<PAGE> 1
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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-2275152
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6400 N. W. 6TH WAY
FORT LAUDERDALE, FLORIDA 33309
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 3, 2000 there were 185,271,416 shares of the
registrant's Common Stock, $.001 par value per share, outstanding.
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<PAGE> 2
CITRIX SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
CONTENTS
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income:
Three Months and Nine Months ended September
30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows:
Nine Months ended September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Qualitative & Quantitative Disclosure about Market Risk 29
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Exhibit Index 32
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- ----------------
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 322,408 $ 216,116
Short-term investments 286,476 221,978
Accounts receivable, net of allowances of $11,508 and $8,242 at
September 30, 2000 and December 31, 1999, respectively 53,111 55,327
Inventories 5,107 7,731
Prepaid taxes 67,467 30,394
Other prepaid expenses 5,458 4,970
Other current assets 5,233 7,184
Current portion of deferred tax assets 27,392 26,544
---------- ----------
Total current assets 772,652 570,244
Long-term investments 193,744 325,755
Property and equipment, net 49,155 31,530
Intangible assets, net 69,300 63,396
Long-term portion of deferred tax assets 17,967 30,197
Other assets, net 16,767 16,735
---------- ----------
$1,119,585 $1,037,857
========== ==========
</TABLE>
CONTINUED
3
<PAGE> 4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- ----------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PAR VALUE)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 71,973 $ 59,988
Current portion of deferred revenues 77,601 67,805
Income taxes payable 3,460 9,202
----------- -----------
Total current liabilities 153,034 136,995
Long term portion of deferred revenues 24,091 53,912
Convertible subordinated debentures 326,221 313,880
Commitments and contingencies
Stockholders' equity:
Preferred stock at $.01 par value--5,000,000 shares authorized, none
issued and outstanding at September 30, 2000 and December 31,
1999, respectively -- --
Common stock at $.001 par value: 1,000,000 shares authorized;
187,060 and 181,093 issued at September 30, 2000 and December
31, 1999, respectively 187 181
Additional paid-in capital 344,741 309,321
Retained earnings 301,240 226,105
Accumulated other comprehensive loss (2,355) (2,537)
----------- -----------
643,813 533,070
Less - common stock in treasury, at cost (27,574) --
----------- -----------
Total stockholders' equity 616,239 533,070
----------- -----------
$ 1,119,585 $ 1,037,857
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE> 5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C>
Revenues:
Revenues $ 103,482 $ 95,771 $ 317,202 $ 255,412
Other revenues 10,009 10,009 29,890 29,821
--------- --------- --------- ---------
Net revenues 113,491 105,780 347,092 285,233
Cost of revenues:
Cost of revenues (excluding amortization
presented separately below) 8,694 3,098 21,907 10,274
Cost of other revenues 160 205 480 651
--------- --------- --------- ---------
Total cost of revenues 8,854 3,303 22,387 10,925
--------- --------- --------- ---------
Gross margin 104,637 102,477 324,705 274,308
Operating expenses:
Research and development 12,532 9,524 36,945 26,644
Sales, marketing and support 43,999 31,214 130,613 85,352
General and administrative 14,305 11,169 43,173 25,927
Amortization of intangible assets 7,890 5,235 22,550 12,776
In-process research and development -- 2,300 -- 2,300
--------- --------- --------- ---------
Total operating expenses 78,726 59,442 233,281 152,999
--------- --------- --------- ---------
Income from operations 25,911 43,035 91,424 121,309
Interest and other income 9,220 6,793 28,551 16,681
Interest expense (4,250) (3,975) (12,639) (8,460)
--------- --------- --------- ---------
Income before income taxes 30,881 45,853 107,336 129,530
Income taxes 9,264 16,507 32,201 46,631
--------- --------- --------- ---------
Net income $ 21,617 $ 29,346 $ 75,135 $ 82,899
========= ========= ========= =========
Earnings per common share:
Basic earnings per share $ 0.12 $ 0.17 $ 0.41 $ 0.47
========= ========= ========= =========
Weighted average shares outstanding 185,627 177,084 184,749 175,065
========= ========= ========= =========
Earnings per common share--assuming dilution:
Diluted earnings per share $ 0.11 $ 0.15 $ 0.37 $ 0.44
========= ========= ========= =========
Weighted average shares outstanding 192,879 193,137 201,536 189,836
========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE> 6
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 75,135 $ 82,899
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 36,345 18,694
Provision for doubtful accounts 1,167 172
Provision for product returns 20,377 17,583
Provision for inventory reserves 7,028 1,124
Tax benefit related to the exercise of non-statutory stock options and
disqualifying dispositions of incentive stock options 72,026 26,945
Accretion of original issue discount and amortization of financing
cost 12,560 8,460
In-process research and development -- 2,300
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (17,721) (32,384)
Inventories (4,343) (5,525)
Prepaid taxes (37,073) 146
Other prepaid expenses 1,738 (2,924)
Other assets (251) (5,958)
Deferred tax assets 11,382 (17,995)
Deferred revenues (20,025) 13,212
Accounts payable and other accrued expenses 11,437 18,528
Income taxes payable (5,742) (671)
--------- ---------
Net cash provided by operating activities 164,040 124,606
INVESTING ACTIVITIES
Purchases of investments (153,198) (502,511)
Proceeds from sale of investments 220,892 140,983
Cash paid for acquisitions, net of cash acquired (30,102) (32,784)
Cash paid for licensing agreement -- (750)
Purchases of property and equipment (31,106) (13,099)
--------- ---------
Net cash provided by (used in) investing activities 6,486 (408,161)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 57,727 43,563
Cash paid under stock repurchase programs (121,901) --
Net proceeds from issuance of convertible subordinated debentures -- 292,458
Other (60) (74)
--------- ---------
Net cash (used in) provided by financing activities (64,234) 335,947
--------- ---------
Increase in cash and cash equivalents 106,292 52,392
Cash and cash equivalents at beginning of period 216,116 127,546
--------- ---------
Cash and cash equivalents at end of period $ 322,408 $ 179,938
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE> 7
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000
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,
1999.
