<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2275152
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6400 N. W. 6TH WAY
FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000
Not Applicable
- -------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
As of August 3, 1998 there were 42,051,274 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
Total Number of Pages: 28
---
<PAGE>
CITRIX SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
<C> <S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations:
Three Months and Six Months ended June 30, 1998
and 1997 5
Condensed Consolidated Statements of Cash Flows:
Six Months Ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II: OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
Exhibit 10 22
Exhibit 27.1 27
Exhibit 27.2 28
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Citrix Systems, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $152,812,285 $140,080,550
Short-term investments 79,588,728 89,111,093
Trade receivables, net of allowances of $6,322,808 and $6,297,986 at
June 30, 1998 and December 31, 1997, respectively 26,199,928 12,631,413
Account receivable from stockholder 10,000,000 -
Inventories 3,372,550 2,273,196
Prepaid expenses 4,825,488 3,497,890
Current portion of deferred tax assets 14,383,854 10,767,437
-------------- --------------
Total current assets 291,182,833 258,361,579
Property and equipment, net 12,864,090 6,678,253
Long-term portion of deferred tax assets 40,638,725 16,763,680
Intangible assets, net 9,087,007 864,513
-------------- --------------
$353,772,655 $282,668,025
============== ==============
</TABLE>
Continued on following page.
3
<PAGE>
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------ ------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,060,864 $ 984,463
Accrued royalties and other accounts payable to stockholder 3,144,262 3,043,836
Acquisition related liabilities 39,556,570 11,712,378
Other accrued expenses 22,900,512 1,312,569
Deferred revenue 4,473,843 3,147,220
Current-portion of deferred revenues on contract with stockholder 20,782,313
15,000,000
Current portion of capital lease obligations payable 18,202 8,396
Income taxes payable 16,261,333 236,410
------------ ------------
Total current liabilities 109,197,899 35,445,272
Long-term liabilities:
Capital lease obligations payable 187,485 -
Deferred revenues on contract with stockholder 42,875,000 50,375,000
------------ ------------
Total long-term liabilities 43,062,485 50,375,000
Stockholders' equity:
Preferred stock at $.01 par value--5,000,000 shares authorized, none
issued and outstanding at June 30, 1998 and December 31, 1997
- -
Common stock at $.001 par value--150,000,000 and 60,000,000 shares
authorized; and 41,912,353 and 41,473,088 issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 41,912 41,473
Additional paid-in capital 157,023,847 148,747,326
Retained earnings 44,446,512 48,058,954
------------ ------------
Total stockholders' equity 201,512,271 196,847,753
------------ ------------
$353,772,655 $282,668,025
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Revenues
Net revenues from unrelated parties $48,236,021 $22,392,149 $93,787,944 $43,912,754
Net revenues - stockholder 7,967,687 2,125,000 11,717,687 2,125,000
----------- ----------- ----------- -----------
Net revenues 56,203,708 24,517,149 105,505,631 46,037,754
Cost of revenues
Cost of goods sold 3,628,869 2,290,551 7,302,476 4,484,381
Cost of revenues - stockholder 1,051,691 - 2,227,520 -
----------- ----------- ----------- -----------
Total cost of revenues 4,680,560 2,290,551 9,529,996 4,484,381
----------- ----------- ----------- -----------
Gross margin 51,523,148 22,226,598 95,975,635 41,553,373
Operating expenses
Research and development 4,386,875 1,622,147 7,784,579 3,135,377
Sales, marketing and support 18,598,278 7,480,411 33,499,307 13,678,479
General and administrative 4,182,903 2,425,602 7,949,022 3,908,269
In-process research and development 33,796,995 - 57,596,995 -
----------- ----------- ----------- -----------
Total operating expenses 60,965,051 11,528,160 106,829,903 20,722,125
----------- ----------- ----------- -----------
Income (loss) from operations (9,441,903) 10,698,438 (10,854,268) 20,831,248
Interest income, net 2,550,120 2,268,568 5,209,828 3,843,184
----------- ----------- ----------- -----------
Income (loss) before income taxes (6,891,783) 12,967,006 (5,644,440) 24,674,432
Income taxes provision (benefit) (2,481,042) 4,668,121 (2,031,998) 8,882,795
----------- ----------- ----------- -----------
Net income (loss) $(4,410,741) $ 8,298,885 $(3,612,442) $15,791,637
=========== =========== =========== ===========
Earnings (loss) per common share:
Basic earnings (loss) per share $(0.11) $0.20 $(0.09) $0.39
=========== =========== =========== ===========
Weighted average shares outstanding 41,870,341 40,763,794 41,748,604 40,528,191
Earnings (loss) per common share assuming
dilution:
Diluted earnings (loss) per share $(0.11) $0.19 $(0.09) $0.37
=========== =========== =========== ===========
Weighted average shares outstanding 41,870,341 43,135,829 41,748,604 42,899,682
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 1997
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (3,612,442) $ 15,791,637
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 2,327,922 599,877
Provision for doubtful accounts and product returns 24,821 396,201
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options 5,531,417 3,406,613
Deferred tax assets (27,491,462) (23,647,080)
In-process research and development 57,596,995 -
Changes in operating assets and liabilities, net of acquisitions:
Trade receivables (13,150,443) (2,212,950)
Account receivable from stockholder (10,000,000) -
Inventories (1,099,354) (125,946)
Prepaid expenses (396,881) (224,949)
Deferred revenue 1,326,623 983,649
Deferred revenue on contract with stockholder (1,717,687) 72,875,000
Accounts payable 674,429 (255,737)
Accrued royalties and other accounts payable to stockholder 100,426 550,248
Income taxes payable 16,024,923 22,931,372
Other accrued expenses 344,502 2,302,508
----------------- ----------------
Net cash provided by operating activities 26,483,789 93,370,443
INVESTING ACTIVITIES
Purchases of short-term investments (108,680,114) (48,171,073)
Proceeds from sale of short-term investments 118,202,478 29,965,035
Cash paid for acquisitions (16,951,705) -
Cash paid for licensing agreement (2,125,000) -
Purchases of property and equipment (6,975,170) (2,396,754)
----------------- ----------------
Net cash used in investing activities (16,529,511) (20,602,792)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 2,745,543 679,424
Repurchase of common stock previously issued - (902)
Payments on capital lease obligations 31,914 (49,350)
----------------- ----------------
Net cash provided by financing activities 2,777,457 629,172
----------------- ----------------
Increase in cash and cash equivalents 12,731,735 73,396,823
Cash and cash equivalents at beginning of period 140,080,550 99,135,049
----------------- ----------------
Cash and cash equivalents at end of period $ 152,812,285 $172,531,872
================= ================
</TABLE>
See accompanying notes.
6
<PAGE>
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
adjustments which, in the opinion of management, are considered necessary for a
fair presentation of the results of operations for the periods shown are of a
normal recurring nature and have been reflected in the unaudited condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the full
fiscal year or for any future period. The information included in these
unaudited condensed consolidated financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations herein and the consolidated financial statements and
accompanying notes included in the Citrix Systems, Inc. (the Company) Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated financial statements
and accompanying notes. While the Company believes that such estimates are fair
when considered in conjunction with the condensed consolidated financial
position and results of operations taken as a whole, the actual amount of such
estimates, when known, may vary from these estimates.
3. REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition," which
the Company has adopted for transactions entered during the year beginning
January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on software
transactions and supersedes SOP 91-1, "Software Revenue Recognition." In March
1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition." SOP 98-4 defers, for one year, the
application of certain passages in SOP 97-2 which limit what is considered
vendor-specific objective evidence necessary to recognize revenue for software
licenses in multiple-element arrangements when undelivered elements exist.
Additional guidance is expected to be provided prior to adoption of the deferred
provision of SOP 97-2. The Company will determine the impact, if any, the
additional guidance will have on current revenue recognition practices when
issued. Adoption of the remaining provisions of SOP 97-2 did not have a material
impact on revenue recognition during the first half of 1998.
7
<PAGE>
4. ACQUISITIONS
On February 5, 1998, the Company completed its acquisition of certain in-process
software technologies and assets of Insignia Solutions, plc for approximately
$17.5 million. Based on appraised value, a portion of the purchase price was
allocated to in-process research and development, which had not reached
technological feasibility and had no alternative future use. The allocation
resulted in a pre-tax charge of approximately $16.0 million to the Company's
operations in the first quarter of 1998. Further, on June 30, 1998, the Company
completed its acquisition of APM Ltd for approximately $40.4 million. Based on
appraised value, a portion of the purchase price was allocated to in-process
research and development which had not reached technological feasibility and had
no alternative future use. The allocation resulted in a pre-tax charge of
approximately $33.8 million to the Company's operations in the second quarter of
1998.
5. LICENSED TECHNOLOGY
In January 1998, the Company licensed certain in-process software technology
from EPiCON, Inc. for approximately $8.0 million. A portion of the licensing fee
was allocated to in-process research and development, which had no alternative
future use. The allocation resulted in a pre-tax charge of approximately $7.9
million to the Company's operations in the first quarter of 1998.
6. EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements. All common share and per share data
have been retroactively adjusted to reflect the three-for-two stock split in the
form of a stock dividend paid on February 20, 1998, which stock dividend was
paid to stockholders of record as of February 12, 1998.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
-------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(4,410,741) $ 8,298,885 $(3,612,442) $15,791,637
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share--
weighted average shares 41,870,341 40,763,794 41,748,604 40,528,191
Effect of dilutive securities:
Employee stock options - 2,372,035 - 2,371,491
----------- ----------- ----------- -----------
Dilutive potential common shares - 2,372,035 - 2,371,491
----------- ----------- ----------- -----------
Denominator for diluted earnings per share
--adjusted weighted-average shares 41,870,341 43,135,829 41,748,604 42,899,682
=========== =========== =========== ===========
Basic earnings (loss) per share $(0.11) $0.20 $(0.09) $0.39
=========== =========== =========== ===========
Diluted earnings (loss) per share $(0.11) $0.19 $(0.09) $0.37
=========== =========== =========== ===========
</TABLE>
8
<PAGE>
In accordance with Statement 128, the dilutive effect of employee stock options,
has not been included in the calculation of the denominator for diluted loss per
share since such inclusion would be anti-dilutive for the three months and six
months ended June 30, 1998.
7. RECLASSIFICATIONS
Certain reclassifications have been made for consistent presentation.
8. LEGAL MATTERS
The Company received a letter dated February 25, 1998 from a third party
alleging that certain technology incorporated in the Company's WinFrame(R)
product line may infringe a patent held by the third party, and requesting that
the Company contact the third party to discuss a licensing arrangement for such
patent. The Company believes that its existing products do not infringe the
patent held by the third party. There can be no assurance that the Company would
prevail in the defense of an infringement claim, if made, or that the Company
could obtain a license to the patent on a reasonable basis, if at all. Any
patent dispute or litigation, or any royalty-bearing license, could have a
material adverse effect on the Company's business, financial condition or
results of operations.
9. SUBSEQUENT EVENT
In July 1998, the Company consummated an agreement to acquire certain software
technology and assets of VDOnet Corporation Ltd., an Israeli firm, including
VDOLive video/audio server technology. The aggregate purchase price was
approximately $8.0 million and the acquisition was accounted for as a purchase.
A substantial portion of the purchase price was for in-process research and
development which had not reached technological feasibility and had no
alternative future use and for which the Company expects to incur a one-time
charge to its operations amounting to approximately $7.0 million in the quarter
ending September 30, 1998.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports innovative client and
application server software that enables effective and efficient deployment of
enterprise applications that is designed for Microsoft Windows operating
systems. The Company was incorporated in April 1989, and shipped its initial
products in 1991.
From its introduction in the second quarter of 1993 through the second
quarter of 1995, the Company's WinView product represented the largest source of
the Company's revenues. The Company began shipping its current principal product
WinFrame in final form in the third quarter of 1995 and since then it has been
the largest source of the Company's revenue.
As a result of the Development Agreement (defined below), the Company will
continue to support the Microsoft NT platform but will no longer incorporate
Windows NT source code directly into the Company's future offerings. However,
future WinFrame products based upon the Windows NT v.3.51 kernel may continue to
be offered under the terms of the Development Agreement until at least September
30, 2001. In June 1997, the Company announced the development of MetaFrame(TM)
product (formerly code-named "pICAsso") which, when combined with the Microsoft
multi-user version of Windows NT technology, will provide capabilities similar
to those currently offered in the WinFrame product line. The MetaFrame product
line was first shipped in June 1998. The Company plans to continue developing
enhancements to its MetaFrame product and expects that this product, existing
and future enhanced WinFrame products and the royalties derived under the terms
of the Development Agreement will constitute a majority of its revenues for the
foreseeable future.
Product revenues are recognized upon shipment only if no significant
Company obligations remain and collection of the resulting receivable is deemed
probable. The initial fee of $75 million relating to the Development Agreement
is being recognized ratably over the term of the contract, which is five years.
The additional $100 million due pursuant to the Development Agreement, as
amended, is being recognized ratably over the remaining term of the contract
effective April, 1998. In the case of non-cancelable product licensing
arrangements under which certain OEMs have software reproduction rights, initial
recognition of revenue also requires delivery and customer acceptance of the
product master or first copy. Subsequent recognition of revenues is based upon
reported royalties from the OEMs as well as estimates of royalties due through
the Company's reporting date. Product returns and sales allowances, including
stock rotations, are estimated and provided for at the time of sale. Non-
recurring engineering fees are recognized ratably as the work is performed.
Revenues from training and consulting are recognized when the services are
performed. Service revenues from customer maintenance fees for ongoing customer
support and product updates are recognized ratably over the term of the
contract, which is typically twelve months. Service revenues, which are
immaterial when compared to net revenues, are included in net revenues on the
face of the statement of operations.
