<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 March 1, 1999 there were 43,225,492 shares of the registrant's Common
Stock, $.001 par value per share, outstanding.
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<PAGE>
CITRIX SYSTEMS, INC.
Form 10-Q/A
For the Quarter Ended June 30, 1998
This Quarterly Report on Form 10-Q/A is being filed by Citrix Systems, Inc.
(the "Company") to amend and restate Items 1 and 2 and Exihibit 27.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 to
reflect the Company's re-evaluation of write-offs for in-process research and
development in connection with certain acquisitions and licensing arrangements.
CONTENTS
Page Number
-----------
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 11
Signatures 22
Exhibit Index 23
Exhibit 27.1 24
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 10,638,416 10,767,437
------------------- -----------------
Total current assets 287,437,395 258,361,579
Property and equipment, net 12,864,090 6,678,253
Long-term portion of deferred tax assets 30,034,632 16,763,680
Intangible assets, net 48,946,820 864,513
------------------- -----------------
$379,282,937 $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 69,956,794 48,058,954
-------------------- -------------------
Total stockholders' equity 227,022,553 196,847,753
-------------------- -------------------
$379,282,937 $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 $ 93,787,943 $43,912,754
Net revenues - stockholder 7,967,687 2,125,000 11,717,687 2,125,000
------------------- ----------------- ----------------- ------------------
Net revenues 56,203,708 24,517,149 105,505,630 46,037,754
Cost of goods sold
Cost of goods sold 3,628,869 2,290,551 7,302,477 4,484,381
Cost of goods sold - stockholder 1,051,691 - 2,227,520 -
------------------- ----------------- ----------------- ------------------
Total cost of revenues 4,680,560 2,290,551 9,529,997 4,484,381
------------------- ----------------- ----------------- ------------------
Gross margin 51,523,148 22,226,598 95,975,633 41,553,373
Operating expenses
Research and development 4,210,840 1,622,147 7,488,436 3,135,377
Sales, marketing and support 18,582,944 7,480,411 33,470,707 13,678,479
General and administrative 4,101,316 2,425,602 7,806,750 3,908,269
Amortization of intangible assets 1,446,248 - 2,220,194 -
In-process research and development 10,700,000 - 15,984,000 -
------------------- ----------------- ----------------- ------------------
Total operating expenses 39,041,348 11,528,160 66,970,087 20,722,125
------------------- ----------------- ----------------- ------------------
Income from operations 12,481,800 10,698,438 29,005,546 20,831,248
Interest income, net 2,550,120 2,268,568 5,209,829 3,843,184
------------------- ----------------- ----------------- ------------------
Income before income taxes 15,031,920 12,967,006 34,215,375 24,674,432
Income taxes provision 5,411,491 4,668,121 12,317,535 8,882,795
------------------- ----------------- ----------------- ------------------
Net income $ 9,620,429 $ 8,298,885 $ 21,897,840 $15,791,637
=================== ================= ================= ==================
Earnings per common share:
Basic earnings per share $0.23 $0.20 $0.52 $0.39
=================== ================= ================= ==================
Weighted average shares outstanding 41,870,341 40,763,794 41,748,604 40,528,191
=================== ================= ================= ==================
Earnings per common share assuming dilution:
Diluted earnings per share $0.21 $0.19 $0.49 $0.37
=================== ================= ================= ==================
Weighted average shares outstanding 45,418,431 43,135,829 45,106,900 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) $ 21,897,840 $ 15,791,637
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 4,081,103 599,877
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 (13,141,930) (23,647,080)
In-process research and development 15,984,000 -
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. Restatement of Financial Statements
In a letter to the American Institute of Certified Public Accountants
("AICPA"), the Securities and Exchange Commission ("SEC") expressed its views on
the recording of in-process research and development ("IPR&D"). As a result, the
Company has re-evaluated the amount of purchased IPR&D recorded in connection
with its acquisitions of Insignia Solutions, plc. ("Insignia") and APM Ltd.,
parent company of Digitivity Inc. ("APM"), and its licensing of technology from
EPiCON, Inc. ("EPiCON") based on its understanding and interpretation of the
aforementioned letter. The re-evaluations resulted in a decrease in the amount
of purchase price that was allocated to IPR&D and an increase in the amount
allocated to purchased technology and goodwill. Specifically, the Company
reduced the amount of previously reported write-offs for purchased IPR&D to
$10.7 million and increased amortization of intangible assets to $1.4 million
and increased intangible assets, net to $48.9 million for the quarter ended June
30, 1998. For the six months ended June 30, 1998, the Company reduced the amount
of previously reported write-offs for purchased IPR&D to $16.0 million and
increased amortization of intangible assets to $2.2 million and increased net
intangible assets to $48.9 million.
