-----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, TfxrN+py5EJf1sqAkH3isO91iAG8BBvGvlH8bBzr065puHiB7not2bFt7tZ8IRgE 8nsAEfBx6/9naQejSaG1Lg== 0000927016-97-002326.txt : 19970815 0000927016-97-002326.hdr.sgml : 19970815 ACCESSION NUMBER: 0000927016-97-002326 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97660729 BUSINESS ADDRESS: STREET 1: 6400 NW 6TH WAY CITY: FORT LAUDERDALE STATE: FL ZIP: 33309 BUSINESS PHONE: 9542673000 MAIL ADDRESS: STREET 1: CITRIX SYSTEMS INC STREET 2: 6400 NW 6TH WAY CITY: FL LAUDERDALE STATE: FL ZIP: 33309 10-Q 1 FORM 10-Q ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C536 . 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 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 (Address of principal executive offices) 33309 (Zip Code) Registrant's telephone number, including area code: (954) 267-3000 Not Applicable ------------------------------------------------------------ Former Name, Former Address and Former Fiscal Year if Changed Since Last Report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of August 1, 1997 there were 27,338,011 shares of the registrant's Common Stock, $.001 par value per share, outstanding. ================================================================================ CITRIX SYSTEMS, INC. Form 10-Q For the Quarter Ended June 30, 1997 CONTENTS
Page Number ----------- PART I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets: June 30, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Operations: Three Months and Six Months ended June 30, 1997 and 1996 5 Condensed Consolidated Statements of Cash Flows: Six Months Ended June 30, 1997 and 1996 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II: OTHER INFORMATION Item 1. Legal Proceedings 17 Item 4 Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Exhibit Index 20 Exhibit 11 21 Exhibit 27 22
2 PART I: FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Citrix Systems, Inc. Condensed Consolidated Balance Sheets (Unaudited)
June 30, December 31, 1997 1996 ------------------------------------------ Assets Current assets: Cash and cash equivalents $ 172,531,872 $ 99,135,049 Short-term investments 56,412,533 38,206,495 Accounts receivable, net of allowances of $2,948,241 and $2,552,039 at June 30, 1997 and December 31, 1996, respectively 7,342,063 5,525,315 Inventories 822,282 696,336 Prepaid expenses 990,767 765,818 Current portion of deferred tax assets 4,244,794 3,168,964 ------------------------------------------ Total current assets 242,344,311 147,497,977 Property and equipment, net 3,878,437 2,081,559 Long-term portion of deferred tax assets 22,571,250 - ------------------------------------------ $ 268,793,998 $ 149,579,536 ==========================================
Continued on following page. 3 Citrix Systems, Inc. Condensed Consolidated Balance Sheets (continued) (Unaudited)
June 30, December 31, 1997 1996 --------------------------------------------- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 500,171 $755,908 Accrued royalties and other accounts payable to stockholder 2,074,374 1,524,126 Other accrued expenses 5,585,704 3,283,197 Deferred revenue 3,058,319 2,074,670 Current-portion of deferred revenues on contract with stockholder 15,000,000 - Current portion of capital lease obligations payable 41,301 82,434 Income taxes payable 22,931,372 - --------------------------------------------- Total current liabilities 49,191,241 7,720,335 Long-term liabilities: Capital lease obligations payable - 8,217 Deferred revenues on contract with stockholder 57,875,000 - --------------------------------------------- Total long-term liabilities 57,875,000 8,217 Contingencies Stockholders' equity: Preferred stock at $.01 par value--5,000,000 shares authorized, none issued and outstanding at June 30, 1997 and December 31, 1996 - - Common stock at $.001 par value--60,000,000 shares authorized; and 27,308,781 and 26,680,236 issued and outstanding at June 30, 1997 and December 31, 1996, respectively 27,309 26,680 Additional paid-in capital 139,207,962 135,123,455 Retained earnings 22,492,486 6,700,849 --------------------------------------------- Total stockholders' equity 161,727,757 141,850,984 --------------------------------------------- $268,793,998 $149,579,536 =============================================