On May 9, 1997, the Company and Microsoft Corporation ("Microsoft") entered
into a License, Development and Marketing Agreement, as amended (the
"Development Agreement"), which provides for the licensing to Microsoft of
certain of the Company's multi-user software enhancements to Microsoft's Windows
NT Server and for the cooperation between the parties for the development of
future multi-user versions of Microsoft Windows NT Server, called Windows NT
Server Terminal Server Edition (formerly referred to as "Hydrix"). The
Development Agreement also provides for each party to develop its own
enhancements or "plug-ins" to the jointly developed products which may provide
access to the Windows NT Server Terminal Server Edition base platform from a
wide variety of computing devices, such as a Company-developed plug-in (known as
MetaFrame) that implements the Independent Computing Architecture (ICA) protocol
on the new platform. Pursuant to the terms of the Development Agreement, in May
1997, the Company received an aggregate of $75 million as a non-refundable
royalty payment and for engineering and support services to be rendered by the
Company. Under the terms of the Development Agreement, as amended, the Company
is entitled to receive payments of an additional $100 million in quarterly
payments, a portion of which has already been received in accordance with the
amendment. In addition, Microsoft and the Company have agreed to engage in
certain joint marketing efforts to promote use of Windows NT Server-based multi-
user software and the Company's ICA protocol. Additionally, until at least
November 1999, Microsoft has agreed to endorse only the Company's ICA protocol
as the preferred way to provide multi-user Windows access for devices other than
Windows client devices. Further, subject to the terms of the Development
Agreement, the Company shall be entitled to license versions of its WinFrame
technology based on Windows NT v.3.51 until at least September 30, 2001.
10
<PAGE>
The Company has recently acquired or licensed technology that is related to
its strategic objectives. On October 2, 1997, the Company completed its
acquisition of certain of the assets, technology and operations of DataPac
Australasia Pty Limited for approximately $5.0 million. Additionally, on
February 5, 1998, the Company completed its acquisition of certain in-process
software technologies and assets of Insignia Solutions, plc for approximately
$17.5 million. In January 1998, the Company licensed certain in-process software
technology from EPiCON, Inc. for approximately $8.0 million. Also, on June 30,
1998 the Company acquired all of the outstanding securities of APM Ltd., parent
company of Digitivity Inc, for approximately $40.4 million. In July 1998, the
Company completed its acquisition of VDOnet Corporation Ltd. for approximately
$8 million. Based on appraised value, a portion of the purchase price was
allocated to in-process research and development, which had not reached
technological feasibility and had no alternative future use. The allocation will
result in a pre-tax charge of approximately $7 million to the Company's
operations in the third quarter of 1998.
The discussion below relating to the individual financial statement
captions, the Company's overall financial performance, operations and financial
position should be read in conjunction with the factors and events described in
"Overview" and "Certain Factors Which May Affect Future Results" which, it is
anticipated, will impact the Company's future performance and financial
position.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of the Company
expressed as a percentage of net revenues and as a percentage of change from
period-to-period for the periods indicated.
<TABLE>
<CAPTION>
CHANGE FROM THREE CHANGE FROM SIX
THREE MONTHS ENDED SIX MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, 1998 VS. JUNE 30, 1998 VS.
------------------ ------------------ ----------------- -----------------
1998 1997 1998 1997 1997 1997
------- ------- ------- ------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 129.2% 129.2%
Cost of revenues........................ 8.3 9.3 9.0 9.7 104.3 112.5
------- ------- ------- ------- ----------------- -----------------
Gross margin............................ 91.7 90.7 91.0 90.3 131.8 131.0
Operating expenses:
Research and development............... 7.8 6.6 7.4 6.8 170.4 148.3
Sales, marketing and support........... 33.1 30.5 31.8 29.7 148.6 144.9
General and administrative............. 7.5 9.9 7.5 8.5 72.4 103.4
In-process research and development.... 60.1 - 54.6 - * *
------- ------- ------- ------- ----------------- -----------------
Total operating expenses.............. 108.5 47.0 101.3 45.0 428.8 415.5
------- ------- ------- ------- ----------------- -----------------
Income (loss) from operations........... (16.8) 43.7 (10.3) 45.3 (188.3) (152.1)
Interest income, net.................... 4.5 9.2 5.0 8.3 12.4 35.6
------- ------- ------- ------- ----------------- -----------------
Income (loss) before income taxes....... (12.3) 52.9 (5.3) 53.6 (153.1) (122.9)
Income taxes provision (benefit)........ (4.4) 19.0 (1.9) 19.3 153.1 122.9
------- ------- ------- ------- ----------------- -----------------
Net income (loss)....................... (7.9%) 33.9% (3.4%) 34.3% (153.1%) (122.9%)
======= ======= ======= ======= ================= =================
</TABLE>
* Not meaningful.
Net Revenues. Net revenues were approximately $56.2 million and $24.5
million for the three months ended June 30, 1998 and 1997, respectively,
representing an increase of 129.2%. For the six months ended June 30, 1998 and
1997, net revenues were $105.5 million and $46.0 million, respectively,
representing an increase of 129.2%. The increases in net revenues in the second
quarter of 1998 compared to the second quarter of 1997 and the respective six
month periods then ended were primarily attributable to an increase in the
volume of shipments of the Company's WinFrame products and, to a lesser extent,
revenues recognized in conjunction with the initial shipment of its MetaFrame
product, in June 1998, which amounted to $7.7 million, as well as the
recognition of revenue related to the Development Agreement with Microsoft.
Principally, the net revenues are composed of WinFrame/MetaFrame, OEM and
Development Agreement revenues which approximated 71.0%, 10.5% and 14.2% of
revenues, respectively, in the three months ended June 30, 1998, and 71.2%,
13.0% and 11.1% of revenues, respectively, in the six months ended June 30,
1998. Both the Company's WinFrame/MetaFrame and OEM revenues represent product
license fees based upon the Company's multi-user NT-based technology.
11
<PAGE>
International. International revenues (sales outside of the United States)
accounted for approximately 27.0% and 18.3% of net revenues for the three months
ended June 30, 1998 and 1997, respectively. International revenues accounted for
approximately 27.3% and 16.9% of net revenues for the six months ended June 30,
1998 and 1997, respectively.
Cost of Goods Sold. Cost of goods sold consists primarily of the cost of
royalties, product media and duplication, manuals, packaging materials and
shipping expense. Cost of OEM revenues included in cost of goods sold primarily
consists of cost of royalties, except where the OEM elects to purchase shrink
wrapped products in which case such costs are as described in the previous
sentence. All development costs incurred in connection with the Development
Agreement are expensed as incurred as a component of cost of goods sold. Costs
associated with non-recurring engineering fees are included in research and
development expenses and are not separately identifiable. All development costs
included in the research and development of software products and enhancements
to existing products have been expensed as incurred. Consequently, there is no
amortization of capitalized research and development costs included in cost of
goods sold.
Gross Margin. Gross margin increased from 90.7% in the second quarter of
1997 to 91.7% in the second quarter of 1998, and from 90.3% in the first half of
1997 to 91.0% in the first half of 1998. The increases in gross margin in both
periods was primarily attributable to changes in product mix, representing
changes in the mix of OEM revenues versus product sold to distributors and
resellers, different products within the WinFrame product line and in
particular, initial licensing of the MetaFrame product, in June 1998, which has
a higher gross margin percentage. These increases were partially offset by the
net contribution attributable to the Development Agreement.
Research and Development Expenses. Research and development expenses
consisted primarily of personnel-related costs. The increases in research and
development expenses in the three months and six months ended June 30, 1998 as
compared to the prior respective periods, resulted primarily from additional
staffing, associated salaries and related expenses required to expand and
enhance the Company's product lines. These increases were partially offset by
the allocation of certain research and development expenses to cost of goods
sold for the portion of these expenses associated with Development Agreement
revenues.
Sales, Marketing and Support Expenses. The increases in sales, marketing
and support expenses in the three months and six months ended June 30, 1998 as
compared to the prior respective periods, resulted primarily from increases in
promotional activities, such as advertising literature production and
distribution and trade shows as well as distributor programs, largely in
connection with the launch of the MetaFrame product. Sales, marketing and
support staff and associated salaries, commissions and related expenses also
increased, resulting from efforts to expand the Company's product distribution.