The effects of the adjustments on the Company's previously reported
consolidated financial statements for the second quarter of 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
----------------------------------- --------------------------------------
Restated As Reported Restated As Reported
<S> <C> <C> <C> <C>
Statement of Operations Data:
Amortization of intangible assets...... $ 1,446,248 $ -- $ 2,220,194 $ --
In-process research and development.... 10,700,000 33,796,995 15,984,000 57,596,995
Total operating expenses............... 39,041,348 60,965,051 66,970,087 106,829,903
Income/(loss) from operations.......... 12,481,800 (9,441,903) 29,005,546 (10,854,268)
Income before income taxes............. 15,031,920 (6,891,783) 34,215,375 (5,644,440)
Net income/(loss)...................... 9,620,429 (4,410,741) 21,897,840 (3,612,442)
Basic earnings per share............... 0.23 (0.11) 0.52 (0.09)
Diluted earnings per share............. $ 0.21 $ (0.11) $ 0.49 $ (0.09)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
June 30, 1998
---------------
Restated As Reported
<S> <C> <C>
Balance Sheet Data:
Total current asssets............... $287,437,395 $291,182,833
Intangible assets, net.............. 48,946,820 9,087,007
Total assets........................ 379,282,937 353,772,655
Retained earnings................... 69,956,794 44,446,512
Total stockholders' equity.......... $227,022,553 $201,512,271
</TABLE>
3. 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.
4. 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.
5. 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. 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 $2.7 million to the Company's operations in the
first quarter of 1998, after giving effect to the re-evaluation described in
Note 2 above. Further, on June 30, 1998, the Company completed its acquisition
of APM Ltd. for approximately $40.4 million. 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 $10.7 million to the Company's
operations in the second quarter of 1998, after giving effect to the re-
evaluation described in Note 2 above.
8
<PAGE>
6. 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 $2.6 million to the Company's operations in the first quarter of
1998, after giving effect to the re-evaluation described in Note 2 above.
7. 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
----------- ----------- ----------- -----------
Restated Restated
<S> <C> <C> <C> <C>
Numerator:
Net income $ 9,620,429 $ 8,298,885 $21,897,840 $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 3,548,090 2,372,035 3,358,296 2,371,491
----------- ----------- ----------- -----------
Dilutive potential common shares 3,548,090 2,372,035 3,358,296 2,371,491
----------- ----------- ----------- -----------
Denominator for diluted earnings per share-
adjusted weighted-average shares 45,418,431 43,135,829 45,106,900 42,899,682
=========== =========== =========== ===========
Basic earnings per share $ 0.23 $ 0.20 $ 0.52 $ 0.39
----------- ----------- ----------- -----------
Diluted earnings per share $ 0.21 $ 0.19 $ 0.49 $ 0.37
=========== =========== =========== ===========
</TABLE>
8. Reclassifications
Certain reclassifications have been made for consistent presentation.
9. 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
<PAGE>
10. Subsequent Events
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 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 $2.4 million in the quarter
ending September 30, 1998.
10
<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
server-based computing 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.
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(R))
protocol on the new platform, which provides Windows NT Server 4.0, Terminal
Server Edition, with capabilities similar to those currently offered in the
WinFrame product line. 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.
As a result of the Development Agreement, the Company will continue to
support the Microsoft Windows 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.
11
<PAGE>
The Company has recently acquired or licensed technology that is related to
its strategic objectives. 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. In January 1998, the Company
licensed certain technology from EPiCON, Inc., for approximately $8.0 million.
On June 30, 1998, the Company acquired all of the outstanding securities of APM
Ltd., parent company of Digitivity Inc. ("APM"), for approximately $40.4
million. These transactions were accounted for using the purchase method of
accounting with the purchase price being principally allocated to purchased
technologies and intangible assets.