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. 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 ("PCS"), 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 ("VSOE"). The Company sells software and PCS separately
and VSOE is determined by the price charged when each element is sold
separately. Product returns and sales allowances, including stock rotations,
are estimated and provided for at the time of sale. Non-recurring
engineering fees are recognized ratably as the work is performed. Revenues
from training and consulting are recognized when the services are performed.
Service 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 are included in net revenues on the face of the
consolidated statements of income.
7
<PAGE> 8
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 Company's convertible subordinated debentures were
excluded from the computation of diluted earnings per share due to their
antidilutive effect.
All share and per share data have 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, and the two-for-one
stock split in the form of a stock dividend paid on February 16, 2000 to
stockholders of record as of January 31, 2000.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 21,617 $ 29,346 $ 75,135 $ 82,899
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per
share - weighted-average shares 185,627 177,084 184,749 175,065
Effect of dilutive securities:
Employee stock options 7,252 16,053 16,787 14,771
-------- -------- -------- --------
Dilutive potential common shares 7,252 16,053 16,787 14,771
-------- -------- -------- --------
Denominator for diluted earnings per
share - weighted-average shares 192,879 193,137 201,536 189,836
======== ======== ======== ========
Basic earnings per share $ 0.12 $ 0.17 $ 0.41 $ 0.47
======== ======== ======== ========
Diluted earnings per share $ 0.11 $ 0.15 $ 0.37 $ 0.44
======== ======== ======== ========
</TABLE>
5. ACQUISITION
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex"), a privately owned e-business consulting
services organization specializing in the design, development and
implementation of Web-based solutions and systems integration. The purchase
price was approximately $47.8 million, of which $28.7 million was paid at
the closing date and the balance is payable, in equal installments 18 and 24
months after the closing date, contingent on future events, as set forth in
the acquisition agreement.
The acquisition was accounted for as a purchase and the allocation of the
purchase price was based on an independent report. The cost in excess of net
tangible assets acquired was approximately $26.1 million, of which $9.0
million was allocated to the acquired workforce and $17.1 million was
allocated to goodwill. The cost associated with the acquired workforce and
goodwill are both being amortized on a straight-line basis over four years.
The results of operations of Innovex are included in the Company's results
of operations from the date of acquisition. Contingent payments to be made
at future dates, if any, will be accounted for as additional purchase price
and amortized over the remaining life of the intangible assets acquired.
8
<PAGE> 9
6. SEGMENT INFORMATION
The Company operates in a single market consisting of the design,
development, marketing and support of client and server-based computing
software for enterprise applications. Design, development, marketing and
support operations outside of the United States are conducted through
subsidiaries located primarily in Europe and the Asia Pacific region.
The Company tracks revenue and gross margin by geography and product
category but does not track operating expenses nor identifiable assets on a
product category basis. The Company does not engage in intercompany
transfers between segments. The Company's management evaluates performance
based primarily on revenues and profit in the geographic locations in which
the Company operates. Segment profit for each segment includes sales and
marketing expenses directly attributable to the segment and excludes certain
expenses which are managed outside the reportable segments. Costs excluded
from segment profit primarily consist of cost of revenues, research and
development costs, interest, corporate expenses, including income taxes, as
well as non-recurring charges for purchased in-process technology, and
overhead costs, including rent, utilities, depreciation and amortization.
Corporate expenses are comprised primarily of corporate marketing costs,
operations and other general and administrative expenses which are
separately managed. Accounting policies of the segments are the same as the
Company's consolidated accounting policies. Net revenues and segment profit,
classified by the major geographic areas in which the Company operates, are
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- - ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
Americas $ 63,195 $ 55,797 $ 181,189 $ 142,227
EMEA(1) 32,328 32,108 113,641 90,904
Asia Pacific 6,677 5,052 17,908 15,393
Other (2) 11,291 12,823 34,354 36,709
--------- --------- --------- ---------
Consolidated $ 113,491 $ 105,780 $ 347,092 $ 285,233
========= ========= ========= =========
Segment profit:
Americas $ 52,775 $ 46,410 $ 151,085 $ 112,592
EMEA(1) 25,120 25,966 89,015 73,163
Asia Pacific 2,459 2,568 8,173 8,827
Other (2) 11,291 12,823 34,354 36,710
Unallocated expenses (3):
Cost of revenues (8,854) (3,303) (22,387) (10,925)
Overhead costs (22,271) (13,556) (61,513) (35,049)
Research and development (12,532) (9,524) (36,945) (26,644)
Net interest 4,970 2,818 15,912 8,221
Other corporate expenses (22,077) (18,349) (70,358) (37,365)
--------- --------- --------- ---------
Consolidated income before income
taxes $ 30,881 $ 45,853 $ 107,336 $ 129,530
========= ========= ========= =========
</TABLE>
--------------
(1) Europe, Middle East and Africa ("EMEA").
(2) Primarily represents royalty fees earned in connection with the License,
Development and Marketing Agreement with Microsoft and OEM revenue.
(3) Represents expenses presented to management on a consolidated basis only
and not allocated to the geographic operating segments.
9
<PAGE> 10
Additional information regarding revenue by product line is as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
Windows Application Servers $ 80,168 $ 78,250 $ 248,087 $ 210,676
Management Services Products 14,440 10,506 42,791 26,417
Computing Appliances Products 1,282 2,815 4,465 7,135
Microsoft Royalties 10,009 10,009 29,889 29,821
Other Revenue 7,592 4,200 21,860 11,184
--------- --------- --------- ---------
Net Revenues $ 113,491 $ 105,780 $ 347,092 $ 285,233
========= ========= ========= =========
</TABLE>
7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related taxes, are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net income $ 21,617 $ 29,346 $ 75,135 $ 82,899
Unrealized gain (loss) on available-for-sale securities, net (4,730) (100) 182 (1,597)
--------- --------- --------- ---------
Comprehensive income $ 16,887 $ 29,246 $ 75,317 $ 81,302
========= ========= ========= =========
</TABLE>
8. INCOME TAXES
In July 1999, the Company changed its organizational structure whereby it
moved certain operational and administrative processes to overseas
subsidiaries. The restructuring resulted in foreign earnings being taxed at
lower foreign tax rates. Effective January 1, 2000, these earnings will be
permanently reinvested overseas in order to fund the Company's growth in
overseas markets. As a result, the Company's effective tax rate was reduced
to 30% for the three and nine month periods ended September 30, 2000 from
36% for the same periods in the prior year.
9. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1999, the Company completed a private placement of $850.0 million
principal amount at maturity of its zero coupon convertible subordinated
debentures (the "debentures") due March 22, 2019. The debentures were priced
with a yield to maturity of 5.25% and resulted in net proceeds to the
Company of approximately $291.9 million, net of original issue discount and
net of debt issuance costs of $9.6 million. 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 14.0612 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. Interest expense related to the debentures was $4.3 million and $4.0
million for the three month periods ended September 30, 2000 and 1999,
respectively. Interest expense related to the debentures was $12.6 million
and $8.5 million for the nine month periods ended September 30, 2000 and
1999, respectively. In March and April of 2000, holders of an aggregate face
value amount of $200,000 of debentures converted the notes into
approximately 2,810 shares of the Company's common stock. The Company made
immaterial payments in connection with these conversions.
10
<PAGE> 11
10. OTHER REVENUES
In May 1997, the Company entered into an agreement, as amended (the
"Agreement"), with Microsoft Corporation ("Microsoft"), which provides for
the licensing of certain of the Company's multi-user software enhancements
and for the cooperation between the parties for the development of certain
future software. At the time of the agreement, Microsoft held in excess of
5% of the Company's outstanding common stock and also had a representative
on the Company's Board of Directors. Microsoft is no longer a significant
shareholder and no longer has Board representation. Amounts arising from the
Agreement are designated as other revenue. Deferred revenue at September 30,
2000 and December 31, 1999 includes $63.9 million and $93.8 million,
respectively, related to this agreement which is being recognized ratably
over the five year term of the Agreement, which began in May 1997.
11. 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 may be made from time to time in the open market and
paid out of general corporate funds. As of September 30, 2000, the Company
purchased 1,350,000 shares of outstanding common stock on the open market at
an average price of $16.22 per share. These shares have been recorded as
treasury stock.
On August 8, 2000, the Company entered into an agreement with a counterparty
in a private transaction to purchase up to 5.8 million shares of the
Company's common stock at various times through the third quarter of 2002.
Pursuant to the terms of the agreement, $100 million was paid to the
counterparty in the third quarter of 2000. The $100 million was recorded as
a reduction of additional paid-in capital and shares delivered to the
Company over the term of the agreement will be recorded in treasury stock.
The ultimate number of shares repurchased will depend on market conditions.
As of September 30, 2000, the Company received 336,000 shares under this
agreement at an average price of $16.87 per share. These shares have been
recorded as treasury stock.
12. LEGAL PROCEEDINGS
In June 2000, the Company and certain of its officers and directors were
named as defendants in several securities class action lawsuits filed in the
United States District Court for the Southern District of Florida. These
actions, which were filed on behalf of purchasers of the Company's common
stock during the period October 20, 1999 to June 9, 2000, generally allege
that, during the class period, the defendants made misstatements to the
investing public about the Company's financial condition and prospects. The
complaints seek unspecified damages. The Company believes the plaintiffs'
claims lack merit and intends to vigorously defend the lawsuits.
In September 2000, a shareholder filed a claim in the Court of Chancery of
the State of Delaware against the Company and nine of its officers and
directors alleging breach of fiduciary duty. The complaint seeks
unspecified damages. The Company believes the plaintiff's claim lacks merit
and intends to vigorously defend the lawsuit.
11
<PAGE> 12
13. RECLASSIFICATIONS
Certain reclassifications have been made for consistent presentation.
14. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement 133. The Statement defers the
effective date of SFAS 133 (as amended by SFAS 138, issued in June 2000) to
fiscal 2001. Management is evaluating SFAS 133, 137, and 138 and does not
believe that adoption of these Statements will have a material impact on its
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes the requirements that must be met
in order to recognize revenue and provides guidance for disclosure of
revenue recognition policies. In June 2000, the SEC issued SAB No. 101B
which delays the implementation date of SAB 101 until no later than the
fourth quarter of fiscal 2000. The Company has assessed the impact of SAB
101 and does not expect the adoption to have a material effect on its
financial position or results of operation.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"), "Accounting
for Certain Transactions Involving Stock Compensation", an interpretation of
APB Opinion No. 25 ("APB 25"). FIN 44 clarifies the application of APB 25
with respect to: the definition of an employee for the purposes of applying
APB 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequences of various modifications
to the terms of a previously fixed stock option or awards, and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12,
2000. The Company has assessed the impact of FIN 44 and does not expect the
adoption to have a material effect on its financial position or results of
operation based on the Company's existing stock compensation arrangements.
12
<PAGE> 13
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
and management of enterprise applications that are designed for Microsoft
Windows(R) operating systems. The Company's Windows Application Servers, which
comprise the largest source of the Company's revenue, primarily consist of the
MetaFrame(TM) product line and related options. The MetaFrame product line,
which began shipping in the second quarter of 1998, permits organizations to
deploy Windows applications without regard to location, network connection, or
type of client hardware platforms.
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, including Microsoft Windows NT Server,
Terminal Server Edition and Microsoft Windows 2000 (collectively, "NT Server").
As a result of the Development Agreement, the Company continues 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) and related interpretations,
"Software Revenue Recognition" as described in Note 3 of the Notes to Condensed
Consolidated Financial Statements included in this report.
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex"), a privately owned e-business consulting
services organization specializing in the design, development and implementation
of Web-based solutions and systems integration, for approximately $47.8 million,
of which $28.7 million was paid at the closing date and the balance is payable,
in equal installments, 18 and 24 months after the closing date, contingent on
future events.
The following discussion 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 may
impact the Company's future performance and financial position.
