-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LZcPQnsLRHTmwI+sBBNLwHhfvRZ7SftBZ3pWFsJTLY+AdWKpvod6nIGojUikSOUG 8XvM3019jjDjyVMlb3IdRA== 0000927016-96-001717.txt : 19961115 0000927016-96-001717.hdr.sgml : 19961115 ACCESSION NUMBER: 0000927016-96-001717 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITRIX SYSTEMS INC CENTRAL INDEX KEY: 0000877890 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 752275152 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27084 FILM NUMBER: 96661387 BUSINESS ADDRESS: STREET 1: 210 UNIVERSITY DR STREET 2: STE 700 CITY: CORAL SPRINGS STATE: FL ZIP: 33071 BUSINESS PHONE: 3057550559 10-Q 1 QUARTERLY REPORT ================================================================================ 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 September 30, 1996 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) 210 UNIVERSITY DRIVE SUITE 700 CORAL SPRINGS, FLORIDA 33071 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 755-0559 Not Applicable - -------------------------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year if Changed Since Last Report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- As of November 1, 1996 there were 26,574,865 shares of the registrant's Common Stock, $.001 par value per share, outstanding. Total Number of Pages: 37 ================================================================================ CITRIX SYSTEMS, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 CONTENTS PART I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets: September 30, 1996 and December 31, 1995 Condensed Consolidated Statements of Operations: Three Months and Nine Months ended September 30, 1996 and 1995 Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 30, 1996 and 1995 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit Index Exhibit 10 Exhibit 11 Exhibit 27 2 PART I: FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CITRIX SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ----------------------------- ASSETS Current assets: Cash and cash equivalents $ 97,568,929 $43,471,491 Short-term investments 31,008,459 - Accounts receivable, net of allowances of $1,922,998 and $1,008,425 at September 30, 1996 and December 31, 1995, respectively 5,860,575 2,328,512 Inventories 595,115 194,023 Prepaid expenses 218,971 230,313 Note receivable from officer, including accrued interest of $28,910 at December 31, 1995 - 128,910 Other current assets 1,948,840 - -------------------------- Total current assets 137,200,889 46,353,249 Property and equipment, net 650,777 301,996 Other assets - 59,941 -------------------------- $137,851,666 $46,715,186 ==========================
See accompanying notes. 3 CITRIX SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (Unaudited)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 726,952 $ 546,266 Accrued royalties and other accounts payable to shareholder 1,221,936 521,517 Other accrued expenses 2,153,121 1,137,478 Deferred revenue 1,275,539 680,767 Deferred revenue on contract with shareholder 541,000 541,000 Current portion of capital lease obligations payable to related parties 112,963 144,976 Income taxes payable - 93,100 ------------------------------ Total current liabilities 6,031,511 3,665,104 Long-term portion of capital lease obligations payable to related parties 17,719 88,379 ------------------------------ Total liabilities 6,049,230 3,753,483 Shareholders' equity: Preferred stock at $.01 par value-- 5,000,000 shares authorized, none issued and outstanding at September 30, 1996 and December 31, 1995 - - Common stock at $.001 par value-- 60,000,000 and 30,000,000 shares authorized; and 26,521,144 and 23,650,916 issued and outstanding at September 30, 1996 and December 31, 1995, respectively 26,521 23,651 Additional paid-in capital 131,992,069 54,938,583 Accumulated deficit (216,154) (12,000,531) ------------------------------ Total shareholders' equity 131,802,436 42,961,703 ------------------------------ $137,851,666 $ 46,715,186 ==============================
See accompanying notes. 4 CITRIX SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1996 1995 1996 1995 ----------------------------------------------------------- Net revenues $ 11,685,801 $ 4,277,506 $ 28,958,658 $ 9,417,649 Cost of goods sold 1,240,597 522,345 3,454,252 1,255,811 ----------------------------------------------------------- Gross margin 10,445,204 3,755,161 25,504,406 8,161,838 Operating expenses: Research and development 904,168 575,422 2,768,253 1,700,075 Sales, marketing and support 3,698,135 1,748,799 9,033,432 4,890,130 General and administrative 1,095,097 454,369 2,703,455 1,139,792 ----------------------------------------------------------- Total operating expenses 5,697,400 2,778,590 14,505,140 7,729,997 ----------------------------------------------------------- Income from operations 4,747,804 976,571 10,999,266 431,841 Other income, net 1,556,158 7,394 3,029,284 34,105 ----------------------------------------------------------- Net income before income taxes 6,303,962 983,965 14,028,550 465,946 Income taxes 990,004 - 2,244,173 - ----------------------------------------------------------- Net income 5,313,958 983,965 11,784,377 465,946 Less redeemable convertible preferred stock accretion - (22,356,546) - (34,534,944) ----------------------------------------------------------- Net income (loss) attributable to common shares $ 5,313,958 $(21,372,581) $11,784,377 $(34,068,998) =========================================================== Historical: Net income (loss) per share $ 0.19 $ (6.68) $ 0.44 $ (10.59) =========================================================== Weighted average shares outstanding 28,337,303 3,198,894 26,969,901 3,216,684 =========================================================== Supplementary: Net income per share $ 0.19 $ 0.05 $ 0.44 $ 0.02 =========================================================== Weighted average shares outstanding 28,337,303 19,951,856 26,969,901 20,161,186 ===========================================================
See accompanying notes. 5 CITRIX SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 ---------------------------- OPERATING ACTIVITIES Net income $ 11,784,377 $ 465,946 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 217,538 133,140 Provision for doubtful accounts 266,354 112,176 Tax benefit related to the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options 3,509,763 - Changes in operating assets and liabilities: Accounts receivable (3,798,417) (238,775) Inventories (401,092) (109,781) Prepaid expenses 11,342 (41,607) Interest on note receivable from officer 28,910 (6,057) Other assets (1,888,900) (70,459) Accounts payable 180,686 147,798 Accrued royalties and other accounts payable to shareholder 700,419 59,445 Other accrued expenses 1,015,643 160,001 Deferred revenue 594,772 583,427 Deferred revenue on contract with shareholder - 204,337 Income taxes payable (93,100) - -------------------------- Net cash provided by operating activities 12,128,295 1,399,591 INVESTING ACTIVITIES Purchases of short-term investments (31,008,459) - Proceeds from note receivable from officer 100,000 - Purchases of property and equipment (566,318) (22,386) -------------------------- Net cash used in investing activities (31,474,777) (22,386) FINANCING ACTIVITIES Net proceeds from issuance of common stock 73,546,593 34,464 Repurchase of common stock previously issued - (4,856) Proceeds from line of credit - 600,000 Payments on line of credit - (600,000) Payments on capital lease obligations payable to related parties (102,673) (71,253) -------------------------- Net cash provided by (used in) financing activities 73,443,920 (41,645) -------------------------- Increase in cash and cash equivalents 54,097,438 1,335,560 Cash and cash equivalents at beginning of period 43,471,491 1,912,781 -------------------------- Cash and cash equivalents at end of period $ 97,568,929 $3,248,341 ========================== SUPPLEMENTARY DISCLOSURE OF NON-CASH INVESTING ACTIVITY Property and equipment acquired under capital leases $ - $ 169,459 ==========================