General and Administrative Expenses. The increases in general and
administrative expenses in the three months and six months ended June 30, 1998
as compared to the prior respective periods, is primarily due to increased
expenses associated with additional staff, associated salaries and related
expenses necessary to support overall increases in the scope of the Company's
operations. These amounts were partially offset by a decline in legal fees from
the levels incurred in the previous period, which were high due to the costs
associated with non-recurring contractual negotiations and litigation defense.
In-Process Research and Development Expenses. On February 5, 1998, the
Company completed its acquisition of certain of the assets, technology and
operations of Insignia Solutions, plc for approximately $17.5 million. This
transaction was accounted for using the purchase method of accounting with the
purchase price being principally allocated to purchased technologies and
intangible assets. Approximately $16.0 million of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use and, as
such, was recorded as a non-recurring charge for in-process research and
development. The value attributed to the in-process research and development
was determined by an independent appraisal. Additionally, the Company licensed
certain technology from EPiCON, Inc., for approximately $8.0 million.
Approximately $7.9 million of the license represents the value of research and
development that had not yet reached technological feasibility and had no
alternative future use, and as such, was recorded as a non-recurring charge for
in-process research and development.
On June 30, 1998, the Company completed its acquisition of APM, Ltd for
approximately $40.4 million. This transaction was accounted for using the
purchase method of accounting with the purchase price being principally
allocated to purchased technologies and intangible assets. Approximately $33.8
million of the total purchase price represented the value of in-process research
and development that had not yet reached technological feasibility and had no
alternative future use and, as such, was recorded as a non-recurring charge for
in-process research and development. The value attributed to the in-process
research and development was determined by an independent appraisal.
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In July 1998, the Company completed its acquisition of VDOnet Corporation
Ltd. for approximately $8 million. This transaction was accounted for using the
purchase method of accounting with the purchase price being principally
allocated to purchase technologies and intangible assets. Approximately $7
million of the total purchase price represented the value of in-process research
and development that had not reached technological feasibility and had no
alternative future use and, as such, was recorded as a non-recurring charge for
in-process research and development in the third quarter of 1998.
Interest Income, Net. Interest income, net, increased during the six months
ended June 30, 1998 compared to the respective period in the prior year and was
primarily due to interest income earned on additional cash generated from the
receipt of an initial license fee under the terms of the Development Agreement.
Income Taxes. The Company's effective tax rate amounted to 36% for the
three months ended June 30, 1998 and 1997 and 36% for the six months ended June
30, 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1998, the Company generated positive
operating cash flows of approximately $12.7 million, which is net of cash used
to purchase and license in-process research and development of $19.1 million.
These amounts were partially offset by an increase in trade receivables during
the period. During the same period, the Company also recognized tax benefits
from the exercise of non-statutory stock options and disqualifying dispositions
of incentive stock options of approximately $5.5 million. The Company purchased
and sold short-term investments for approximately $108.7 million and $118.2
million, respectively, during the six months ended June 30, 1998. Additionally,
the Company expended approximately $7.0 million in the same period for the
purchase of leasehold improvements and equipment. These capital expenditures
were primarily associated with the Company's expansion into new facilities.
As of June 30, 1998, the Company had approximately $152.8 million in cash
and cash equivalents, $79.6 million in short-term investments and $182.0 million
of working capital. The Company's cash and cash equivalents and short-term
investments are invested in investment grade, interest bearing securities to
minimize interest rate risk and allow for flexibility in the event of immediate
cash needs. At June 30, 1998, the Company had approximately $36.2 million in
trade receivables, net of allowances, and $68.1 million of deferred revenues, of
which the Company anticipates $25.3 million will be earned over the next twelve
months.
On June 30, 1998, the Company completed its acquisition of outstanding
securities of APM Ltd for approximately $38.6 million in cash. Payment for the
acquired securities was made in the third quarter of 1998.
In addition, in July 1998, the Company acquired certain in-process software
technologies and assets of VDOnet for approximately $8.0 million.
The Company believes existing cash and cash equivalents and short-term
investments will be sufficient to meet operating and capital expenditures
requirements for at least the next twelve months.
The Company paid cash amounting to approximately $3,000 in lieu of
fractional shares in connection with its three-for-two stock split effected
February 20, 1998. The Company does not anticipate paying any cash dividend on
its Common Stock in the foreseeable future.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company does not provide financial performance forecasts. The Company's
operating results and financial condition have varied in the past and may in the
future vary significantly depending on a number of factors. Except for the
historical information contained herein, the matters contained in this report
include forward-looking statements that involve risks and uncertainties. The
following factors, among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this report and
presented elsewhere by management from time to time. Such factors, among others,
may have a material adverse effect upon the Company's business, results of
operations and financial condition.
Reliance Upon Strategic Relationship with Microsoft. Microsoft is the
leading provider of desktop operating systems. The Company is dependent upon the
license of certain key technology from Microsoft, including certain source and
object code licenses, technical support and other materials. The Company is also
dependent on its strategic alliance agreement with
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Microsoft which provides for cooperation in the development of technologies for
advanced operating systems, and the promotion of advanced Windows application
program interfaces. On May 9, 1997, the Company and Microsoft entered into a
License, Development and Marketing Agreement, as amended (the "Development
Agreement"), which provides for the licensing to Microsoft of certain of the
Company's multi-user software enhancements to Microsoft's Windows NT Server and
for the cooperation between the parties for the development of certain future
multi-user versions of Microsoft Windows NT Server, known as the Windows NT
Server Terminal Server Edition. The Development Agreement also provides for each
party to develop its own enhancements or "plug-ins" to the jointly developed
products which may provide access to the Windows NT Server Terminal Server
Edition platform from a wide variety of computing devices, such as the MetaFrame
product line that implements the Independent Computing Architecture (ICA(R))
protocol on the new platform. Pursuant to the terms of the Development
Agreement, the Company received an aggregate of $75 million as a non-refundable
royalty payment and for engineering and support services to be rendered by the
Company. Under the terms of the Development Agreement, as amended, the Company
is entitled to receive payments of an additional $100 million in quarterly
payments. In addition, Microsoft and the Company have agreed to engage in
certain joint marketing efforts to promote use of Windows NT Server-based multi-
user software and the Company's ICA protocol. Additionally, until at least
November 1999, Microsoft has agreed to endorse only the Company's ICA protocol
as the preferred way to provide multi-user Windows access for devices other than
Windows client devices. Further, subject to the terms of the Development
Agreement, the Company shall be entitled to license versions of its WinFrame
technology based on Windows NT v.3.51 until at least September 30, 2001.
The Company's relationship with Microsoft is subject to certain risks and
uncertainties. First, the Windows NT Server Terminal Server Edition based
platforms will allow Microsoft to create products that may be competitive with
at least some of the Company's current WinFrame and MetaFrame products. Second,
as stated above, Microsoft has agreed to endorse only the Company's ICA protocol
as the preferred method to provide multi-user Windows access for devices other
than Windows clients until at least November 1999. Subsequent to November 1999,
it is possible that Microsoft will market or endorse other methods to provide
non-Windows client devices multi-user Windows access. Third, the Company's
ability to successfully commercialize its MetaFrame product will be dependent on
Microsoft's ability to market and sell its Windows NT Server Terminal Server
Edition products. Finally, there may be delays in the release and shipment of
future releases of Windows NT Server Terminal Server Edition. Microsoft's
distributors and resellers are not within the control of the Company and, to the
Company's knowledge, are not obligated to purchase products from Microsoft.