13
<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth statement of income 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.
<TABLE>
<CAPTION>
INCREASE/(DECREASE) FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
THREE MONTHS ENDED NINE MONTHS ENDED 2000 2000
SEPTEMBER 30, SEPTEMBER 30, Vs. Vs.
------------------ ---- ------------- SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999 1999 1999
---- ---- ---- ---- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0% 7.3% 21.7%
Cost of revenues (excluding
amortization presented
separately below) 7.8 3.1 6.5 3.8 168.0 104.9
------ ------ ------ ------
Gross margin 92.2 96.9 93.5 96.2 2.1 18.4
Operating expenses:
Research and development 11.0 9.0 10.6 9.3 31.6 38.7
Sales, marketing and support 38.8 29.5 37.6 29.9 41.0 53.0
General and administrative 12.6 10.6 12.5 9.1 28.1 66.5
Amortization of intangible
assets 7.0 4.9 6.5 4.5 50.7 76.5
In-process research and
development -- 2.2 -- 0.8 (100.0) (100.0)
------ ------ ------ ------
Total operating expenses 69.4 56.2 67.2 53.6 32.4 52.5
------ ------ ------ ------
Income from operations 22.8 40.7 26.3 42.6 (39.8) (24.6)
Interest and other income 8.1 6.4 8.2 5.8 35.7 71.2
Interest expense (3.7) (3.8) (3.6) (3.0) 6.9 49.4
------ ------ ------ ------
Income before income taxes 27.2 43.3 30.9 45.4 (32.7) (17.1)
Income taxes 8.2 15.6 9.3 16.3 (43.9) (30.9)
------ ------ ------ ------
Net income 19.0% 27.7% 21.6% 29.1% (26.3)% (9.4)%
====== ====== ====== ======
</TABLE>
NET REVENUES. Net revenues are presented below in five categories: Windows
Application Servers, Management Services Products, Computing Appliances
Products, Microsoft Royalties and Other Revenue. Windows Application Servers
revenue represents fees related primarily to the licensing of the Company's
MetaFrame product, subscription for product support, updates and upgrades and
additional user licenses. Management Services Products consist of system option
products such as Load Balancing Services, Resource Management Services and other
options. 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. The Company
sells packaged products and electronic licenses through its distribution
channels. As the Company has experienced an increase in electronic sales as a
percentage of revenue, our traditional packaged product has declined as a
percentage of product mix. Microsoft royalties represent fees recognized in
connection with the Development Agreement. Other Revenue consists primarily of
services and consulting revenues.
14
<PAGE> 15
With respect to product mix, the increase in net revenues for the three
months ended September 30, 2000 compared to the three months ended September 30,
1999 was primarily attributable to an increase in the volume of shipments of
Management Services Products and an increase in Windows Application Servers
revenue which was due to an increase in the number of MetaFrame licenses sold.
The increase in Windows Application Servers revenue was partially offset by an
increase in the reserve for returns and a decrease in revenue from the WinFrame
product line, the Company's Windows application server software based on Windows
NT 3.51. The reserve for returns increased this quarter due to an increased
level of stock balancing from the Company's distributors and resellers. The
increase in net revenues was also due to an increase in Other Revenue due mainly
to consulting revenue.
The increase in net revenues for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999 was primarily attributable
to an increase in Windows Application Servers revenue due primarily to an
increase in the number of MetaFrame licenses sold, partially offset by a
decrease in revenue from the WinFrame product line. The increase in net revenues
was also due to an increase in the volume of shipments of Management Services
Products, specifically, Load Balancing Services and Resource Management Services
Products, and to a lesser extent, an increase in Other Revenue due mainly to
consulting revenue.
An analysis of the Company's net revenues by product line is presented in
the table below:
<TABLE>
<CAPTION>
INCREASE/(DECREASE) FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
THREE MONTHS ENDED NINE MONTHS ENDED 2000 2000
SEPTEMBER 30, SEPTEMBER 30, Vs. Vs.
-------------------- -------------------- SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999 1999 1999
---- ---- ---- ---- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Windows Application Servers 70% 74% 72% 74% 2% 18%
Management Services Products 13 10 12 9 37 62
Computing Appliances Products 1 3 1 3 (54) (37)
Microsoft royalties 9 9 9 10 -- --
Other revenue 7 4 6 4 81 95
---- ---- ---- ----
Net revenues 100% 100% 100% 100% 7% 22%
</TABLE>
SEGMENT REVENUES. The increase in net revenues by operating segment for the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999 was primarily due to the Company's increased sales and
marketing efforts and continued demand for Citrix products in the Americas and
Asia Pacific regions, while Europe, Middle East and Africa ("EMEA") remained
relatively stable this quarter due to some market weakness in Europe. The
increase in net revenues by operating segment for the nine months ended
September 30, 2000 compared to the same period in 1999 was primarily due to the
Company's increase sales and marketing efforts and continued demand for Citrix
products in the Americas and EMEA regions. Other revenue has remained relatively
stable, from the third quarter of 1999 to the third quarter of 2000, but has
decreased as a percentage of net revenues due to the growth of the other
segments. Revenue by operating segment as a percentage of net revenues remained
relatively constant for the three and nine month periods ended September 30,
2000 compared to the same periods in 1999.
15
<PAGE> 16
An analysis of net revenues by operating segment is presented in the table
below:
<TABLE>
<CAPTION>
INCREASE/(DECREASE) FOR THE
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
THREE MONTHS ENDED NINE MONTHS ENDED 2000 2000
SEPTEMBER 30, SEPTEMBER 30, Vs. Vs.
-------------------- -------------------- SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999 1999 1999
---- ---- ---- ---- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Americas 56% 53% 52% 50% 13% 27%
EMEA 28 30 33 32 1 25
Asia Pacific 6 5 5 5 32 16
Other (1) 10 12 10 13 (12) (6)
---- ---- ---- ----
Net revenues 100% 100% 100% 100% 7% 22%
</TABLE>
(1) Primarily represents royalty fees earned in connection with the Development
Agreement and OEM revenue.