See accompanying notes. 6 CITRIX SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1996 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 have been included. 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 and the consolidated financial statements and accompanying notes included in the Citrix Systems, Inc.'s (the "Company") 1995 Annual Report on Form 10-K. 2. SIGNIFICANT ACCOUNTING POLICIES 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. NET INCOME (LOSS) PER SHARE Historical net income (loss) per share is calculated using the weighted average number of common and common equivalent shares outstanding during the respective periods. Pursuant to the requirements of the Securities and Exchange Commission, common shares and common equivalent shares issued at prices below the Company's initial public offering price during the twelve months immediately preceding the date of the initial filing of the Company's October 24, 1995 Registration Statement have been included in the calculation of common shares and common equivalent shares, using the treasury stock method, as if they were outstanding for all periods presented. Dilutive common stock equivalents consist of warrants and stock options calculated using the treasury stock method. All common share and per share data, except par value per share, have been retroactively adjusted to reflect the two-for-three reverse stock split of the Company's Common Stock effective December 7, 1995 and the two-for-one stock split of the Company's Common Stock effective June 4, 1996. Supplementary net income per share is computed in the same manner as historical net income (loss) per share, after giving effect to the conversion of Redeemable Convertible Preferred Stock into an aggregate of 15,359,388 shares of Common Stock, which occurred in December 1995, as though it occurred at the beginning of 1995. 7 INCOME TAXES The income taxes recorded in the three months and nine months ended September 30, 1996 have been computed based upon the Company's estimated annual effective tax rate for the fiscal year ending December 31, 1996, giving effect to the utilization of all of the Company's income tax net operating loss carryforwards and tax credit carryforwards from prior periods. The Company recorded income tax expense of approximately $990,000 during the third quarter of 1996. Other current assets primarily consist of estimated payments of federal income taxes and anticipated tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options in excess of the income taxes otherwise due. SHORT-TERM INVESTMENTS Short-term investments at September 30, 1996 primarily consist of commercial paper. The Company follows the provisions of Statement of Financial Accounting Standards Board No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FASB No. 115). FASB No. 115 requires investments to be classified based on management's intent in three categories: held-to-maturity securities, available-for-sale securities and trading securities. Held-to-maturity securities are recorded at amortized cost. Available-for-sale securities are recorded at market value with unrealized gains and losses reported as a separate component of shareholders' equity. Trading securities are recorded at market value with unrealized gains and losses reported in the earnings. The Company classifies its short-term investments as available-for-sale securities. The market value of these securities at September 30, 1996 approximated cost. 3. SECONDARY OFFERING In June 1996, the Company issued an additional 2,364,888 shares in connection with the second public offering of its Common Stock, which generated net proceeds of approximately $73,200,000. 8 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 are designed for 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 WinView product represented the largest source of the Company's revenues. The Company began shipping WinFrame products in final form in the third quarter of 1995. The Company anticipates that the WinFrame product line will constitute a majority of its revenues for the foreseeable future. The Company anticipates that revenues from the WinView product will decline over time as the Company's distribution channels and customer base transition to WinFrame products. Revenues from WinFrame and WinView products result primarily from license fees for "shrink wrapped" product sold to distributors and resellers. The Company also derives revenue from initial license fees and associated quarterly royalties from original equipment manufacturers ("OEMs"), non-recurring engineering fees and training, consulting and service revenue. Product revenues are recognized upon shipment only if no significant Company obligations remain and collection of the resulting receivable is deemed probable. In the case of non-cancelable product licensing arrangements under which certain OEMs have software reproduction rights, recognition of revenue also requires delivery and customer acceptance of the product master or first copy. 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 income statement. RESULTS OF OPERATIONS The following table sets forth statement of operations data of the Company expressed as a percentage of net revenues and as a percentage of change from period-to-period for the periods indicated.
CHANGE FROM THREE CHANGE FROM NINE THREE MONTHS ENDED NINE MONTHS ENDED MONTHS ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ----------------------------- --------------------------- 1996 VS 1996 VS 1996 1995 1996 1995 1995 1995 ------------------------------------------------------------------------------------------------------- Net revenues............... 100.0% 100.0% 100.0% 100.0% 173.2% 207.5% Cost of goods sold......... 10.6 12.2 11.9 13.3 137.5 175.1 ----- ----- ----- ----- ----- ----- Gross margin............... 89.4 87.8 88.1 86.7 178.2 212.5 ----- ----- ----- ----- ----- ----- Operating expenses: Research and development. 7.7 13.5 9.6 18.1 57.1 62.8 Sales, marketing and support................. 31.6 40.9 31.2 51.9 111.5 84.7 General and administrative.......... 9.4 10.6 9.3 12.1 141.0 137.2 Total operating ----- ----- ----- ----- ----- ----- expenses........... 48.7 65.0 50.1 82.1 105.0 87.7 ----- ----- ----- ----- ----- ----- Income from operations.... 40.7 22.8 38.0 4.6 * * Other income, net.......... 13.3 0.2 10.5 0.4 * * ----- ----- ----- ----- ----- ----- Income before income taxes................. 54.0 23.0 48.5 5.0 * * Income taxes............... 8.5 0.0 7.7 0.0 * ----- ----- ----- ----- ----- ----- Net income................. 45.5% 23.0% 40.8% 5.0% * % * % ===== ===== ===== ===== ===== =====
* Not meaningful. 9 Net Revenues. Net revenues were approximately $11.7 million and $4.3 million for the three months ended September 30, 1996 and 1995, respectively, representing an increase of 173.2%. For the nine months ended September 30, 1996 and 1995, net revenues were approximately $29.0 million and $9.4 million, respectively, representing an increase of 207.5%. The increase in net revenues for both periods primarily reflects revenues generated from the Company's WinFrame products, whose first production version was shipped in the third quarter of 1995 and, to a lesser extent, increased OEM revenues. These increases in net revenues were partially offset by a decline in the Company's WinView product revenues. WinFrame and OEM revenues approximated 71.2% and 18.8% of revenues, respectively, in the three months ended September 30, 1996 and 59.2% and 27.7% of revenues, respectively, in the nine months ended September 30, 1996. Both the Company's WinFrame and OEM revenues represent product license fees based upon the Company's multiuser NT-based technology. The Company anticipates that WinView revenues will continue to decline as a percentage of the Company's revenues in future periods. 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 above. 