Additionally, the Company may hire additional development, marketing and support
staff to the extent they are needed in order to fulfill the Company's
responsibilities under the terms of the Development Agreement. Further, if
Microsoft (1) develops competitive plug-in products, (2) endorses in the future
other methods to provide non-Windows client devices multi-user Windows access,
(3) is unable to successfully market and sell the Windows NT Server Terminal
Server Edition products, or (4) encounters delays in the release and shipment of
future releases of Windows NT Server Terminal Server Edition, the Company's
business, results of operations and financial condition could be adversely
affected.
Dependence Upon Broad-Based Acceptance of ICA Protocol. The Company
believes that its success in the markets in which it competes will depend upon
its ability to cause broad-based acceptance of its ICA protocol as an emerging
standard for supporting distributed Windows applications, thereby creating
demand for its server products.
Dependence Upon Strategic Relationships. In addition to its relationship
with Microsoft, the Company has relationships with NCD, Tektronix, Wyse and
others. The Company is dependent on its strategic partners to successfully
incorporate the Company's technology into their products and to successfully
market and sell such products.
Competition. The markets in which the Company competes are intensely
competitive. Most of the competitors and potential competitors, including
Microsoft, have significantly greater financial, technical, sales and marketing
and other resources than the Company. Additionally, the announcement of the
release, and the actual release of products competitive to the Company's
existing and future product lines, such as Microsoft's Windows NT Server
Terminal Server Edition and related plug-ins, could cause existing and potential
customers of the Company to postpone or cancel plans to license certain of the
Company's existing and future product offerings, which would adversely impact
its net revenues, operating results and financial condition. Further, the
Company's ability to market ICA, MetaFrame and other future product offerings
will be dependent on Microsoft's licensing and pricing scheme to allow client
devices implementing ICA, MetaFrame or any such future product offerings to
attach to the Windows NT Server Terminal Server Edition.
Dependence on Proprietary Technology. The Company relies primarily on a
combination of copyright, trademark and trade secret laws, as well as
confidentiality procedures and contractual provisions to protect its proprietary
rights. Despite the Company's precautions, it may be possible for unauthorized
third parties to copy certain portions of the Company's products or
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to obtain and use information regarded as proprietary. Additionally, the laws of
some foreign countries do not protect the Company's intellectual property to the
same extent as do the laws of the United States and Canada. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future or that any such assertion will not result in costly
litigation or require the Company to obtain a license to intellectual property
rights of such third parties. In addition, there can be no assurance that such
licenses will be available on reasonable terms or at all, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Product Concentration. The Company anticipates that one of its product
technologies and future derivative products and product lines based upon this
technology, if any, will constitute a majority of its revenues for the
foreseeable future. The Company's ability to generate revenue from its MetaFrame
product will be highly dependent on market acceptance of Windows NT Server
Terminal Server Edition products, with which its product is intended to be
combined to provide capabilities similar to those currently offered in the
WinFrame technology line. The Company may experience declines in demand for
products based on WinFrame technology, whether as a result of new competitive
product releases, price competition, lack of success of its strategic partners,
technological change or other factors. In addition, the introduction of products
based upon the MetaFrame technology may be competitive with its WinFrame
technology line and may delay or replace orders of either technology.
Management of Growth and Anticipated Operating Expenses. The Company has
recently experienced rapid growth in the scope of its operations, the number of
its employees, and the geographic area of its operations. In addition, the
Company has completed certain international acquisitions since October 1997, and
assimilating the operations and personnel of such acquired companies has placed
and may continue to place a significant strain on the Company's managerial,
operational and financial resources. To manage its growth effectively, the
Company will be required to continue to implement and improve additional
management and financial systems and controls, and to expand, train and manage
its employee base. Although the Company believes that it has made adequate
allowances for the costs and risks associated with these expansions, there can
be no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's current or future operations or that Company
management will be able to effectively manage this expansion and still achieve
the rapid execution necessary to fully exploit the market window for the
Company's products and services in a timely and cost-effective manner. The
Company's future operating results will also depend on its ability to manage its
expanding product line, expand its sales and marketing organizations, and expand
its support organization commensurate with the increasing base of its installed
products. If the Company is unable to manage growth effectively or unable to
achieve the rapid execution necessary to fully exploit the market window for the
Company's products and services in a timely and cost-effective manner, the
Company's business, results of operations and financial condition may be
materially adversely affected.
Additionally, the Company expects that its requirements for office
facilities and equipment will grow as staffing requirements dictate. The Company
plans to increase its professional staff during 1998 as sales, marketing and
support and product development efforts as well as associated administrative
systems are implemented to support planned growth. As a result of this planned
growth in staff, the Company believes that additional facilities will be
required during 1998. Although the Company believes that the cost of expanding
in such additional facilities will not significantly impact its financial
position or results of operations, the Company anticipates that operating
expenses will increase during 1998 as a result of its planned growth in staff
and that such increase may reduce its income from operations and cash flows from
operating activities in 1998.
Information System Conversion. The Company and its wholly-owned
subsidiaries all utilize separate applications to process their accounting
transactions. As a result, the Company and its subsidiaries are currently in the
process of converting a significant part of its business operations to a single
accounting application purchased from a third-party vendor. Although the Company
believes it has addressed all the significant issues related to this conversion,
there can be no assurance that unanticipated software and hardware problems will
not arise, which may result in delays in customer billings and vendor payments,
as well as extended accounts receivable payment cycles.
Dependence on Key Personnel. The Company's success will depend, in large
part, upon the services of a number of key employees. The effective management
of the Company's anticipated growth will depend, in large part, upon the
Company's ability to retain its highly skilled technical, managerial and
marketing personnel as well as its ability to attract and maintain replacements
for and additions to such personnel in the future.
New Products and Technological Change. The markets for the Company's
products are relatively new and are characterized by rapid technological change,
evolving industry standards, changes in end-user requirements and frequent new
product introductions and enhancements, including enhancements to certain key
technology licensed from Microsoft. The Company believes it will incur
additional costs and royalties associated with the development, licensing, or
acquisition of new
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technologies or enhancements to existing products which will increase the
Company's cost of goods sold and operating expenses. To the extent that such
transactions have not yet occurred, the Company cannot currently quantify such
increase. The Company may use a substantial portion of its cash and cash
equivalents and short-term investments to fund these additional costs, in which
case, the Company's interest income will decrease if not offset by cash flows
from future operations. Additionally, the Company and others may announce new
products, new MetaFrame capabilities or technologies that could replace or
shorten the life cycle of the Company's existing product offerings. These market
characteristics will require the Company to continuously enhance its current
products and develop and introduce new products to keep pace with technological
developments and respond to evolving end-user requirements. The Company may hire
additional development staff to the extent they are needed in order to fulfill
the Company's responsibilities under the terms of the Development Agreement. To
the extent the Company is unable to add additional staff and resources in its
development efforts, future enhancement and additional features to its existing
or future products may be delayed, which may have a material adverse effect on
the Company's business, results of operations and financial condition.