The Company expects to continue investing in international markets and
expanding its international operations by establishing additional foreign
operations, hiring personnel, expanding its international sales force and
continuing to add third party channel partners.
COST OF REVENUES. Cost of revenues consists primarily of the cost of
royalties, product media and duplication, manuals, packaging materials and
shipping expense. All development costs incurred in connection with the
Development Agreement are expensed as incurred as a separate component of cost
of revenues. The Company's cost of revenues excludes amortization of core
technology. Cost of revenues also consists of compensation and other
personnel-related costs for consulting services.
GROSS MARGIN. Gross margin as a percentage of net revenue decreased for the
three and nine months ended September 30, 2000 primarily due to reserves for
obsolete inventory on-hand and the impact of the consulting services business
which has a lower gross profit margin as a percentage of net revenue than that
associated with the sale of software licenses. The Company anticipates gross
margin as a percentage of net revenues will increase from current levels but
will remain below historical levels as the Company increases its consulting
services offering.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consisted primarily of personnel-related costs. 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 certain acquisitions and licensing arrangements. 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.
SALES, MARKETING AND SUPPORT EXPENSES. The increase in sales, marketing and
support expenses for the three months ended September 30, 2000 resulted
primarily from higher headcount levels of sales, services and marketing staff
and associated salaries, commissions and related expenses in order to increase
the Company's sales, consulting and marketing efforts. The increase for the nine
months ended September 30, 2000 resulted from higher headcount levels and
increased advertising and corporate branding and marketing activities directed
at customer and business partner acquisition and retention.
16
<PAGE> 17
GENERAL AND ADMINISTRATIVE EXPENSES. The increase in general and
administrative expenses for the three and nine months ended September 30, 2000
was primarily due to increased expenses associated with additional staff,
associated salaries and related expenses necessary to support overall increases
in the scope and geographical diversity of the Company's operations. The
increase for the nine months ended September 30, 2000 was also due to an
increase in the provision for doubtful accounts in the second quarter of 2000
resulting from the reserve of specific customers' accounts receivable balances,
an increase in consulting fees for information systems projects and an increase
in legal fees relating to litigation defense. The Company is in the early stages
of an enterprise resource planning implementation project. While a significant
portion of the costs associated with this project will be capitalized, certain
costs will be expensed during the course of the project, which is expected to
continue through 2001. This project is not expected to have a material impact on
our general and administrative expenses.
AMORTIZATION OF INTANGIBLE ASSETS. The increase in amortization of goodwill
and identifiable intangible assets is primarily due to the acquisition of
ViewSoft, Inc. ("ViewSoft") in July 1999 and Innovex in February 2000 which
resulted in additional goodwill and identifiable intangible assets of $31.1
million and $26.7 million, respectively. As of September 30, 2000, the Company
had net goodwill and identifiable intangible assets of $69.3 million associated
with these and other transactions which will be fully amortized over two to four
years. The Company anticipates that amortization of goodwill and identifiable
intangible assets will increase as the Company continues to search for suitable
acquisition candidates.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition of
certain in-process software technologies from ViewSoft, the Company allocated
$2.3 million of the purchase price to In-Process Research and Development
("IPR&D"). During 1998, the Company completed acquisitions of certain in-process
software technologies in which it allocated a portion of the purchase price to
IPR&D. The Company allocated $10.7 million and $2.4 million for IPR&D related to
the APM Ltd ("APM") and VDOnet Corporation, Ltd ("VDOnet") acquisitions,
respectively.
Since the respective dates of acquisition, the Company has used the acquired
in-process technology to develop new product offerings and enhancements, which
have or will become part of the Company's suite of products when completed.
Functionality included in products using the acquired in-process technology have
been introduced at various times following the respective transaction dates of
the acquired assets. The Company currently expects to complete the development
of the remaining projects at various dates in 2001. Upon completion, the Company
has offered and intends to offer the related products to its customers.
The nature of the efforts required to develop and integrate the acquired
in-process technology into commercially viable products or features and
functionalities within the Citrix suite of existing products principally relate
to the completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet design
requirements, including functions, features and technical performance
requirements. The Company currently expects that products utilizing the acquired
in-process technology will be successfully developed, but there can be no
assurance that commercial viability of any of these products will be achieved.
Furthermore, future developments in the software industry, particularly the
server-based computing environment, changes in technology, changes in other
products and offerings or other developments may cause the Company to alter or
abandon product plans.
17
<PAGE> 18
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. 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 each of the respective acquisitions. 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
estimable at the date of such transactions, and the estimates discussed below
should not be considered the Company's current projections for operating results
for the acquired assets or the Company as a whole.
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. The updated status of completion for each project is
set forth in the table below.
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, and is targeted for the
server-based computing market. At the date of the acquisition, VDOnet was
shipping a client server video streaming product that was not operational in a
Windows NT or in a MetaFrame environment. VDOnet was in the process of modifying
its software to be operational in a Windows NT environment. In addition, VDOnet
was developing enhancements that would provide for a live camera feed and
multicast, which is intended to direct a video stream to multiple client devices
simultaneously. Following the acquisition, the Company continued the process of
modifying the VDOnet software to be operational in a Windows NT environment.
The Company is currently exploring alternative uses of the technology
acquired in the VDOnet acquisition. These uses relate primarily to delivering
video applications in a server-based computing environment and video streaming
within ICA devices. The Company is reviewing potential modifications to its
future cash flow projections based on alternative uses of the acquired
technology and the remaining efforts necessary to complete these alternative
projects. The Company expects to complete their evaluation in the fourth quarter
of 2000. Based on the results of the evaluation, the Company may record a
write-down if the net realizable value of the acquired technology is less than
its carrying amount. The carrying amount of the technology acquired from VDOnet
was approximately $2.1 million as of September 30, 2000, and the Company has
incurred approximately $4.2 million in expenses to date. At the date of
valuation, the project was expected to be completed in the second quarter of
1999 and the expected cost to complete the project was approximately $200,000.