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 87.8% in the third quarter of fiscal 1995 to 89.4% in the third quarter of fiscal 1996 and from 86.7% in the first nine months of 1995 to 88.1% in the first nine months of 1996. The increase in gross margin was primarily attributable to changes in product mix, representing changes in the mix of OEM revenues versus product sold to distributors and resellers, and different products within the WinFrame product line. Gross margin as a percentage of net revenues may decrease in future periods as a result of additional costs associated with the development or acquisition of new technologies or enhancements to existing products. Research and Development Expenses. Research and development expenses were approximately $900,000 and $575,000 for the three months ended September 30, 1996 and 1995, respectively, and $2.8 million and $1.7 million for the nine months ended September 30, 1996 and 1995, respectively. Increases in research and development expenses in the third quarter of 1996 compared to the third quarter of 1995 resulted primarily from additional staffing, associated salaries and related expenses. The increase in research and development expenses for the nine months ended September 30, 1996 is primarily due, in addition to the above, to expenses associated with the translation and localization of the WinFrame products and increased expenses associated with patent filings relating to certain aspects of the Company's software products and technology. Sales, Marketing and Support Expenses. Sales, marketing and support expenses approximated $3.7 million and $1.7 million for the three months ended September 30, 1996 and 1995, respectively, and $9.0 million and $4.9 million for the nine months ended September 30, 1996 and 1995, respectively. The increase for both periods resulted primarily from increases in promotional activities, such as reseller and distributor programs, advertising literature, and trade shows. Sales staff and associated salaries, commissions and related expenses as well as marketing staff, associated salaries and related expenses, also increased. General and Administrative Expenses. General and administrative expenses were approximately $1.1 million and $500,000 for the three months ended September 30, 1996 and 1995, respectively, and $2.7 million and $1.1 million for the nine months ended September 30, 1996 and 1995, respectively. The increase in general and administrative expenses for both periods is primarily due to expenditures associated with being a public company such as increased legal fees and associated regulatory filings and expenses as well as expenses associated with investor relations, and increased staff, associated salaries and related expenses. In addition to the aforementioned, the provision for doubtful accounts is higher in both periods due to an increased level of accounts receivable attributable to each period's respective increase in sales. Other Income, Net. Other income, net, amounted to approximately $1.6 million and $7,000 for the three months ended September 30, 1996 and 1995, respectively, and $3.0 million and $34,000 for the nine months ended September 30, 1996 and 1995, respectively. The increase in each period is primarily due to interest income generated from the net proceeds of the Company's initial and second public offerings completed in December 1995 and June 1996, respectively. 10 Income Taxes. During the three months and nine months ended September 30, 1996, the Company incurred income taxes of approximately $990,000 and $2.2 million, respectively, based on its estimated annual effective tax rate. Income tax net operating loss carryforwards and income tax credit carryforwards are included in the computation of the estimated annual effective tax rate. If the Company continues to remain profitable, such loss and tax credit carryforwards will reduce the amount of taxes payable in future periods. The amount of the loss and tax credit carryforwards which can be utilized in any period may be limited in the event that a change in ownership exceeding certain limits prescribed by Section 382 of the Internal Revenue Code is deemed to occur in the future. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 1996, the Company generated positive operating cash flows primarily from increased profitability. The increase in accounts receivable was partially funded by corresponding increases in other accrued expenses and accrued royalties. During the same period, the Company recognized tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of approximately $3.5 million. In June 1996, the Company completed its second public offering, which generated net proceeds of approximately $73.2 million. Additionally, the Company purchased short-term investments for approximately $31.0 million during the same period. The Company also generated positive operating cash flows in the nine months ended September 30, 1995 primarily due to an increase in deferred revenues and increased profitability, which was partially offset by an increase in accounts receivable. The Company has lines of credit for working capital and equipment lease financing aggregating $2.0 million and $500,000, respectively. These lines expire in February 1997. The working capital credit line is limited to a percentage of eligible accounts receivable. The credit lines are secured by the accounts receivable and the equipment leased, respectively, and are subject to certain performance and operating ratios. The credit line agreement also restricts the Company's ability to pay cash dividends. There were no borrowings outstanding under the working capital credit line as of September 30, 1996. At September 30, 1996, the Company had approximately $97.6 million in cash and cash equivalents, $31.0 million in short-term investments and $131.2 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. On such date, the Company had approximately $5.9 million in accounts receivable, net of allowances, and $1.8 million of deferred revenues, most of which the Company anticipates will be earned over the next twelve months. 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 1996 and 1997 as sales, marketing, support, product development efforts and associated administrative systems are implemented to support planned growth. As a result of this planned growth the Company entered into a 63-month lease in June 1996 for approximately 46,000 rentable square feet and intends to relocate to this new facility by December 31, 1996. Additionally, the Company anticipates that it will occupy an additional 24,000 square feet in the new facility within the next eighteen months. The Company believes that the cost of moving its operations to such facilities will not significantly impact its financial position or results of operations. The Company believes existing cash and cash equivalents and short-term investments, together with borrowings available under the Company's lines of credit, will be sufficient to meet operating and capital expenditures requirements for at least the next twelve months. The Company has not paid cash dividends on its common stock. 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 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. 11 Reliance Upon Strategic Relationship with Microsoft. Microsoft Corporation ("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. 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 make its Intelligent Console Architecture ("ICA") protocol a de facto 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 a number of strategic partners. 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 a shareholder, have significantly greater financial, technical, sales and marketing and other resources than the Company. Dependence on Proprietary Technology. The Company relies 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. Product Concentration. The Company anticipates that one of its product technologies, future derivative products and product lines based upon this technology, if any, will constitute a majority of its revenue for the foreseeable future. The Company may experience declines in demand for products based on this technology, whether as a result of new competitive product releases, price competition, lack of success of its strategic partners, technological change or other factors. Management of Growth. 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. To manage its growth effectively, the Company will be required to continue to implement additional management and financial systems and controls, and to expand, train and manage its employee base. 