See accompanying notes. 4 Citrix Systems, Inc. Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 --------------------------------------------------------------------------- Revenues: Net revenues from unrelated parties $22,392,149 $ 9,501,193 $43,912,754 $ 17,272,856 Net revenues attributable to a stockholder 2,125,000 - 2,125,000 - --------------------------------------------------------------------------- Net revenues 24,517,149 9,501,193 46,037,754 17,272,856 Cost of goods sold 2,290,551 1,233,582 4,484,381 2,213,525 --------------------------------------------------------------------------- Gross margin 22,226,598 8,267,611 41,553,373 15,059,331 Operating expenses: Research and development 1,622,147 960,249 3,135,377 1,864,078 Sales, marketing and support 7,480,411 2,848,519 13,678,479 5,335,430 General and administrative 2,425,602 747,631 3,908,269 1,608,357 --------------------------------------------------------------------------- Total operating expenses 11,528,160 4,556,399 20,722,125 8,807,865 --------------------------------------------------------------------------- Income from operations 10,698,438 3,711,212 20,831,248 6,251,466 Interest income, net 2,268,568 911,798 3,843,184 1,473,123 --------------------------------------------------------------------------- Income before income taxes 12,967,006 4,623,010 24,674,432 7,724,589 Income taxes 4,668,121 1,006,023 8,882,795 1,254,169 --------------------------------------------------------------------------- Net income $ 8,298,885 $ 3,616,987 $15,791,637 $ 6,470,420 =========================================================================== Net income per share $ 0.29 $ 0.14 $ 0.55 $ 0.25 =========================================================================== Weighted average shares outstanding 29,078,793 26,257,711 28,851,515 26,128,124 ===========================================================================
See accompanying notes. 5 Citrix Systems, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1997 1996 ------------------------------------------ Operating activities Net income $ 15,791,637 $ 6,470,420 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 599,877 173,746 Provision for doubtful accounts and product returns 396,201 397,692 Tax benefit related to the exercise of non-statutory stock options and disqualified dispositions of incentive stock options 3,406,613 1,624,696 Deferred tax assets (23,647,080) - Changes in operating assets and liabilities: Accounts receivable (2,212,950) (1,147,517) Inventories (125,946) (275,513) Prepaid expenses (224,949) (43,465) Other assets - (410,373) Interest on note receivable from officer - 28,910 Deferred revenue 983,649 279,007 Deferred revenue on contract with stockholder 72,875,000 - Accounts payable (255,737) (192,313) Accrued royalties and other accounts payable to stockholder 550,248 472,993 Income taxes payable 22,931,372 4,787 Other accrued expenses 2,302,508 977,378 ------------------------------------------ Net cash provided by operating activities 93,370,443 8,342,448 Investing activities Purchases of short-term investments (48,171,073) (2,951,518) Proceeds from sale of short-term investments 29,965,035 - Proceeds from note from officer - 100,000 Purchases of property and equipment (2,396,754) (340,876) ------------------------------------------ Net cash used in investing activities (20,602,792) (3,192,394) Financing activities Net proceeds from issuance of common stock 679,424 73,499,513 Repurchase of common stock previously issued (902) - Payments on capital lease obligations (49,350) (72,703) ------------------------------------------ Net cash provided by financing activities 629,172 73,426,810 ------------------------------------------ Increase in cash and cash equivalents 73,396,823 78,576,864 Cash and cash equivalents at beginning of period 99,135,049 43,471,491 ------------------------------------------ Cash and cash equivalents at end of period $172,531,872 $ 122,048,355 ==========================================
See accompanying notes. 6 Citrix Systems, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 1997 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 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, 1996. 2. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amount of such estimates, when known, may vary from these estimates. 3. Net Income Per Share Net income per share is calculated using the weighted average number of common and common equivalent shares outstanding during the respective periods. Common and common equivalent shares include dilutive common stock equivalents which consist of warrants and stock options calculated using the treasury stock method. All common share and per share data have been retroactively adjusted to reflect the two-for-one stock split in the form of a stock dividend of the Company's Common Stock effective June 4, 1996. 4. Income Taxes The income taxes recorded in the three and six months ended June 30, 1997 and 1996 were computed based upon the Company's estimated annual effective tax rate for the fiscal years ended December 31, 1997 and 1996, giving effect in 1996 to the utilization of substantially all of the Company's income tax net operating loss carryforwards and tax credit carryforwards from prior periods. 7 5. Reclassifications Certain reclassifications have been made for consistent presentation. 