, respectively. International revenues
accounted for approximately 38% and 27% of net revenues for the nine months
ended September 30, 1999 and 1998, respectively. The increase in international
revenues as a percentage of net revenues were primarily due to the Company's
increased sales and marketing efforts in Europe and Asia.
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 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 94.2% in the third quarter of
1998 to 96.9% in the third quarter of 1999, and from 92.2% in the first nine
months of 1998 to 96.2% in the first nine months 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 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 related to the Development Agreement in the third quarter of
1999 compared to the third quarter of 1998 is due to a decrease in related
costs. The increase in gross margin related to the Development Agreement for the
first nine months of 1999 compared to the first nine months of 1998 is due to an
increase in revenue related to the Development Agreement and a decrease in
related costs. The overall increase in gross margin as a percentage of net
revenues for the first nine months of 1999 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 in the third quarter of 1999 compared to the third quarter
of 1998 and the respective nine month periods then ended resulted primarily from
increased sales staff and associated salaries, commissions and expenses related
to expansion of the Company's sales force. The increase was also due to higher
levels of promotional activities and marketing programs directed at customer and
business partner acquisition and retention, increased marketing staff and
associated salaries, and additional advertising activities related to specific
product lines and corporate branding. Promotional activities include co-op
advertising programs and other promotional
12
activities such as direct mail campaigns, programs directed at resellers, and
trade shows.
General and Administrative Expenses. The increase in general and
administrative expenses is primarily due to increased expenses associated with
consulting fees and additional staff, associated salaries and related expenses
necessary to support overall increases in the scope of the Company's operations,
including additional expenditures related to improvements to its information
systems.
Amortization of Intangible Assets. The increase in amortization of
goodwill and identifiable intangible assets is primarily due to the acquisition
of APM Ltd. in June 1998, VDOnet Corporation Ltd. in July 1998 and ViewSoft,
Inc. in July 1999. These acquisitions resulted in additional goodwill and
identifiable intangible assets of approximately $30.5 million, $5.6 million and
$31.2 million, respectively, at their respective date of acquisition.
In-Process Research and Development Expenses. During 1999 and 1998, the
Company completed certain acquisitions related to its strategic objectives.
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 in 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 APM, VDOnet, and ViewSoft is summarized below. After
the acquisition of each technology, the Company has continued the development of
these in-process projects.
APM
In June 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
project is an application server for Java, which is similar to WinFrame
software, but runs Java applications. This project is intended for the server-
based computing market. As of September 30, 1999, expenses totaling
approximately $3.6 million had been incurred since the date of acquisition. The
Company estimates approximately $1.3 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
environment, and integrating and porting such technology into a variety of
server-based computing architectures.
13
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. This project is
intended for the server-based computing market. As of September 30, 1999,
expenses totaling approximately $3.2 million had been incurred since the date of
acquisition. The Company estimates approximately $1.6 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.
ViewSoft
In July 1999, the Company completed its acquisition of ViewSoft, Inc.
("ViewSoft"). The in-process research and development acquired in the ViewSoft
acquisition consisted primarily of one significant research and development
project, ViewSoft Internet 4.0. This project enables multi-tier, Web-based
application development and deployment. At the date of the valuation, ViewSoft
was in development with this product. The product was intended to operate in the
multi-tier web application market and was not intended to operate in a Citrix
MetaFrame or WinFrame environment. The Company estimated this project was
approximately 85% complete at the date of acquisition. The aggregate value
assigned to in-process research and development was $2.3 million. At the date of
the valuation, the expected cost to complete the project was approximately
$660,000. As of September 30, 1999, expenses totaling approximately $550,000 had
been incurred since the date of acquisition and the Company estimates
approximately $1.1 million will be required to complete the remaining research
and development project. The project is expected to be completed in the first
half of 2000. The remaining efforts to complete the project relate primarily to
stress testing and, to a lesser extent, bug fixes and documentation. The
research and development risks associated with this project relate primarily to
potential design flaws revealed during testing.
The fair value of the ViewSoft in-process technology was based on analyses
of the markets, projected cash flows and risks associated with achieving such
projected cash flows. In developing these cash flow projections, revenues were
estimated based on relevant factors, including aggregate revenue growth rates
for the business as a whole, individual service offering revenues,
characteristics of the potential market for the service offerings and the
anticipated life of the underlying technology. Operating expenses and resulting
profit margins were estimated based on the characteristics and cash flow
generating potential of the acquired in-process research and development, and
included assumptions that certain expenses would decline over time as operating
efficiencies were obtained based on the Company's historical knowledge of its
operations. The Company assumed material net cash inflows would commence in
2000. Appropriate adjustments were made to operating income to derive net cash
flow, and the estimated net cash flows of the in-process technology was then
discounted to present value using rates of return that the Company believes
reflect the specific risk/return characteristics of this research and
development project. The selection of the discount rate was based on the
consideration of: (i) the weighted average cost of capital, which measures a
company's cost of debt and equity financing weighted by the percentage of debt
and percentage of equity in its target capital structure; (ii) the corresponding
weighted average return on assets which measures the after-tax return required
on the assets employed in the business weighted by each asset group's percentage
of the total asset portfolio; and (iii) venture capital required rates of return
which typically relate to equity financing for relatively high-risk business
projects.
Revenues attributable to the acquired in-process technology were assumed
to increase during the first two years of the four year projection period at
annual rates ranging from 179% to 904% and then decrease at rates ranging from
14% to 26%.