18
<PAGE> 19
APM
The in-process research and development acquired in the APM acquisition
consisted primarily of one significant research and development project. The
project is a Windows NT-based application server which runs Java applications.
At the date of the acquisition, APM was shipping a Java application server
solution that allowed an enterprise user to access Java-applets from the
Internet and execute these applets outside the corporate firewall in a
server-based computing configuration in a fashion that was transparent to the
enterprise user. APM was in the process of modifying its software product to
incorporate changes necessary for it to interface with Java 2.0, which was a
major new release that included significant rewrites to the Java desktop.
Following the acquisition, the Company planned on continuing the process of
incorporating changes necessary to interface with Java 2.0, and in addition,
planned on further developing the software product into an application server
for Java 2.0 that would operate in a MetaFrame server environment.
In the second quarter of 2000, management changed the Java application
server to a Java Performance Pack product, which adds performance enhancements
and management tools to other Citrix products. The remaining efforts to complete
the project are primarily the continuing incorporation of changes necessary to
interface with Java 2.0 and the utilization of acquired technology to develop a
Java Performance Pack product that will operate in a MetaFrame 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, and integrating and porting such technology
into a variety of server-based computing architectures.
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 MetaFrame
environment. The Company is currently exploring the use of the product for the
development of portal-ware applets.
The remaining efforts to complete the project relate primarily to applet
development, on-going stress testing and, to a lesser extent, bug fixes and
documentation. The research and development risks associated with this project
relate primarily to potential product limitations revealed during testing.
19
<PAGE> 20
The actual and estimated costs to complete and completion dates of the
in-process and core technology acquired for the APM and ViewSoft acquisitions
are as follows:
<TABLE>
<CAPTION>
APM VIEWSOFT
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Date acquired June 1998 July 1999
Cost incurred to date $4,275 $3,520
Estimated cost to complete 35 3,500
--------- ----------
Total estimated project cost $4,310 $7,020
========= ==========
Estimated cost to complete at date of valuation $4,000 $ 660
========= ==========
Estimated completion date at date of valuation First Quarter Fourth Quarter
of 1999 of 1999
Current estimated completion date . First Quarter First Quarter
of 2001 of 2001
</TABLE>
The estimated completion date of the in-process and core technology related
to the APM acquisition has been extended from the originally anticipated
completion date as certain personnel working on this project have been allocated
to other projects and as development efforts of the APM technology have been
redirected from a Java application server to a Java Performance Pack to
accommodate changes in the development of the Java market. The estimated
completion date of the ViewSoft project has been delayed from the originally
anticipated completion date due to increases in project scope, a longer testing
period, and transition of the development team. 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 completing these projects or that the Company will be successful
in its efforts to integrate and further develop these technologies.
INTEREST AND OTHER INCOME. The increase in interest and other income for the
three and nine months ended September 30, 2000 was primarily due to interest
earned on the invested net proceeds from the issuance of the zero coupon
convertible subordinated debentures in March 1999 and from an increase in cash
from operations. The Company may acquire or make investments in companies it
believes are related to its strategic objectives. Such investments will reduce
the Company's cash and/or investment balances and therefore may reduce interest
income.
INTEREST EXPENSE. The increase in interest expense for the three and nine
months ended September 30, 2000 was primarily due to interest related to the
zero coupon convertible subordinated debentures issued in March 1999.
INCOME TAXES. In July 1999, the Company changed its organizational structure
whereby it moved certain operational and administrative processes to overseas
subsidiaries. The restructuring resulted in foreign earnings being taxed at
lower foreign tax rates. These earnings will be permanently reinvested overseas
in order to fund the Company's growth in overseas markets. As a result of these
organizational changes, the Company's effective tax rate amounted to 30% for the
three and nine month periods ended September 30, 2000 and 36% for the three and
nine month periods ended September 30, 1999.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000, the Company generated
positive operating cash flows of approximately $164.0 million. Cash provided by
operating activities was derived primarily from net income of $75.1 million,
adjusted for, among other things, tax benefits from the exercise of
non-statutory stock options and disqualifying dispositions of incentive stock
options of $72.0 million, non-cash charges for depreciation and amortization of
$36.3 million and provisions for product returns of $20.4 million, offset by a
net decrease of $60.6 million from changes in operating assets and liabilities.
Cash provided by investing activities of $6.5 million related to the proceeds
from the sale of investments of $220.9 million offset by cash outflows from the
purchase of investments of $153.2 million, purchase of property and equipment of
$31.1 million, and net cash paid for acquisitions, primarily Innovex, of $30.1
million. Cash used in financing activities of $64.2 million is a result of cash
paid under the Company's stock repurchase programs of $121.9 million offset by
the proceeds from the issuance of common stock under the Company's stock option
plan of $57.7 million.
As of September 30, 2000, the Company had approximately $802.6 million in
cash and investments and $619.6 million of working capital. 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, 2000, the Company had approximately $53.1
million in accounts receivable, net of allowances, and $101.7 million of
deferred revenues, of which the Company anticipates $77.6 million will be earned
over the next twelve months.
On April 15, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to $200 million of the Company's common
stock. Purchases will be made from time to time in the open market and paid out
of general corporate funds. As of September 30, 2000, the Company purchased
1,350,000 shares of outstanding common stock on the open market at an average
price of $16.22 per share. These shares have been recorded as treasury stock.
On August 8, 2000, the Company entered into an agreement with a counterparty
in a private transaction to purchase up to 5.8 million shares of the Company's
common stock at various times through the third quarter of 2002. Pursuant to the
terms of the agreement, $100 million was paid to the counterparty in the third
quarter of 2000. The ultimate number of shares repurchased will depend on market
conditions. As of September 30, 2000, the Company received 336,000 shares under
this agreement at an average price of $16.87 per share. These shares have been
recorded as treasury stock.
In connection with the Company's stock repurchase program, in October 2000,
the Board of Directors approved a program authorizing the Company to sell put
warrants that entitle the holder of each warrant to sell to the Company,
generally by physical delivery, one share of common stock at a specified price.