Year 2000 Compliance. Until recently, many computer programs were written
using two digits rather than four digits to define the applicable year in the
twentieth century. Such software may recognize a date using "00" as the year
1900 rather than the year 2000. Utilizing both internal and external resources,
the Company is in the process of defining, assessing and converting, or
replacing, various programs, hardware and instrumentation systems to make them
Year 2000 compatible. The Company's Year 2000 project is comprised of two
components -- business applications and equipment. The business applications
component consists of the Company's business computer systems, as well as the
computer systems of third-party suppliers or customers whose Year 2000 problems
could potentially impact the Company. Equipment exposures consist of personal
computers, system servers, telephone equipment and elevators whose Year 2000
problems could also impact the Company. The cost of the Year 2000 initiatives is
not expected to be material to the Company's results of operations or financial
position.
The Company's main product, WinFrame, is an authorized extension to
Microsoft Windows NT v.3.51 server. While the Company believes both Windows NT
v.3.51 server and WinFrame/Enterprise (versions 1.5, 1.6 and 1.7) are currently
capable of storing four-digit year data, allowing applications to differentiate
between dates from the 1900s and the year 2000 and beyond, potential
incompatibility with two-digit application programs may limit the Company's
sales of product in those situations. While the Company believes that its
WinFrame/Enterprise (versions 1.5, 1.6 and 1.7) are capable of storing four-
digit year data, it is typically the application's function to collect and
properly store date data. There can be no assurance that the Company's products
will not be integrated by the Company or its customers with, or otherwise
interact with non-compliant software or other products which may expose the
Company to claims from its customers or other third parties. The foregoing could
result in the loss of or delay in market acceptance of the Company's products
and services, increased service costs to the Company or payment by the Company
of compensatory or other damages. Although most Windows applications do store
four-digit year dates today, it is possible that some applications are now or
have historically only collected two-digit year data, WinFrame cannot create
four-digit year data for applications which have collected only two digits in
year fields. Further, there can be no assurance that the Company's software
products that are designed to be Year 2000 compliant contain all necessary
technology to make them Year 2000 compliant. Many companies are expending
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company, thus
potentially resulting in stalled market sales within the industry. The foregoing
could result in a material adverse effect on the Company's business, results of
operations and financial condition.
Potential for Undetected Errors. Despite significant testing by the Company
and by current and potential customers, errors may not be found in new products
until after commencement of commercial shipments. Additionally, third party
products, upon which the Company's products are dependent, may contain defects,
which could reduce the performance of the Company's products or render them
useless.
Reliance Upon Indirect Distribution Channels and Major Distributors. The
Company relies significantly on independent distributors and resellers for the
marketing and distribution of its products. The Company's distributors and
resellers are not within the control of the Company, are not obligated to
purchase products from the Company, and may also represent other lines of
products.
Need to Expand Channels of Distribution. The Company intends to leverage
its relationships with hardware and software vendors and systems integrators to
encourage these parties to recommend or distribute the Company's products. In
addition, an integral part of the Company's strategy is to expand its direct
sales force and add third-party distributors both domestically and
internationally. The Company is currently investing, and intends to continue to
invest, significant resources to develop these channels, which could adversely
affect the Company's operating margins and related cash flows from operating
activities.
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Revenue Recognition Process. The Company continually re-evaluates its
programs, including specific license terms and conditions, to market its various
current and future products and services. The Company may implement new programs
which may include, among other things, specified and unspecified enhancements to
its current and future product lines. Revenues associated with such enhancements
may be recognized after the initial shipment or licensing of the software
product or may be recognized over the product's life cycle. The timing of the
implementation of such programs, the timing of the release of such enhancements
as well as factors such as determining vendor-specific objective evidence of
fair value of each element offered separately and whether upgrades and
enhancements are defined as upgrade rights pursuant to Statement of Position
(SOP) 97-2 will impact the timing of the Company's recognition of revenues and
related expenses associated with its products, related enhancements and
services. Because of the uncertainties related to the outcome of the re-
evaluation of its programs, the determination of vendor-specific objective
evidence of fair value and whether upgrades and enhancements will be defined as
upgrade rights pursuant to SOP 97-2, and its impact on revenue recognition, the
Company cannot currently quantify the impact of such re-evaluation on its
business, results of operations and financial condition.
Product Returns and Price Reductions. The Company provides most of its
distributors with product return rights for stock balancing or limited product
evaluation. The Company also provides most of its distributors with price
protection rights. The Company has established reserves for each of these
circumstances where appropriate, based on historical trends and evaluation of
current circumstances. Although the Company believes that it has adequate
reserves to cover product returns, there can be no assurance that the Company
will not experience significant returns in the future or that such reserves will
be adequate.
International Operations. The Company's continued growth and profitability
will require expansion of its international operations. To successfully expand
international sales, the Company will need to establish additional foreign
operations, hire additional personnel and recruit additional international
resellers. Such international operations are subject to certain risks, such as
difficulties in staffing and managing foreign operations, dependence on
independent relicensors, fluctuations in foreign currency exchange rates,
compliance with foreign regulatory and market requirements, variability of
foreign economic and political conditions and changing restrictions imposed by
regulatory requirements, tariffs or other trade barriers or by United States
export laws, costs of localizing products and marketing such products in foreign
countries, longer accounts receivable payment cycles, potentially adverse tax
consequences, including restrictions on repatriation of earnings and the burdens
of complying with a wide variety of foreign laws.
Fluctuations in Economic and Market Conditions. The demand for the
Company's products depends in part upon the general demand for computer hardware
and software, which fluctuates based on numerous factors, including capital
spending levels and general economic conditions.
Growth Rate. The Company's revenue growth rate in the current year may not
approach the levels attained in 1997 and 1996, which were high, due primarily to
the increased market acceptance of WinFrame during that period. However, to the
extent the Company's revenue growth continues, the Company believes that its
cost of goods sold and certain operating expenses will also increase. Due to
the fixed nature of a significant portion of such expenses, together with the
possibility of slower revenue growth, the Company's income from operations and
cash flows from operating and investing activities may decrease in the current
year.
Fluctuations in Quarterly Operating Results. The Company's quarterly
operating results have in the past varied and may in the future vary
significantly depending on factors such as the success of the Company's WinFrame
or MetaFrame products, the size, timing and recognition of revenue from
significant orders, increased competition, the proportion of revenues derived
from distributors, OEMs and other channels, changes in the Company's pricing
policies or those of its competitors, the financial stability of major
customers, new product introductions or enhancements by competitors and
partners, delays in the introduction of products or product enhancements by the
Company or by competitors and partners, customer order deferrals in anticipation
of upgrades and new products, market acceptance of new products, the timing and
nature of sales and marketing expenses (such as trade shows and other
promotions), other changes in operating expenses, personnel changes (including
the addition of personnel), foreign currency exchange rates and general economic
conditions. The Company operates with little order backlog because its software
products typically are shipped shortly after orders are received. In addition,
like many systems level software companies, the Company has often recognized a
substantial portion of its revenues in the last month of a quarter with these
revenues frequently concentrated in the last weeks or days of the quarter. As a
result, the product revenues in any quarter are substantially dependent on
orders booked and shipped in that quarter, and revenues for any future quarter
are not predictable with any degree of certainty. Any significant deferral of
purchases of the Company's products could have a material adverse effect on the
Company's business, results of operations and financial condition in any
particular quarter, and to the extent significant sales
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occur earlier than expected, operating results for subsequent quarters may be
adversely affected. Royalty and license revenues are impacted by fluctuations in
OEM licensing activity and certain end user licensing and deployment activity
from quarter to quarter because initial license fees generally are recognized
upon customer acceptance and continuing royalty and subsequent ongoing license
revenues are recognized when the amount of such licensing activity can be
reasonably determined. The Company's expense levels are based, in part, on its
expectations as to future orders and sales, and the Company may be unable to
adjust spending in a timely manner to compensate for any sales shortfall. If
sales are below expectations, operating results are likely to be adversely
affected. Net income may be disproportionately affected by a reduction in sales
because a significant portion of the Company's expenses do not vary with
revenues. The Company may also choose to reduce prices or increase spending in
response to competition or to pursue new market opportunities. In particular, if
new competitors, technological advances by existing competitors or other
competitive factors require the Company to invest significantly greater
resources in research and development efforts, the Company's operating margins
in the future may be adversely affected.