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. Additionally, the Company and others may announce new products, 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. 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. 12 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 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. Product Returns and Price Reductions. The Company provides most of its distributors and resellers with product return rights for stock balancing or limited product evaluation. The Company also provides most of its distributors and resellers 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. 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 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. 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 recently introduced WinFrame 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 from quarter to quarter because initial license fees generally are recognized upon customer acceptance and continuing royalty and 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 of 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. 13 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. 14 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The exhibits which are filed with the report as set forth on the Exhibit Index appearing on Page 17 of this report and are incorporated herein by this reference. (a) Reports on Form 8-K No reports on Form 8-K were filed during the three month period ended September 30, 1996. 15 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. CITRIX SYSTEMS, INC. /s/ ROGER W. ROBERTS ---------------------------------------------- Roger W. Roberts President, Chief Executive Officer and Secretary (Principal Executive Officer) /s/ JAMES J. FELCYN, JR. --------------------------------------------- James J. Felcyn, Jr. Vice-President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 16 EXHIBIT INDEX 10* License, Development and Marketing Agreement dated July 9, 1996 between the Company and Microsoft Corporation 11 Computation of Earnings (Losses) Per Share 27 Financial Data Schedule *Confidential treatment requested pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 17 EX-10 2 LICENSE, DEVELOPMENTS, AND MARKETING AGREEMENT Exhibit 10 LICENSE, DEVELOPMENT, AND MARKETING AGREEMENT This LICENSE, DEVELOPMENT, AND MARKETING AGREEMENT (the "Agreement") is entered into and effective as of July 9, 1996 (the "Effective Date") by and between MICROSOFT CORPORATION ("Microsoft"), a Washington corporation and CITRIX SYSTEMS, INC. ("Citrix"), a Delaware corporation. RECITALS -------- A. Microsoft desires to license Citrix's presentation protocol known as ICA for use in the Microsoft Windows family of products; B. Citrix desires to license its ICA technology to Microsoft, support Microsoft's efforts to include ICA in the Microsoft Windows family of products, and to engage in joint marketing to promote use of Citrix WinFrame in conjunction with the ICA technology as included in the Microsoft Windows family of products. AGREEMENT --------- 1. DEFINITIONS For purposes of this Agreement, the following terms shall have the following meanings: 1.1 "ICA Software" shall mean the Windows-based presentation software described in the attached Exhibit A, in source and object codes forms, including any related documentation. 1.2 "Microsoft Modifications" shall mean any modifications or derivative works of the ICA Software created by Microsoft hereunder pursuant to Section 3.2. 1.3 "Windows Products" shall mean Windows 3.x, Windows for Workgroups, Windows 95, Windows NT, Internet Explorer for Windows, the operating system code named "Pegasus", and any upgrades, derivatives or successors to the foregoing released during the term and any renewals of this Agreement. The parties agree that for purposes of this Agreement "derivatives" or "successors" of a given Windows Product must contain a substantial portion of the Windows Product's functionality, including, for Windows 95 and Windows, a substantial portion of the Win32 APIs. Windows Products shall not include a version of Windows that provides the operating system functionality for a television set top box. The parties shall mutually agree upon whether additional products covered by any license agreement between Citrix and Microsoft's Consumer Platforms Division shall be considered Windows Products under this Agreement. 1.4 "WinFrame" shall mean Citrix's Windows NT-based remote access product known as "WinFrame." 1.5 "Multi-User Windows NT" shall mean a version of Windows NT Server or Workstation that permits concurrent use of the operating system by multiple end users. 1.6 "Maintenance" shall mean changes in software necessary to maintain previously existing functionality between the software and other software, including changes in order to accommodate changing interfaces to other software. 2. DEVELOPMENT 2.1 Delivery and Acceptance. Citrix shall deliver the ICA Software to ----------------------- Microsoft, and Microsoft shall evaluate the ICA Software and submit a written acceptance or rejection of the ICA Software to Citrix according the schedule described in the attached Exhibit A. The source code version of the ICA Software shall be delivered to a mutually agreeable member of the Microsoft legal department who, following reasonable verification via a consultant that the source code builds and is complete, will store such source code within the legal department's files, until the source code becomes licensed pursuant to Section 3.2. If Microsoft fails to provide notice of rejection within the required time period, the ICA Software shall be deemed accepted. In the event Microsoft rejects the ICA Software, this Agreement shall automatically terminate unless the parties mutually agree upon an extension to the evaluation and acceptance period. 2.2 Integration and Porting. Citrix shall provide the engineering services, ----------------------- test suites, documentation, specifications, and support described in the attached Exhibit B for porting the ICA Software to the Windows Products and integration of the ICA Software into the Windows Products, including support for operating ICA Software on all microprocessor platforms on which the Windows Products operate (hereafter "Services and Support"). 2.3 Limited Reimbursement for Services and Support. All Services and Support ---------------------------------------------- provided by Citrix as described in Section 2.2 shall be [CONFIDENTIAL TREATMENT REQUESTED], except as otherwise set forth in Exhibit B or unless mutually agreed upon by the parties in a written amendment to this Agreement. [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. -2- 3. LICENSES 3.1 ICA Software-Distribution. Citrix hereby grants to Microsoft, under ------------------------- Citrix's intellectual property rights, the following worldwide, non-exclusive, perpetual, irrevocable, royalty free rights: (a) to make, use, copy, import, distribute (directly or indirectly), license, sell, offer to sell, rent or lease the ICA Software (and derivative works thereof created pursuant to Section 3.2), in object code form, in conjunction with the Windows Products; (b) to the sub- license the rights set forth in paragraph (a) above to third parties, including the right to sub-license such rights to further third parties. 