In February 2000, the Company completed its acquisition of all of the
operating assets of Innovex for approximately $47.8 million, of which $28.1
million was paid in cash at the closing date and the balance is payable, in
equal installments, 18 and 24 months after the closing date, contingent upon
future events.
The Company believes existing cash and investments together with cash flow
expected from operations will be sufficient to meet operating and capital
expenditures requirements through 2000. The Company may from time to time seek
to raise additional funds through public or private financing. The Company may
also acquire or make investments in companies it believes are related to its
strategic objectives. Such investments will reduce the Company's available
working capital.
21
<PAGE> 22
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
We do not provide financial performance forecasts. Our operating results
and financial condition have varied in the past and may in the future vary
significantly depending on a number of factors. Except for the historical
information in this report, the matters contained in this report include
forward-looking statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ materially from
those contained in forward-looking statements made in this report. Such factors,
among others, may have a material adverse effect upon our business, results of
operations and financial condition.
OUR SUCCESS IS SUBSTANTIALLY DEPENDENT UPON OUR STRATEGIC RELATIONSHIP WITH
MICROSOFT
Microsoft is the leading provider of desktop operating systems. We depend
upon the license of key technology from Microsoft, including certain source and
object code licenses, and technical support. We also depend upon our strategic
alliance agreement with Microsoft pursuant to which Citrix and Microsoft have
agreed to cooperate to develop advanced operating systems. Our relationship with
Microsoft is subject to the following risks and uncertainties:
o COMPETITION WITH MICROSOFT. NT Server is, and future product offerings by
Microsoft may be, competitive with our current MetaFrame products, and any
future product offerings by Citrix.
o EXPIRATION OF MICROSOFT'S ENDORSEMENT OF THE ICA PROTOCOL. Microsoft's
obligation to endorse only our ICA 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-tier Windows access to non-Windows client devices.
o DEPENDENCE ON MICROSOFT FOR COMMERCIALIZATION. Our ability to successfully
commercialize our MetaFrame product depends on Microsoft's ability to
market NT Server products. We do not have control over Microsoft or any of
its distributors or resellers. Microsoft is not obligated to continue
marketing specific NT Server products, and could discontinue one or more NT
Server products at any time. Further, to our knowledge, Microsoft's
distributors and resellers are not obligated to purchase products from
Microsoft.
o PRODUCT RELEASE DELAYS. There may be delays in the release and shipment of
future versions of NT Server.
o IMPACT OF MICROSOFT ANTITRUST LITIGATION ON CITRIX INTELLECTUAL PROPERTY.
The United States District Court for the District of Columbia, in the
matter of UNITED STATES V. MICROSOFT, Civ. No. 98-1232 ET SEQ., by order of
June 7, 2000 directed that Microsoft be required to share certain
intellectual property with certain other firms in the information
technology industry. The scope of the District Court's order, and its
potential impact, if any, upon any intellectual property licensed by Citrix
to Microsoft, have not been clarified by the District Court or otherwise,
because the District Court, by order of June 20, 2000, stayed its order of
June 7, 2000 until the currently pending appeals in the matter have been
concluded, or until the District Court's stay is earlier vacated by an
appellate court.
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.
22
<PAGE> 23
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 Server
its Remote Desktop Protocol (RDP) which has certain of the capabilities of our
ICA protocol, and may offer customers a competitive solution. In October 2000,
Microsoft announced a new licensing program involving RDP which may make it more
competitive in the market. 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, Hewlett Packard and others. We depend upon our
strategic partners to successfully market and promote the use of our 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 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 Server.
In addition, alternative products exist for Internet commerce that directly
or indirectly compete with our products. Existing or new products that extend
website 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.
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OUR RELIANCE ON A FEW PRODUCTS FOR A MAJORITY OF OUR REVENUE COULD ADVERSELY
AFFECT OUR BUSINESS
The Company anticipates that its MetaFrame product line and related
enhancements will constitute the majority of its revenue for the foreseeable
future. The Company's ability to generate revenue from its MetaFrame product
will depend upon market acceptance of NT Server products. Declines in demand for
products based on MetaFrame technology may occur as a result of new competitive
product releases, price competition, lack of success of its strategic partners,
technological change or other factors.
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 recently completed certain acquisitions. 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. We believe we have made adequate allowances for the
costs and risks associated with these expansions. However, our systems,
procedures or controls may not be adequate to support our current or future
operations. In addition, we may not be able to effectively manage this expansion
and still achieve the rapid execution necessary to fully exploit the market
opportunity for our products and services in a timely and cost-effective manner.
Our future operating results will also depend on our ability to manage our
expanding product line, expand our sales and marketing organizations and expand
our support organization commensurate with the increasing base of our installed
product. Our failure to properly manage our growth could adversely affect our
business, operating results and financial condition.
We plan to continue to increase our professional staff during 2000 and 2001
as we implement sales, marketing and support and product developments efforts,
as well as associated administrative systems, to support planned growth. As a
result of this planned growth in the size of our staff, we believe that we will
require additional facilities during 2000 and 2001. 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 2000 and 2001 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.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY
We rely primarily on a combination of copyright, trademark and trade secret
laws, as well as confidentiality procedures and contractual provisions, to
protect our proprietary rights. Our efforts to protect our proprietary
technology rights may not be successful. The loss of any material trade secret,
trademark, tradename 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. A significant portion of our sales are derived from license
agreements for packaged products. Such license agreements 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:
o 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.
o 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.
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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:
o rapid technological change;
o evolving industry standards;
o changes in customer requirements; and
o 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 may need to hire additional personnel to develop new products, product
enhancements and technologies and to fulfill our responsibilities under the
terms of the Development Agreement. If we are unable to add staff and resources,
future enhancement and additional features to our existing or future products
may be delayed, which may have a material adverse effect on our business,
results of operations and financial condition.
OUR FAILURE TO COMPLETE CERTAIN OF OUR ACQUIRED RESEARCH AND DEVELOPMENT
PROJECTS COULD ADVERSELY AFFECT OUR BUSINESS
Failure to complete the development of acquired in-process research and
development 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. 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 each of
the respective acquisitions. 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 estimable at the date of such transactions, and
the estimates disclosed in this report should not be considered the Company's
current projections for operating results for the acquired assets or the Company
as a whole.