These acquisitions and licensing arrangement were accounted for under the
purchase method of accounting and in accordance with Accounting Principles Board
Opinion No. 16, "Accounting for Business Combinations." The Company allocated
the cost of the acquisitions to the assets acquired and the liabilities assumed
based on their estimated fair values using valuation methods believed to be
appropriate at the time. The acquired intangible assets included in-process
technology projects, among other assets, which were related to research and
development that had not reached technological feasibility and for which there
was no alternative future use. As a result of the SEC's letter to the AICPA
dated September 9, 1998 regarding its views on write-offs of purchased in-
process research and development ("IPR&D"), the Company revised its calculations
of the value of the acquired in-process technology based on adjusted after-tax
cash flows and reduced the amount of the write-offs for purchased IPR&D related
to the Insignia acquisition, EPiCON licensing agreement and APM acquisition to
$2.7 million, $2.6 million and $10.7 million, respectively. These reductions
have been reallocated to other intangible assets. After giving effect to the
re-evaluation, the Company recorded amortization of intangible assets of $1.4
million and $2.2 million and IPR&D of $10.7 million and $16.0 million for the
three and six months ended June 30, 1998, respectively, in accordance with
applicable accounting pronouncements.
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.
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.................... 7.5 6.6 7.1 6.8 159.6 138.8
Sales, marketing and support................ 33.1 30.5 31.7 29.7 148.4 144.7
General and administrative.................. 7.3 9.9 7.4 8.5 69.1 99.7
Amortization of intangible assets........... 2.6 - 2.1 - * *
In-process research and development......... 19.0 - 15.1 - * *
-------- -------- ------ ------- ------- ---------
Total operating expenses................... 69.5 47.0 63.5 45.0 238.7 223.2
-------- -------- ------ ------- ------- ---------
Income from operations....................... 22.2 43.7 27.5 45.3 16.7 39.2
Interest income, net......................... 4.5 9.2 4.9 8.3 12.4 35.6
-------- -------- ------ ------- ------- ---------
Income before income taxes................... 26.7 52.9 32.4 53.6 15.9 38.7
Income taxes provision....................... 9.6 19.0 11.7 19.3 15.9 38.7
-------- -------- ------ ------- ------- ---------
Net income................................... 17.1% 33.9% 20.7 34.3% 15.9% 38.7%
======== ======== ====== ======= ======= =========
</TABLE>
* Not meaningful.
12
<PAGE>
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.
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
13
<PAGE>
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.
Amortization of Intangible Assets. The increase in amortization of goodwill
and identifiable intangible assets in the three months and six months ended June
30, 1998 as compared to the prior respective periods is due to the Insignia and
APM acquisitions and EPiCON licensing arrangement. As of June 30, 1998, after
giving effect to the re-evaluation discussed in "--Overview" and in Note 2 to
the Notes to the Condensed Consolidated Financial Statements ("Note 2"), the
Company had other net intangible assets of $48.9 million, associated with the
DataPac Australasia Pty Limited, an October 2, 1997 acquisition, Insignia and
APM acquisitions and the EPiCON licensing arrangement, remaining to be amortized
over four years following each of the transactions. See "--In-Process Research
and Development Expenses."
In-Process Research and Development Expenses. During 1998, the Company
completed the acquisition and licensing of certain in-process software
technologies in which it allocated a portion of the purchase price to IPR&D.
The Company allocated $2.7 million and $10.7 million for IPR&D related to the
Insignia and APM acquisitions, respectively and $2.6 million for IPR&D related
to the licensing agreement with EPiCON, after giving effect to the re-evaluation
as further discussed in "--Overview" and in Note 2.
Since the respective dates of acquisition and licensing, the Company has used
the acquired in-process technology to develop new product offerings, which have
or will become part of the Company's suite of products when completed.
Functionality included in products using the acquired in-process technology have
been introduced at various times following the respective transaction dates of
the acquired assets and licensing, and the Company currently expects to complete
the development of the remaining projects at various dates between 1999 and
2000. Upon completion, the Company offers the related products to its
customers.
The nature of the efforts required to develop and integrate 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.