3.2 ICA Software-Development. In the event Citrix is in material breach of its ------------------------ obligation to provide Services and Support and fails to cure such breach within thirty (30) days of notice from Microsoft, then (following written notice to Citrix) Microsoft shall thereby have the following worldwide, non-exclusive, perpetual, irrevocable (subject to the last sentence of this Section 3.2), [CONFIDENTIAL TREATMENT REQUESTED] rights, under Citrix's intellectual property rights: (a) to make, use, copy, modify, and create derivative works of the ICA Software, in source code form, to perform Maintenance of the ICA Software (and derivative works thereof), and to fix any bugs or defects in the ICA Software (and derivative works thereof), and (b) to distribute and license the ICA Software (and derivative works thereof), in source code form, to licensees of Microsoft's Windows Products source code, on terms and conditions equivalent to those under which Microsoft licenses the source code for the Windows Products, for purposes of Maintenance, and fixing bugs and defects. In the event a court of competent jurisdiction, following any appeals to which Microsoft may be entitled, rules that Microsoft did not have the right to invoke the above license grant, then the license grant is thereby revoked until such time (if any) as the conditions for invoking the license grant occur. [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. -3- 3.3 ICA Software Modifications-License Back. In the event Microsoft creates --------------------------------------- Microsoft Modifications pursuant to Section 3.2 above, Microsoft thereby grants to Citrix the following worldwide, non-exclusive, perpetual, irrevocable, [CONFIDENTIAL TREATMENT REQUESTED] rights, under Microsoft's intellectual property rights: (a) to make, use, copy, import, distribute (directly or indirectly), license, sell, offer to sell, rent or lease the Microsoft Modifications, in source and object code forms, in conjunction with the ICA Software; (b) to the sub-license the rights set forth in paragraph (a) above to third parties, including the right to sub-license such rights to further third parties. 4. MULTI-USER WINDOWS NT, INTERNET BROWSER 4.1 Extension. In the event Microsoft ships a commercial release of Multi-User --------- Windows NT, during the term of this Agreement, the terms and conditions of the Windows NT source code agreement (currently coded #5198-9338) and binary distribution agreement (currently coded 5198-0228 then in effect between Microsoft and Citrix shall be extended automatically [CONFIDENTIAL TREATMENT REQUESTED], to the date that is [CONFIDENTIAL TREATMENT REQUESTED] from the date of Microsoft's commercial release of Multi-User Windows NT. 4.2 Optional Termination. Microsoft agrees to notify Citrix not later than six -------------------- (6) months prior to commercial shipment of Multi-User Windows NT of its intent to ship such a Multi-User Windows NT. Microsoft shall use reasonable best efforts to notify Citrix thirty (30) days prior to Microsoft's public disclosure of its intent to ship a Multi-user Windows NT. Upon receipt of such notice, Citrix may terminate this Agreement upon written notice to Microsoft, effective no earlier than the day following Microsoft's commercial shipment of the initial Windows Product containing the ISA Software. Following termination of this Agreement pursuant to this Section 4.2(a) the rights described in Sections 3.1, 3.2 (if invoked prior to such termination), and 3.3 (if Section 3.2 is invoked prior to such termination) shall continue in full force and effect, and (b) Citrix's obligations to provide Services and Support shall cease. 4.3 Internet Browser. [CONFIDENTIAL TREATMENT REQUESTED] In addition, Citrix ---------------- shall not make or permit any Browser Provider to make any disclosure regarding a Browser Provider's intention or plan to distribute ICA Software in conjunction with a Browser Provider's browser software in any other manner prior to May 25, 1996. [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. -4- 5. INTEROPERABILITY 5.1 Compatability. Both parties shall use commercially reasonable efforts to ------------- ensure the ICA Software will be implemented in the Windows Products in manner such that a Windows Product incorporating ICA Software will operate in a manner compatible with WinFrame. Citrix shall develop test suites to test such compatability, modify such test suites to account for future releases of ICA Software, and promptly provide such test suites (and modifications thereof) to Microsoft for its use as necessary to test compatability. Upon mutual agreement, Microsoft shall provide certain Microsoft tools and test suites related to the Windows Products for use in developing Citrix's test suites as described above. Microsoft agrees to provide a reasonable number of free copies of Microsoft selected (in consultation with Citrix) Microsoft applications and systems software products in binary form for use only in Citrix's compatibility testing. 5.2 Compatibility Support. Each party will provide beta releases of new --------------------- products to the other party which relate to the subject matter of this Agreement to test interoperability between Windows Products incorporating ICA Software and WinFrame. Each party shall treat such beta releases as confidential information, and shall provide prompt and regular feedback regarding any interoperability issues encountered. The parties shall work in good faith to share test plans, and to establish a process and assign responsibility for reproducing and resolving bugs, including a joint escalation procedure. 5.3 Meeting. The parties agree to meet at least twice per calendar year during ------- the term of this Agreement and any renewals thereof to discuss their respective engineering and marketing plans relative to the development of software based on the ICA Software and protocols. 6. SALES AND MARKETING 6.1 Briefings. The parties will conduct joint industry analyst briefings as --------- mutually agreed. 6.2 Cooperative Marketing. The parties will conduct cooperative marketing to --------------------- promote the use of ICA Software incorporated into Windows Products with WinFrame-based servers, as mutually agreed. 6.3 Web Page. The parties shall work in good faith to create a mutually -------- agreeable HTML-based Web page describing the Microsoft/Citrix relationship and Microsoft products that incorporate ICA Software. Citrix and Microsoft may display such Web page at their corporate Web sites, and other authorized Web sites under license by a party. -5- 6.4 Web Sites. Both parties will use commercially reasonable efforts to --------- establish Web sites, by July 31, 1996, that highlight the Internet functionality of the ICA Software which will be bundled with Windows Products. The parties agree to jointly seek the cooperation and contribution of goods and services by providers of server hardware (e.g., Compaq) and communications services (e.g., MCI) in the establishment of these sites. 7. WARRANTIES 7.1 Citrix. Citrix warrants and represents that: ------ 7.1.1 It has the full power to enter into this Agreement and grant the license rights set forth herein; 7.1.2 It has not previously and will not grant any rights in the ICA Software to any third party that are in conflict with the rights granted to Microsoft herein; 7.1.3 The ICA Software does not (a) infringe any copyright enforceable under the laws of the countries listed in Section 7.4, (b) violate any trade secret right of any third party, or (c) to the best of Citrix's knowledge infringe any patent right of any third party as of the Effective Date; 7.2 Microsoft. Microsoft represents and warrants that: 7.2.1 It has the full power to enter into this Agreement and grant the license rights set forth herein; 7.2.2 It has not previously and will not grant any rights in the Microsoft Modifications to any third party that are in conflict with the rights granted to Citrix herein; 7.2.3 The Microsoft Modifications do not infringe any copyright enforceable under the laws of the countries listed in Section 7.4, (b) violate any trade secret right of any third party, or (c) to the best of Microsoft's knowledge infringe any patent right of any third party as of the Effective Date. 7.3 EXCEPT AS PROVIDED IN SECTIONS 7.1 AND 7.2, THE SOFTWARE LICENSED BY EACH PARTY TO THE OTHER PURSUANT TO THIS AGREEMENT IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND. ANY REPRESENTATIONS OR WARRANTIES MADE BY EITHER PARTY TO ITS CUSTOMERS, EXPRESS OR IMPLIED BY LAW OR OTHERWISE, REGARDING INTELLECTUAL PROPERTY ARE THE SOLE RESPONSIBILITY OF SUCH PARTY. EACH PARTY DISCLAIMS ALL OTHER WARRANTIES, EITHER -6- EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 7.4 Neither party shall have any obligation to the other for any copyright infringement claim made against the other which arises from the use or distribution of the ICA Software or the Microsoft Modifications outside the geographical boundaries of the United States, Canada, Australia, Japan, the European Economic Community, Sweden, Norway, and Finland, and each party hereby releases and discharges the other from any and all copyright infringement claims resulting from such use or distribution. 