Because of these factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Due to all of
the foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially adversely affected.
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PART II: OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
On December 8, 1995, the Company's registration statement on Form S-1
(File No. 33-98542) became effective. The net proceeds from the
offering were $38,892,728. The Company has not utilized any of the
proceeds from its initial public offering.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of stockholders held May 14, 1998 (the
"1998 Annual Meeting"), the Company's stockholders took the following
actions:
(1) The Company's stockholders elected Kevin R. Compton, Stephen M. Dow
and Mark B. Templeton as Class III directors, each to serve for a
three-year term expiring at the Company's annual meeting of
stockholders in 2001 or until his successor has been duly elected and
qualified or until his early resignation or removal. Election of the
directors was determined by a plurality of the votes cast at the 1998
Annual Meeting. With respect to such matter, the votes were cast as
follows: 38,630,037 shares voted for the election of Mr. Compton,
38,630,292 shares voted for the election of Mr. Dow and 38,629,941
shares voted for the election of Mr. Templeton, and 150,260 shares
were withheld from the election of Mr. Compton, 150,365 shares were
withheld from the election of Mr. Dow, and 150,716 shares were
withheld from the election of Mr. Templeton. No other persons were
nominated, or received votes, for election as directors of the Company
at the 1998 Annual Meeting. The other directors of the Company whose
term of office continued after the annual meeting were: Edward E.
Iacobucci, Michael W. Brown, Robert N. Goldman, Tyrone F. Pike, Roger
W. Roberts. In addition, in July 1998, the Board of Directors voted to
expand the Board by one and appointed John White as the person to fill
the newly created vacancy.
(2) The Company's stockholders approved and adopted an amendment to the
Company's Amended and Restated Certificate of Incorporation to
increase the number of authorized shares of the Company's Common
Stock, par value $0.001 per share, from 60,000,000 to 150,000,000
shares. With respect to such matter, the votes were cast as follows:
30,111,545 shares voted for the proposal, 8,650,821 shares voted
against the proposal, 18,291 shares abstained from voting on the
proposal.
Item 5. Other Information
Proposals of stockholders intended for inclusion in the proxy
statement to be furnished to all stockholders entitled to vote at the
next annual meeting of stockholders of the Company must be received at
the Company's principal executive offices not later than December 4,
1998. The deadline for providing timely notice to the Company of
matters that stockholders otherwise desire to introduce at the next
annual meeting of stockholders of the Company is February 17, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits which are filed with the report as set forth on the
Exhibit Index appearing on page 20 of this report and are incorporated
herein by this reference.
(b) A report on Form 8-K was filed with the Securities and Exchange
Commission on July 15, 1998 with respect to:
Item 2 -- Acquisition or Disposition of Assets. To disclose the
consummation of the acquisition of all of the outstanding securities
of APM Ltd. on June 30,1998.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on this 14th day of August 1998.
CITRIX SYSTEMS, INC.
By: /s/ ROGER W. ROBERTS
-----------------------------------
Roger W. Roberts
Chief Executive Officer
(Principal Executive Officer)
By: /s/ JAMES J. FELCYN, JR.
-----------------------------------
James J. Felcyn, Jr.
Vice-President of Finance and
Administration and Chief Financial
Officer (Principal Financial Officer)
By: /s/ MARC-ANDRE BOISSEAU
-----------------------------------
Marc-Andre Boisseau
Controller
(Principal Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number
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<C> <S> <C>
10* Amendment #1 to License, Development and Marketing 22
Agreement Dated May 9, 1997, between the Company and
Microsoft Corporation
27.1 Financial Data Schedule 27
27.2 Financial Data Schedule 28
</TABLE>
* Confidential treatment requested under Rule 24b-2 of
the Securities Exchange Act of 1934.
<PAGE>
EXHIBIT 10
Amendment No. 1 to the
May 9, 1997
License, Development and Marketing Agreement
Between Microsoft Corporation and Citrix Systems
This Amendment No. 1 is entered into as of April 17, 1998 (the "Amendment
Effective Date"), by and between Microsoft Corporation ("Microsoft") and Citrix
Systems, Inc. ("Citrix"), to amend the License, Development and Marketing
Agreement, dated May 9, 1997 (the "Agreement").
Provided this Amendment has been properly executed on behalf of the parties by
their duly authorized representatives, the parties agree to modify the Agreement
as follows:
1. Introduction and Effect of this Amendment.
-----------------------------------------
Microsoft and Citrix desire to establish an alternative achievement
milestone for Citrix which, if met, would enable Citrix to achieve the
financial benefits outlined in Section 9.2.1.1. The concept behind
the alternative provided for in this Amendment is that in the event
the milestone is achieved, Citrix is accepting pre-defined quarterly
fees (described in Section 9.7 below) in lieu of the royalties
provided for in Sections 9.1.2 and 9.2 of the Agreement, in exchange
for Microsoft's commitment to make commercially reasonable efforts to
package the Hydrix functionality in its relatively high-volume Windows
NT Server product.
This Amendment shall add new Sections 9.7, 8.14 and 8.15 to the
Agreement. In addition, Section 10.3(ii) shall be amended to add the
words "and 9.7" after the words "under Sections 9.1 and 9.2". All
provisions of the Agreement not so modified shall remain in full force
and effect. All defined terms in the Agreement shall have the same
meaning in this Amendment unless expressly provided to the contrary.
2. The Milestone.
-------------
9.7 In the event Citrix achieves the milestone defined below in this
Section 9.7 (the "Milestone"), the provisions of this Section shall
replace and supersede the provisions of Sections 9.1.2 and 9.2 of the
Agreement In the event Citrix does not achieve the Milestone, the
provisions of Section 9.1.2 and 9.2 shall remain unaltered and in full
force and effect.
9.7.1 If Citrix achieves the Milestone, then Microsoft shall pay
Citrix (i) Ten Million Dollars ($10,000,000) in recognition
of Citrix engineering efforts expended in achieving the
Milestone, payable upon release to manufacturing of Hydrix
4.0; and (ii) a quarterly payment of Fifteen Million Dollars
($15,000,000) per calendar quarter for six (6) quarters
<PAGE>
-2-
beginning with the first quarter after the release to
manufacturing of Hydrix 4.0, payable on the first day of such
calendar quarter.