14
Projected annual revenue ranged from approximately $10.0 million to $192.9
million over the term of the projection. These projections were based on
aggregate revenue growth rates for the business as a whole, individual product
revenues, giving consideration to transaction volumes and prices, anticipated
growth rates for the server-based computing market, anticipated product
development and product introduction cycles, and the estimated life of the
underlying technology. Projected revenue from the in-process research and
development was assumed to peak in 2001, and decrease during 2002 and 2003.
Gross profit attributable to the acquired in-process technology was
assumed to increase in the first two years of the projection period at annual
rates ranging between 173% and 882% and then decrease over the remaining years
at rates between 14% to 26%, resulting in annual gross profits ranging from
approximately $4.5 to $12.3 million. The gross profit projections assumed a
growth rate approximately the same as the revenue growth rate.
Operating profit attributable to the acquired in-process technology was
assumed to increase in the first two years of the projection period at annual
rates ranging between 153% and -286% (due to an expected operating loss in the
first year), and decrease over the remaining years at rates between 14% and 26%
annually, resulting in annual operating profits ranging from approximately $2.2
million to $5.5 million. Operating profit projections assumed a growth rate
approximately the same as the revenue growth rate.
The Company used a discount rate of 30% for valuing the in-process
research and development acquired, which the Company believes reflected the risk
associated with the completion of the research and development project and the
estimated future economic benefits to be generated subsequent to the project's
completion.
No assurance can be given that actual revenues and operating profit
attributable to acquired in-process research and development will not deviate
from the projections used to value such technology in connection with the
acquisition. Ongoing operations and financial results for acquired assets, and
the Company as a whole, are subject to a variety of factors which may not have
been known or been estimable at the date of such transaction, and such
estimates should not be considered the Company's current projections for
operating results for the acquired assets or the Company as a whole.
The estimated costs to complete the APM and VDOnet projects as of
September 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 and, in APM's case, the rapid pace of technological
change in the Java environment. 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 and eleven months, respectively, from the
originally anticipated completion dates due to changes in the development of
these technologies resulting from end user feedback. The estimated cost to
complete the ViewSoft project as of September 30, 1999 has increased from the
estimated cost of $660,000, at the time of the valuation, due to an increase in
the scope of the project. The estimated completion date of the ViewSoft project
is expected to be delayed by approximately five months from the originally
anticipated completion date due to increases in project scope and a longer
testing period. 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 three and nine
months ended September 30, 1999 compared to the respective periods in the prior
year primarily due to interest income earned on cash obtained from the issuance
of the zero coupon convertible subordinated debentures in March 1999 and cash
generated from operations.
15
Interest Expense. Interest expense increased during the three and nine
months ended September 30, 1999 compared to the respective periods 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 nine months ended September 30, 1999 and 1998.
Liquidity and Capital Resources
During the nine months ended September 30, 1999, the Company generated
positive operating cash flows of approximately $124.6 million. Cash provided by
operating activities relate primarily to net income of $82.9 million as adjusted
for tax benefits related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options of $26.9 million, and
depreciation and amortization of $18.7 million. Accounts payable and other
accrued expenses increased $20.5 million due to higher expenses from increased
marketing activities and royalty fees. The increase in cash provided by
operating activities were partially offset by a $18.0 million increase in
deferred tax assets primarily due to an increase in deferred revenue and a $16.1
million increase in accounts receivable primarily due to higher revenue levels.
Cash used in investing activities of $408.2 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. Cash of approximately $32.8 million was used in the acquisition of
ViewSoft, Inc. These cash outflows were partially offset by cash inflows from
the sale of investments of approximately $141.0 million. Cash provided by
financing activities of $335.9 million related primarily to $292.5 million of
net proceeds from the issuance of convertible subordinated debentures and $43.6
million from the issuance of common stock under the Company's stock plans.
As of September 30, 1999, the Company had approximately $693.9 million in
cash and investments and $296.2 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 September 30, 1999, the Company had approximately $47.4 million
in accounts receivable, net of allowances, and $112.0 million of deferred
revenues, of which the Company anticipates $63.0 million will be earned over the
next twelve months. The Company also expects to receive an additional $15.0
million under the terms of the Development Agreement prior to December 31, 1999.
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 September 30, 1999, none of the Company's
outstanding common stock had 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. for approximately
$33.6 million in cash and liabilities assumed.
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.
16
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 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 completed
its 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 has not discovered any significant potential year 2000 exposure
regarding its internal information systems. 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
17
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. All critical suppliers and other parties have
responded to the Company's inquires and 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 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, 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.
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's
agreement to endorse only our ICA(R) protocol as the preferred method to
provide multi-user Windows access for devices other than Windows clients
expired in November 1999. Microsoft may now market or endorse other
methods to provide multi-user Windows access to non-Windows client
devices.
. Dependence on Microsoft for Commercialization. Our ability to successfully
commercialize our MetaFrame product depends on Microsoft's ability to
market NT Terminal Server products and future product offerings. 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
19
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 and technologies 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, operating results and financial
condition.
20
We plan to continue to increase our professional staff as we implement
additional 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;
. changes in customer requirements; and
21
. 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 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.
22
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:
. the success of our Windows Application Servers product group and
specifically our MetaFrame product line;
23
. 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 modified 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.
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:
24
. 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 September 30, 1999
levels, the fair value of the portfolio at September 30, 1999 would decline by
approximately $4.8 million.
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PART II. OTHER INFORMATION
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 August 3, 1999 with respect to:
Item 5 - Other Events. To disclose the completion of the acquisition of
ViewSoft, Inc. on July 23, 1999.
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 15th day of November 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)
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Exhibit Index
Page Number
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27 Financial Data Schedule 30
29