8. INDEMNITY 8.1 Indemnity. --------- 8.1 Each party shall (the "Indemnifying Party"), at its expense and upon request, defend any claims or action brought against the other party, and the other party's subsidiaries, affiliates, directors, officers, employees, agents and independent contractors (the "Indemnified Party"), which, if true, would constitute a breach of a warranty set forth in Section 7, and the party will indemnify and hold the other party harmless from and against any costs, damages and fees reasonably incurred by the other party, including but not limited to fees of attorneys and other professionals, that are attributable to such claim; provided, that: (i) the Indemnified Party provides the Indemnifying Party with reasonably prompt notice in writing of any such claim or action and permits the Indemnifying party, through counsel reasonably acceptable to the Indemnified Party, to answer and defend such claim or action; and (ii) the Indemnified Party provides Indemnifying Party information, assistance and authority to help the Indemnifying Party to defend such claim or action. The Indemnified Party will not be responsible for any settlement made without its written permission, which permission will not be unreasonably withheld. The Indemnifying Party shall reimburse the Indemnified Party upon demand for any payments made or loss suffered by it at any time after the date hereof, based upon the judgment of any court of competent jurisdiction or pursuant to a bona fide compromise or settlement of claims, demands, or actions, in respect to any damages related to any claim or action under this Section. 8.2 The Indemnified Party shall have the right to employ separate counsel and participate in the defense of any claim or action at its expense. 8.3 Following notice of an Infringement Claim, Citrix may, at its expense, without obligation to do so, procure for Microsoft the right to continue to market, use and have others use, the ICA Software or, without obligation to do so, may replace or modify the ICA Software to make it non-infringing. If Citrix elects to replace or modify the ICA -7- Software, such replacement shall meet substantially the specifications as provided in Exhibit A and shall be subject to the acceptance provisions of Section 2.1. Citrix shall have no liability for any infringement claim based on Microsoft's (a) use or distribution of the ICA Software after receipt of notice from Citrix that Microsoft should cease use or distribution of the ICA Software due to an infringement claim, or (b) combination of the ICA Software with other programs or data, if such infringement claim would have been avoided by the exclusive use of the ICA Software. For all infringement claims arising under this Section 8.3, Microsoft agrees to indemnify and defend Citrix from and against all damages, costs and expenses, including reasonable attorneys' fees. 8.4 Following notice of an infringement claim, Microsoft may, at its expense, without obligation to do so, procure for Citrix the right to continue to market, use and have other use, the Microsoft Modifications or, without obligation to do so, may replace or modify the Microsoft Modifications to make it non-infringing. Microsoft shall have no liability for any infringement claim based on Citrix's (a) use or distribution of the Microsoft Modifications after receipt of notice from Microsoft that Citrix should cease use or distribution of the Microsoft Modifications due to an infringement claim, or (b) combination of the Microsoft Modifications with other programs or data, if such infringement claim would have been avoided by the exclusive use of the Microsoft Modifications. For all infringement claims arising under this Section 8.4, Citrix agrees to indemnify and defend Microsoft from and against all damages, costs and expenses, including reasonable attorneys' fees. 9. CONFIDENTIALITY 9.1 Each party expressly undertakes to retain in confidence the terms and conditions of this Agreement, and all other non-public information and know-how disclosed to the each other that has been designated as proprietary and/or confidential or that, by the nature of the circumstances surrounding the disclosure, ought in good faith to be treated as proprietary and/or confidential (the "Confidential Information"), and will make no use of such information and know-how except under the terms and during the existence of this Agreement; provided that each party may disclose the terms and conditions of this Agreement to its immediate legal and financial consultants as required in the ordinary course of that party's business. Each party shall use its best efforts to protect the Confidential Information, which precautions shall be at least as great as the precautions it takes to protect its own confidential information. Each party may disclose Confidential Information only to its employees on a "need-to-know" basis. Each party may disclose Confidential Information as required by government or judicial order, provided each party gives the other party prompt notice of such order and complies with any protective order (or equivalent) imposed on such disclosure. Each party shall notify the other party promptly upon the discovery of any unauthorized use or disclosure of Confidential -8- Information, and will cooperate with the other party in every reasonable way to assist the other party in regaining possession of such Confidential Information and to prevent future unauthorized use or disclosures. 9.2 Confidential Information shall not include that information defined as Confidential Information above which: (i) entered the public domain without the receiving party's breach of any obligation owed to the disclosing party under this Agreement by the disclosing party, (ii) became known to the receiving party prior to the disclosure of such information, (iii) became known to the receiving party from a source other than the disclosing party other than by breach of an obligation of confidentially owed under this Agreement, (iv) was disclosed to a thirty party without any obligation of confidence, or (v) was independently developed by the receiving party. 9.3 The terms of confidentiality under this Agreement shall not be construed to limit either party's right to independently develop or acquire products without use of the other party's Confidential Information. Further, either party shall be free to use for any purpose the residuals resulting from access to or work with such Confidential Information, provided that such party shall maintain the confidentiality of the Confidential Information as provided herein, except to the extent that disclosure is inherent from selling, licensing or otherwise disposing of a product using or incorporating such residuals. The term "residuals" means information in non-tangible form, which may be retained by persons who have had access to Confidential Information, including ideas, concepts know-how or techniques contained therein. Neither party shall have any obligation to limit or restrict the assignment of such persons or to pay royalties for any work resulting from the use of residuals or the sale of products using or incorporating residuals, [CONFIDENTIAL TREATMENT REQUESTED] However, the foregoing shall not be deemed to grant to either party a license under the other party's copyrights or patents. [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. -9- 10. TERM AND TERMINATION 10.1 Term. The term of this Agreement shall commence as of the Effective Date ---- and shall continue for a period of two (2) years, unless terminated as provided in this Agreement. The Agreement shall automatically renew for additional two (2) year terms unless a party notifies the other party sixty (60) days prior to the start of a prospective renewal term that it does not desire to renew this Agreement. 10.2 Termination For Cause. Either party may terminate this Agreement --------------------- immediately upon written notice at any time if the other party is in material breach of any term or condition of this Agreement, and fails to cure that breach within thirty (30) days after written notice thereof. 