The fair value of the in-process technology in each acquisition was based on
analyses of the markets, projected cash flows and risks associated with
achieving such projected cash flows. In developing these cash flow projections,
revenues were estimated based on relevant factors, including aggregate revenue
growth rates for the business as a whole, individual service offering revenues,
characteristics of the potential market for the service offerings and the
anticipated life of the underlying technology. Operating expenses and resulting
profit margins were estimated based on the characteristics and cash flow
generating potential of the acquired in-process research and development, and
included assumptions that certain expenses would decline over time as operating
efficiencies were obtained. The Company assumed material net cash inflows would
commence in 1999 for the Insignia acquisition and EPiCON licensing agreement and
in 2000 for the APM acquisition. Appropriate adjustments were made to operating
income to derive net cash flow, and the estimated net cash flows of the in-
process technologies in each acquisition were then discounted to present value
using rates of return that the Company believes reflect the specific risk/return
characteristics of these research and development projects. The selection of
discount rates for application in each acquisition were based on the
consideration of: (i) the weighted average cost of capital ("WACC"), which
measures a company's cost of debt and equity financing weighted by the
percentage of debt and percentage of equity in its target capital structure;
(ii) the corresponding weighted average return on assets ("WARA") which measures
the after-tax return required on the assets employed in the business weighted by
each asset group's percentage of the total asset portfolio; and (iii) venture
capital required rates of return which typically relate to equity financing for
relatively high-risk business projects. The risk adjusted discount rates were
35%, 40% and 50% for the EPiCON licensing agreement, Insignia acquisition and
APM acquisition, respectively.
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
operating results, financial condition and results of operations. No assurance
can be given that
14
<PAGE>
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 licensed technology,
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 transaction, and the estimates
discussed below should not be considered the Company's current projections for
operating results for the acquired assets or licensed technology or the Company
as a whole.
Revenues attributable to the acquired in-process technology associated with
these acquisitions were assumed to increase depending on the product between the
first one to four years of two to six year projection periods at annual rates
ranging from 20% to 264% before decreasing over the remaining years at rates
ranging from 7% to 68% as other products are released in the marketplace.
Projected annual revenue attributable to the products ranged from approximately
$0.6 million to $74.6 million over the term of the projections. These
projections were based on aggregate revenue growth rates for the business as a
whole, individual product revenues, giving consideration to transaction volumes
and prices, anticipated growth rates for the server-based computing market,
anticipated product development and product introduction cycles, and the
estimated life of the underlying technology. Projected revenues from the in-
process research and development were assumed to peak during periods between
1999 and 2002, depending on the product, and decline from 2000 to 2004 as other
new products are expected to enter the market.
Gross profit was assumed to increase in the first one to four years of the
projection period, depending on the product, at annual rates ranging from 20% to
266%, decreasing over the remaining years at rates ranging from 7% to 68%
annually, resulting in annual gross profits ranging from approximately $0.6
million to $69.2 million. The gross profit projections assumed a growth rate
approximately the same as the revenue growth rate.
Operating profit was assumed to increase depending on the product, in the
first one to four years of the projection period at annual rates ranging between
19% and 255%, and decrease over the remaining years at rates between 3% and 75%
annually, resulting in annual operating profits of approximately $0.3 million to
$31.2 million. Operating profit projections assumed a growth rate approximately
the same as the revenue growth rate.
The Company used discount rates ranging from 35% to 50% for valuing the in-
process research and development acquired in these transactions, which the
Company believes reflected the risk associated with the completion of the
individual research and development projects acquired and the estimated future
economic benefits to be generated subsequent to the projects' completion.
A description of the in-process research and development and the estimates
made by the Company for EPiCON, Insignia and APM are summarized below. All of
the acquired projects are targeted for the server-based computing market. After
the acquisition or license of each technology, the Company has continued the
development of these in-process projects.
EPiCON
The in-process research and development acquired in the license of EPiCON
technology consisted of one significant research and development project,
Application Installation Services. This project enables an application to be
installed once on a server and then replicated to all other servers in a server
farm configuration, and is targeted for the server-based computing market. At
the date of licensing, EPiCON was shipping its Windows NT 3.51 version of its
ALTiS application deployment product and was testing its Windows NT 4.0 version.
Neither the Windows NT 3.51 version nor the Windows NT 4.0 version of the ALTiS
product was operating in a Citrix MetaFrame or WinFrame environment at the date
of licensing. After licensing the EPiCON technology, the Company continued the
development of this in-process project, which the Company estimated was less
than 60% complete at the date of licensing. The aggregate value assigned to the
in-process research and development was $2.6 million, after giving effect to the
re-evaluation described in "--Overview" and in Note 2. At the time of the
valuation, the expected cost to complete the project was approximately $300,000.
As of June 30, 1998, approximately $75,000 had been incurred since the date of
licensing. The Company estimates that approximately $1.0 million will be
required to complete the remaining research and
15
<PAGE>
development project and it is expected to be completed during the first half of
1999. The remaining efforts to complete the project relate primarily to
utilizing the technology in a multi-user environment. The research and
development risks associated with this project primarily reside with the
migration of the Application Installation Services technology to the Company's
MetaFrame and WinFrame platforms, which are based on server-based computing
technology.