9.7.1.1 In the event Citrix achieves the Milestone and Microsoft
ships Multi-User client device support for any device
other than a Windows Client Device following the two and
one-half year period described in Section 8.7 but before
payment in full of all amounts due under Section 9.7.1,
then Citrix, in its sole and absolute discretion, may
continue to receive the quarterly payments provided for
in Section 9.7.1 or may elect to receive a lump sum
payment from Microsoft of all outstanding amounts due
under Section 9.7.1, payable in full to Citrix within
thirty (30) days from the date of its written demand to
Microsoft.
9.7.1.2 For purposes of this Section 9.7, Citrix shall have
achieved the Milestone of (i) the final commercial
version of Hydrix 4.0 is released to manufacturing by
Microsoft on or before May 15, 1998; or (ii) Closure of
all [Confidential Treatment Requested]* is achieved on
or before April 30, 1998.
9.7.1.3 For purposes of this Section 9.7, [Confidential
Treatment Requested]* shall mean and include only: (i)
those [Confidential Treatment Requested]* listed in
Schedule 9.7.1.3 (which are a subset of the Hydrix 4
[Confidential Treatment Requested]* database as of March
17, 1998), (ii) incomplete correction of the
[Confidential Treatment Requested]*, and (iii) any
regressions to Hydrix functionality caused by
corrections to [Confidential Treatment Requested]*. The
set of [Confidential Treatment Requested]* shall not be
expanded by the Hdyra Test and Acceptance Document dated
March 5, 1998.
9.7.1.4 For purposes of this Section 9.7, Closure shall occur
when, in Microsoft's sole and absolute judgment, the
criteria for closure of [Confidential Treatment
Requested]* has been met as determined in accordance
with Version 1.2 of the Hydra Test and Acceptance
Document dated March 5, 1998 or a mutually agreed-upon
subsequent version, including passage of all applicable
acceptance tests.
* [CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2 PROMULGATED
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
<PAGE>
-3-
9.7.1.5 Citrix delivered initial test results to Microsoft on
April 7, 1998. Microsoft shall notify Citrix in writing
or via electronic mail (with confirmed receipt) no later
than April 20, 1998, whether Closure has been achieved.
If Microsoft determines Closure has not been achieved,
Microsoft's written notice shall identify all
deficiencies and Citrix shall have until April 30, 1998,
to meet the applicable criteria. If Citrix disagrees
with Microsoft's determination of deficiencies, the
parties agree to utilize the escalation procedure
described in Schedule 9.7.1.5 or a mutually agreed
alternative procedure. In all matters relating to
achievement of Closure, Microsoft and Citrix shall act
in good faith.
9.7.2 By September 30, 1998, Microsoft will notify Citrix if
Microsoft will include the Hydrix functionality in its
standard Windows NT Server product, in addition to any other
packaging for Hydrix that Microsoft may offer in its sole and
absolute discretion. If Microsoft does not elect to make such
inclusion, quarterly payments due Citrix will continue per
Section 9.7.1 through the quarter ended September 30, 1998,
at which time the balance of all outstanding amounts due
under Section 9.7.1 shall become payable over the succeeding
three (3) quarters, in equal quarterly increments.
8.14 Microsoft agrees that it will configure the initial release of the
Windows-Based Terminal ("WBT") Kit so that an OEM may, if it chooses,
configure the Hydrix client software with or without Microsoft's
Remote Desktop Protocol ("RDP") installed. Microsoft also agrees to
bundle ICA client documentation in the initial release of the WBT Kit
under the same terms as it bundles ICA client software as set forth
in Section 8.11 of the Agreement, provided such documentation does
not exceed the length of the RDP documentation provided by Microsoft
with the WBT Kit, and meets Microsoft's standards for style and
quality.
8.15 Microsoft agrees to use good faith efforts to develop Internet
commercial use licensing for Hydrix.
<PAGE>
-4-
IN WITNESS WHEREOF, the parties have duly authorized their representatives
to make and sign this Amendment No. 1.
CITRIX SYSTEMS, INC. MICROSOFT CORPORATION
By: /s/ Edward E. Iacobucci By: /s/ Paul Maritz
----------------------- ----------------------
Name: Edward E. Iacobucci Name: Paul Maritz
--------------------- --------------------
Title: Chairman Title: Vice President
-------------------- -------------------
Date: 4/17/98 Date: 4/17/98
--------------------- --------------------
<PAGE>
-5-
Schedule 9.7.1.3
[Confidential Treatment Requested]*
* [CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2 PROMULGATED
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
Schedule 9.7.1.5
[Confidential Treatment Requested]*
* [CONFIDENTIAL TREATMENT REQUESTED] INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE COMMISSION PURSUANT TO RULE 24b-2 PROMULGATED
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 152,812,285 152,812,285
<SECURITIES> 79,588,728 79,588,728
<RECEIVABLES> 42,522,736 42,522,736
<ALLOWANCES> 6,322,808 6,322,808
<INVENTORY> 3,372,550 3,372,550
<CURRENT-ASSETS> 291,182,833 291,182,833
<PP&E> 16,788,792 16,788,792
<DEPRECIATION> 3,924,702 3,924,702
<TOTAL-ASSETS> 353,772,655 353,772,655
<CURRENT-LIABILITIES> 109,197,899 109,197,899
<BONDS> 0 0
0 0
0 0
<COMMON> 41,912 41,912
<OTHER-SE> 201,470,359 201,470,359
<TOTAL-LIABILITY-AND-EQUITY> 353,772,655 353,772,655
<SALES> 56,203,708 105,505,631
<TOTAL-REVENUES> 56,203,708 105,505,631
<CGS> 4,680,560 9,529,996
<TOTAL-COSTS> 4,680,560 9,529,996
<OTHER-EXPENSES> 60,965,051 106,829,903
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (6,891,783) (5,644,440)
<INCOME-TAX> (2,481,042) (2,031,998)
<INCOME-CONTINUING> (4,410,741) (3,612,442)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,410,741) (3,612,442)
<EPS-PRIMARY> (0.11) (0.09)
<EPS-DILUTED> (0.11) (0.09)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 172,531,872 172,531,872
<SECURITIES> 56,412,533 56,412,533
<RECEIVABLES> 10,290,304 10,290,304
<ALLOWANCES> 2,948,241 2,948,241
<INVENTORY> 822,282 822,282
<CURRENT-ASSETS> 242,344,311 242,344,311
<PP&E> 4,955,243 4,955,243
<DEPRECIATION> 1,076,806 1,076,806
<TOTAL-ASSETS> 268,793,998 268,793,998
<CURRENT-LIABILITIES> 49,191,241 49,191,241
<BONDS> 0 0
0 0
0 0
<COMMON> 27,309 27,309
<OTHER-SE> 161,700,448 161,700,448
<TOTAL-LIABILITY-AND-EQUITY> 268,793,998 268,793,998
<SALES> 24,517,149 46,037,754
<TOTAL-REVENUES> 24,517,149 46,037,754
<CGS> 2,290,551 4,484,381
<TOTAL-COSTS> 2,290,551 4,484,381
<OTHER-EXPENSES> 11,528,160 20,722,125
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 12,967,006 24,674,432
<INCOME-TAX> 4,668,121 8,882,795
<INCOME-CONTINUING> 8,298,885 15,791,637
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,298,885 15,791,637
<EPS-PRIMARY> 0.20 0.39
<EPS-DILUTED> 0.19 0.37
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