10.3 Effect of Termination. In the event of termination or expiration of this --------------------- Agreement for any reason (other than for rejection of the ICA Software pursuant to Section 2.1), Sections 1,3,8,9,10.3,11, and 12 shall survive termination. 11. LIMITATION OF LIABILITY; ACTIONS 11.1 Except for a material breach of Sections 9 or 3, NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN ADVANCE. The entire cumulative liability of a party for any damages arising out of or related to this Agreement shall not exceed ten million dollars. The parties acknowledge that other parts of this Agreement rely upon the inclusion of this Section. 11.2 Nothing in this Agreement shall affect or limit either party's right to institute and prosecute proceedings in any court of competent jurisdiction (as provided in Section 12.3) to seek, under any applicable laws, damages for breach of this Agreement, or specific performance of this Agreement, or an order enjoining the other party from activities in violation of this Agreement. 12. GENERAL 12.1 Notices. All notices and requests in connection with this Agreement shall ------- be deemed given as of the day they are received either by messenger, delivery service, or in the United States of America mails , postage prepaid, certified or registered, return receipt requested, and addressed as follows: -10- To CITRIX To MICROSOFT Citrix Systems, Inc. Microsoft Corporation 210 University Dr., Suite 700 One Microsoft WA Coral springs, FL 33071 Redmond, Wa 98052-6399 Attention:_______________________ Attention: Group Vice President, Platforms Group Phone: (206) 882-8080 Phone:___________________________ Fax: (206) 936-7329 Fax:_____________________________ Copy to: Law & Corporate Affairs Fax: (206) 936-7409 or to such other address as a party may designate pursuant to this notice provision. 12.2 Independent Contractors. Citrix is an independent contractor for ----------------------- Microsoft, and nothing in this Agreement shall be construed as creating an employer-employee relationship, a partnership, or a joint venture between the parties. 12.3 Governing Law; Jurisdiction; Attorneys' Fees. This Agreement shall be -------------------------------------------- governed by the laws of the State of Washington as though entered into between Washington residents and to be performed entirely within the State of Washington. In any action or suit to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement (a) the prevailing party shall be entitled to recover its costs, including reasonable attorney's fees, and (b) the party bringing the action in a court in the state and county where the other party's corporate headquarters is located. 12.4 Assignment. This Agreement shall be binding upon and inure to the benefit ---------- of each party's respective successors and lawful assigns; provided, however, that neither party may assign this Agreement, in whole or in part, without the prior written approval of the other party, which consent shall not be unreasonably withheld. 12.5 Construction. If for any reason a court of competent jurisdiction finds ------------ any provision of this Agreement, or portion thereof, to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissable so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. Failure by either party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. This Agreement has been negotiated by the parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction if favor or against either party. -11- 12.6 Entire Agreement. This Agreement constitutes the entire Agreement between ---------------- the parties with respect to the Services and all other subject matter hereof and merges all prior and contemporaneous communications. It shall not be modified except by a written agreement dated subsequent to the date of this Agreement and signed on behalf of Citrix and Microsoft by their respective duly authorized representatives. IN WITNESS WHEREOF, the parties have entered into this Agreement as of the Effective Date written above.
MICROSOFT CORPORATION CITRIX SYSTEMS, INC. /s/ Paul Maritz /s/ Edward E. Iacobucci - ----------------------- ----------------------- By (Sign) By (Sign) Paul Maritz Edward E. Iacobucci - ----------------------- ----------------------- Name (Print) Name (Print) Vice President Chairman - ----------------------- ----------------------- Title Title July 9, 1996 - ----------------------- ----------------------- Date Date
-12- EXHIBIT A DESCRIPTION AND ACCEPTANCE DESCRIPTION - ----------- The ICA software described in this agreement is currently Citrix version 1.6 client for Windows 3.1, Windows for Workgroups, Windows95, and Windows NT; and requires the following enhancements and changes to make it acceptable in this agreement: Function that is removed: [CONFIDENTIAL TREATMENT REQUESTED] Function and features that are added: [CONFIDENTIAL TREATMENT REQUESTED] Citrix agrees to add the following capabilities to the ICA Software for a future shipment upon request from Microsoft. The schedule for these requested capabilities is to be negotiated in good faith between Citrix and Microsoft, with consideration for each parties business needs. [CONFIDENTIAL TREATMENT REQUESTED] Microsoft agrees to reimburse Citrix for reasonable engineering expenses associated with porting and adapting ICA software to non-Intel Windows NT platforms, and to the Pegasus operating system. ACCEPTANCE CRITERIA - ------------------- Citrix will deliver a detailed Test Plan outlining steps taken to test all its deliverables to Microsoft within 2 weeks of this Agreement. Microsoft will provide written comments within 10 days to Citrix. If no comments are received within 10 days, the Test Plan will be considered acceptable by Microsoft. Software delivery will occur when Citrix delivers to Microsoft as described below. [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. -13- . For each software delivery, Citrix will provide: - written statement of contents - the ICA Software - the Test Plan - the Test Plan results, which will include tests executed, test compliance - release notes, including list of known bugs - method to identify version, including visually and from setup. - description of changes from the previous release Source code for ICA Software that is delivered will be maintained in such a way that the ICA Software delivery can be rebuilt from the source. . For each software drop, Microsoft runs their own acceptance tests. Upon receipt of ICA Software, Microsoft, with the assistance of Citrix, if such assistance is requested, will test the ICA Software for a period of up to sixty (60) days ("Test Period"), to determine if it contains Errors. During the Test Period, Microsoft will promptly notify Citrix of any Errors it discovers. Citrix will use reasonable efforts to promptly correct the Errors and redeliver the corrected items for testing. This process of notification and correction may be repeated as necessary during the Test Period but in no case will exceed a total of sixty (60) days. Conformity to ICA Software Description, the agreed-upon acceptance criteria, and Citrix's warranties herein shall solely determine Microsoft's right to accept or reject the Licensed Software. The Licensed Software shall be deemed accepted if Microsoft ships the same to a customer for revenue. Within thirty (30) days after the end of the Test Period or within a time frame mutually agreed upon between Citrix and Microsoft, Citrix will deliver a final ICA Software to Microsoft with a list of all Errors Citrix has been unable to correct, together with a schedule of when correction, if any, will be made and delivered. Within twenty (20) days after such final delivery, Microsoft will furnish written notice to Citrix of acceptance or rejection. Should this written notice not be received within (20) twenty days, the ICA Software is deemed accepted. Should the proposed deliverable and schedule be rejected by the Microsoft, Microsoft will provide a specific list of deficiencies in proposed deliverable and each point of deficiency shall be reviewed and negotiated for final disposition. This discussion will commence immediately upon notification of non-acceptance and will be completed within five (5) working days. Citrix shall supply