Insignia
The in-process research and development acquired in the Insignia acquisition
consisted primarily of one significant research and development project, Keoke,
a video display protocol designed to add performance and bandwidth management
enhancements to ICA in WinFrame and MetaFrame software. The Company estimated
this project was less than 40% complete at the date of acquisition. The
aggregate value assigned to in-process research and development was $2.7
million, after giving effect to the re-evaluation described in "--Overview" and
in Note 2. At the date of the valuation, the expected cost to complete the Keoke
and other projects related to the acquisition was approximately $1.9 million. As
of June 30, 1998, approximately $420,000 had been incurred since the date of
acquisition. The Company estimates that approximately $890,000 will be required
to complete the remaining research and development project and it is expected to
be completed by the end of 1999. The remaining efforts to complete the project
are primarily the utilization of performance enhancements and algorithmic
methodologies of the Keoke protocol to create similar improvements in the
Company's Independent Computing Architecture (ICA) protocol. The research and
development risks associated with this project primarily relate to the
integration and sorting of key performance features of Keoke into the Company's
ICA protocol.
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 for Java, which is similar to
WinFrame software, but actually runs Java applications. At the date of the
acquisition, APM was shipping a secure server-based enterprise solution that
helped companies deploy and manage intranet and Internet-based Java
applications. The Company estimated this project was less than 45% complete at
the date of acquisition. The aggregate value assigned to the in-process research
and development was $10.7 million, after giving effect to the re-evaluation
described in "--Overview" and in Note 2. At the time of the valuation, the
expected cost to complete the project was approximately $8.0 million and it is
expected to be completed in 2000. The remaining effort to complete the project
is primarily the utilization of acquired technology to develop an application
server for Java that would operate in a MetaFrame and WinFrame environment. The
research and development risks associated with this project relate primarily to
updating the acquired technology to be compatible with Sun Microsystems' Java
2.0 application, integrating and porting such technology into a variety of
server-based computing environments.
There can be no assurance that the Company will not incur additional charges
in subsequent periods to reflect costs associated with these transactions or
that the Company will be successful in its efforts to integrate and further
develop these technologies.
Interest Income, Net. 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.
16
<PAGE>
Liquidity and Capital Resources
During the six months ended June 30, 1998, the Company generated positive
operating cash flows of approximately $26.5 million, which is net of cash used
to purchase and license in-process research and development of $16.0 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 $178.2 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 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,
17
<PAGE>
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 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
18
<PAGE>
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
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
19
<PAGE>
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.
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
20
<PAGE>
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 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
21
<PAGE>
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.
Uncertainty as to IPR&D Valuation. With respect to the statements made
regarding the adjustment of amounts previously charged to in-process research
and development, the amount and rate of amortization of such amounts included in
this report are subject to a number of risks and uncertainties, including,
without limitation, the effects of any changes in accounting standards or
guidance adopted by the SEC or the accounting profession. In the event of any
changes in accounting standards or guidance adopted by the SEC, such changes may
materially affect future results of operations through increased amortization
expense.
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.
22
<PAGE>
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 10th day of March 1999.
CITRIX SYSTEMS, INC.
By: /s/ MARK B. TEMPLETON
-------------------------
Mark B. Templeton
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)
23
<PAGE>
Exhibit Index
Page Number
-----------
27.1 Financial Data Schedule 25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<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> 287,437,395 287,437,395
<PP&E> 16,788,792 16,788,792
<DEPRECIATION> 3,924,702 3,924,702
<TOTAL-ASSETS> 379,282,937 379,282,937
<CURRENT-LIABILITIES> 109,197,899 109,197,899
<BONDS> 0 0
0 0
0 0
<COMMON> 41,912 41,912
<OTHER-SE> 226,980,641 226,980,641
<TOTAL-LIABILITY-AND-EQUITY> 379,282,937 379,282,937
<SALES> 56,203,708 105,505,630
<TOTAL-REVENUES> 56,203,708 105,505,630
<CGS> 4,680,560 9,529,997
<TOTAL-COSTS> 4,680,560 9,529,997
<OTHER-EXPENSES> 39,041,348 66,970,087
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 15,031,920 34,215,375
<INCOME-TAX> 5,411,491 12,317,535
<INCOME-CONTINUING> 9,620,429 21,897,840
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,620,429 21,897,840
<EPS-PRIMARY> 0.23 0.52
<EPS-DILUTED> 0.21 0.49
</TABLE>