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,
new products may contain errors after commencement of commercial shipments.
Additionally, our products depend upon certain third party products which may
contain defects and could reduce the performance of our products or render them
useless. Since our products are often used in mission-critical applications,
errors in our products or the products of third parties upon which our products
rely could give rise to warranty or other claims by our customers. 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.
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OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND AND MANAGE DISTRIBUTION CHANNELS
AND MAJOR DISTRIBUTORS
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 are not obligated to
purchase products from us and may also represent other lines of products. We
must expand our distribution channels and provide appropriate incentives to our
distributors to continue our growth rate.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO EXPAND OUR DISTRIBUTION CHANNELS
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 large
account channels and add third-party distributors both domestically and
internationally. We are currently investing, and intend to continue to invest,
significant resources to develop these channels, which could reduce our profits.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO ATTRACT LARGE ENTERPRISE CUSTOMERS
We intend to attract and service large enterprise customers by expanding our
large account channels and offering consulting services. Our inability to
attract large enterprise customers could have a material adverse effect on our
business, operating results and financial condition. Additionally, large
enterprise customers usually request special pricing and generally have longer
sales cycles which could negatively impact our revenues. Further, as we attempt
to attract large enterprise customers, we may need to increase corporate
branding activities which will increase our operating expenses, but may not
proportionally increase our operating revenues.
OUR SUCCESS DEPENDS UPON BROAD-BASED ACCEPTANCE OF INTERNET-BASED BUSINESS
SOFTWARE SOLUTIONS
We intend to leverage our relationships with application service providers
("ASP") to encourage them to use our products in providing their solutions to
end users. The ASP market is in its nascent stage of development but is evolving
quickly. We cannot predict when or if the ASP market will fully evolve into a
commercially viable market. We are currently investing, and intend to continue
to invest, significant resources to develop these channels, which could reduce
our profits.
IF OUR GROWTH RATE DOES NOT CONTINUE OUR FINANCIAL CONDITION COULD BE AFFECTED
Our revenue growth rate in 2000 may not approach the levels attained in
recent years. 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 2000.
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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:
o the success of our MetaFrame products;
o the effects of acquisitions or licenses of additional technology;
o the size, timing and recognition of revenue from significant orders;
o increased competition;
o changes in our pricing policies or those of our competitors, including
Microsoft;
o new product introductions or enhancements by competitors;
o delays in the introduction of products or product enhancements by us or our
competitors;
o customer order deferrals in anticipation of upgrades and new products;
o market acceptance of new products and technologies offered by us;
o changes in operating expenses, including for the addition of personnel;
o foreign currency exchange rates;
o general economic conditions; and
o changes in distribution mix, including packaged product versus electronic
license.
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.
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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:
o difficulties in staffing and managing foreign operations;
o fluctuations in foreign currency exchange rates;
o compliance with foreign regulatory and market requirements;
o variability of foreign economic and political conditions;
o changing restrictions imposed by regulatory requirements, tariffs or other
trade barriers or by United States export laws;
o costs of localizing products and marketing such products in foreign
countries;
o longer accounts receivable payment cycles;
o potentially adverse tax consequences, including restrictions on
repatriation of earnings;
o difficulties in protecting intellectual property; and
o 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. Following
periods of volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against such companies. For
example, in June 2000, the Company and certain of its officers and directors
were named as defendants in several securities class action lawsuits filed in
the United States District Court for the Southern District of Florida. These
actions, which were filed on behalf of purchasers of the Company's common stock
during the period October 20, 1999 to June 9, 2000, generally allege that,
during the class period, the defendants made misstatements to the investing
public about the Company's financial condition and prospects. The complaints
seek unspecified damages. The Company believes the plaintiffs' claims lack merit
and intends to vigorously defend the lawsuits.
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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.
Prior to September 30, 2000, the Company did 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, however, the Board of Directors adopted a Foreign Exchange Risk
Management Policy on July 27, 2000. The modeling technique used measures the
change in fair values arising from an immediate hypothetical shift in market
interest rates and assumes ending fair values include principal plus accrued
interest, dividends and reinvestment income. If market interest rates were to
increase by 100 basis points from December 31, 1999 levels, the fair value of
the portfolio would decline by approximately $4.5 million. If market interest
rates were to increase by 100 basis points from September 30, 2000 levels, the
fair value of the portfolio would decline by approximately $2.6 million.
In connection with the Company's stock repurchase program, in October 2000,
the Board of Directors approved a program authorizing the Company to sell put
warrants that entitle the holder of each warrant to sell to the Company,
generally by physical delivery, one share of common stock at a specified price.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2000, the Company and certain of its officers and directors were named
as defendants in several securities class action lawsuits filed in the United
States District Court for the Southern District of Florida. These actions, which
were filed on behalf of purchasers of the Company's common stock during the
period October 20, 1999 to June 9, 2000, generally allege that, during the class
period, the defendants made misstatements to the investing public about the
Company's financial condition and prospects. The complaints seek unspecified
damages. The Company believes the plaintiffs' claims lack merit and intends to
vigorously defend the lawsuits.
In September 2000, a shareholder filed a claim in the Court of Chancery of the
State of Delaware against the Company and nine of its officers and directors
alleging breach of fiduciary duty. The complaint seeks unspecified damages. The
Company believes the plaintiff's claim lacks merit and intends to vigorously
defend the lawsuit.
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 33 of this report, are incorporated herein by
reference.
(b) There were no reports on Form 8-K filed by the Company during the third
quarter of 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on this 13th day of November 2000.
CITRIX SYSTEMS, INC.
By: /s/ JOHN P. CUNNINGHAM
------------------------------------------
John P. Cunningham
Chief Financial Officer and Senior
Vice-President of Finance and
Administration
(Authorized Officer and
Principal Financial Officer)
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EXHIBIT INDEX
27.1 Financial Data Schedule