intermediate ICA software releases as deemed necessary by Citrix. Citrix agrees to promptly provide Microsoft with all corrections, updates, releases, versions, upgrades and enhancements to the ICA Software (collectively, "Updates"), and with a description of any new features, corrections, etc. to the ICA Software contained in such Updates, at no additional charge during the term of this Agreement. Such Updates shall be -14- provided to Microsoft in beta and final forms, and no later than they are provided to any other customers. Parties agree that initial delivery of the ICA Software has been made. Citrix is obligated to deliver update releases of ICA Software in support of Windows products delivery schedules. -15- EXHIBIT B SUPPORT SUPPORT - ------- Each party shall provide third level technical support for the items provided by said party to the other party. Third level support is defined to be support for problems which have been determined to be errors in the ICA Software. Such support will be provided, at no charge, from initial acceptance of the item being supported until two years after expiration of this Agreement. This support shall also cover the period of time when the product is released to Beta sites for the Beta testing period before product release. Technical support will consist of: . Each party shall assign a contact person who will be the recipient of all support questions and will provide support responses. The contact person will, as much as possible, be the same individual but changes may be made from time to time as business requirements suggest. . Parties shall communicate all errors in accordance with the Error Reporting Mechanism defined below. Problems of unusual severity or impact may be communicated by telephone contact to the contact person, but all such problems will also be reported using the Error Reporting Mechanism. Upon reasonable request by Microsoft, Citrix agrees to provide an engineer on- site at Microsoft's premises to correct bugs found in the Licensed Software. MS shall not be obligated to pay Citrix for such engineer's time, but MS' agrees to reimburse Citrix for reasonable living expenses during the time that such engineer is at MS premises. The obligation for travel expenses will be mutually agreed-upon at the time of the request. For the purposes of this agreement problems to be addressed may be handled by correction to the delivered product (or component thereof) or by updated documentation of limitation of capability or by means of circumventing said problem with no material loss of functionality. All problems which have been determined to need correction will be corrected in accordance with schedule and guidelines that are determined for fixing errors after product release. SUPPORT ESCALATION PROCEDURE Should a reported problem not be addressed in terms consistent with this agreement, or should one party view the importance or severity of a problem as more significant than the other, a support escalation procedure may be put into effect Microsoft will have the right to classify all error severity. -16-
ERRORS - ------ DEFINITIONS & TIMELINES SEVERITY CRITERIA ----------- --------- 1 Critical: Problem which prevents or seriously -------- impairs the performance of substantially all major functions. Behavior compromises security of the client. 2 Severe Impact: Problem which prevents or ------------- seriously impairs the performance of a major function. 3 Degraded Operation: Problem which disables or ------------------ impairs the performance of a minor function. 4 Nuisance: Problem does not impair functionality --------- but does not work as user would expect. PRIORITY CRITERIA TIME LIMIT * - -------- -------- ------------
[CONFIDENTIAL TREATMENT REQUESTED] * This is the time within which Citrix must provide a plan for problem resolution and, if possible, a temporary work around solution. The actual timetable to complete and deliver the correction shall be negotiated in good faith between Citrix and MS, provided Citrix shall use its reasonable best effort to correct any such problem in a reasonably prompt manner. ** Errors of priority level lower than 2 will be addressed in a timely fashion consistent with the business needs of both parties. DETERMINATION OF ERROR LEVELS The Severity and Priority level of each error shall be initially set by the party submitting the error. In addition, Priority and Severity levels of errors may be modified in time, if mutually agreed upon. Each party shall determine whether or not each error will be fixed for that party's release of the ICA Software. [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. -17- FIXING ERRORS AFTER PRODUCT RELEASE Any Errors reported after the first version of the Microsoft product has been released, will be considered for fixing in the next upgrade release of the Microsoft product. The specific Errors that will be fixed in such an upgrade will be determined by Microsoft. There is no assurance that there will be upgrade or error correction releases of the product. Determination of the schedule, if any, for such a release is at the discretion of Microsoft but will consider the business needs of other parties. REPORTING ERRORS The party which finds an error in the other's software will send detailed Error reports with steps taken to reproduce the Error, frequency of reproduction, and any supporting information to a pre-determined e-mail alias. The Error Reporting mechanism will include a method for tracking and dispositioning all errors. Microsoft shall acknowledge receipt of Error report within two working days. -18- EX-11 3 COMPUTATION OF EARNINGS (LOSSES) PER SHARE CITRIX SYSTEMS, INC. EXHIBIT 11 Computation of Earnings (Losses) Per Share (In Thousands, Except Per Share Data)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1996 1995 1996 1995 -------------------------------------------------------------------- Historical: Primary and fully diluted: Average shares outstanding 26,208 2,409 24,830 2,426 Net effect of dilutive stock options based on the treasury stock method 2,129 - 2,140 - Net effect of stock options granted within one year of initial public offering - 790 - 790 -------------------------------------------------------------------- Total 28,337 3,199 26,970 3,216 ==================================================================== Net income $ 5,314 $ 984 $11,784 $ 466 Less Redeemable Convertible Preferred Stock accretion - (22,357) - (34,535) -------------------------------------------------------------------- Net income (loss) attributable to common shares $ 5,314 $ 21,373 $11,784 $(34,069) ==================================================================== Per share amount $ 0.19 $(6.68) $ 0.44 $(10.59) ==================================================================== Supplementary: Primary and fully diluted: Average Shares outstanding 26,208 2,409 24,830 2,426 Net effect of dilutive stock options and warrants based on the treasury stock method 2,129 1,393 2,140 1,585 Effect of dilutive redeemable convertible preferred stock - 15,360 - 15,360 Net effect of stock options granted within one year of initial public offering - 790 - 790 -------------------------------------------------------------------- Total 28,337 19,952 26,970 20,161 ==================================================================== Net income $ 5,314 $ 984 $11,784 $ 466 ==================================================================== Supplementary per share amount $ 0.19 $0.05 $ 0.44 $0.02 ====================================================================
EX-27 4 FINANCIAL DATA SCHEDULE
5 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 JUL-01-1996 JAN-01-1996 SEP-30-1996 SEP-30-1996 97,568,929 97,568,929 31,008,459 31,008,459 7,783,573 7,783,573 1,922,998 1,922,998 595,115 595,115 137,200,889 137,200,889 1,010,862 1,010,862 360,085 360,085 137,851,666 137,851,666 6,031,511 6,031,511 0 0 0 0 0 0 26,521 26,521 131,992,069 131,992,069 137,851,666 137,851,666 11,685,801 28,958,658 11,685,801 28,958,658 1,240,597 3,454,252 1,240,597 3,454,252 5,697,400 14,505,140 0 0 0 0 6,303,962 14,028,550 990,004 2,244,173 5,313,958 11,784,377 0 0 0 0 0 0 5,313,958 11,784,377 0.19 0.44 0.19 0.44
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