6. Legal Matters In March and April 1997, three different class action lawsuits were filed against the Company and certain of its directors and officers. In their complaints, the plaintiffs assert that the Company and certain of its directors and officers misrepresented the Company's strategic relationship with a shareholder. The outcome of these lawsuits cannot yet be determined. Accordingly, no provision for any liability that may result from these matters has been recognized in the accompanying consolidated financial statements. There can be no assurances, however, that the outcome of these lawsuits will not have a material adverse effect on the Company's business, results of operations and financial condition. 7. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the second quarter ended June 30, 1997 and 1996 of $0.02 and $0.01 per share, respectively. For the six months ended June 30, 1997 and 1996, the impact is expected to be an increase of $0.03 and $0.02 per share, respectively. The impact of Statement No. 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. 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 Company's WinView product represented the largest source of the Company's revenues. The Company began shipping its current principal product WinFrame in final form in the third quarter of 1995 and since then it has been the largest source of the Company's revenue. As a result of the Development Agreement (defined below), the Company will not offer product lines built on future versions of the Microsoft NT technology. Future WinFrame products based upon the NT v.3.51 kernel will continue to be offered under the terms of the Development Agreement. Provisions in the Development Agreement relating to the Company's ability to ship current and future products based upon the NT v.3.51 kernel expire on September 30, 2001. In June 1997, the Company announced a product (code-named "pICAsso") which, when combined with the Microsoft multi-user version of NT technology, will provide capabilities similar to those currently offered in the WinFrame product line. The Company plans to continue development enhancements to its pICAsso 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. The Company anticipates that revenues from the WinView product will continue to 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. 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. 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 estimation 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 income statement. On May 9, 1997, the Company and Microsoft Corporation ("Microsoft") entered into a License, Development and Marketing Agreement (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, code-named Hydrix 4.x and Hydrix 5.x. 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 Hydrix base platform from a wide variety of computing devices, such as a Company developed plug-in that implements the ICA protocol on the new platform, code-named pICAsso. 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, the Company will be eligible to receive royalty payments of up to an additional $100 million based on Microsoft's release and shipment of Hydrix 4.x and Hydrix 5.x products. 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, for a period of at least two and one-half years, 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. 9 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.
Change from Change from Three Months Six Months Three Months Ended Six Months Ended Ended Ended June 30, June 30, June 30, 1997 June 30, 1997 -------------------- ---------------------- vs. vs. 1997 1996 1997 1996 1996 1996 ------------------------------------------------------------------------------ Net revenues....................................... 100.0% 100.0% 100.0% 100.0% 158.0% 166.5% Cost of goods sold................................. 9.3 13.0 9.7 12.8 85.7 102.6 ----- ----- ----- ----- ----- ----- Gross margin....................................... 90.7 87.0 90.3 87.2 168.8 175.9 Operating expenses: Research and development........................ 6.6 10.1 6.8 10.8 68.9 68.2 Sales, marketing and support.................... 30.6 30.0 29.7 30.9 162.6 156.4 General and administrative...................... 9.9 7.9 8.5 9.3 224.4 143.0 ----- ----- ----- ----- ----- ----- Total operating expenses..................... 47.1 48.0 45.0 51.0 153.0 135.3 ----- ----- ----- ----- ----- ----- Income from operations............................ 43.6 39.0 45.3 36.2 188.3 233.2 Other income, net.................................. 9.2 9.6 8.3 8.5 148.8 160.9 ----- ----- ----- ----- ----- ----- Income before income taxes........................ 52.8 48.6 53.6 44.7 180.5 219.4 Income taxes....................................... 19.0 10.6 19.3 7.3 364.0 * ----- ----- ----- ----- ----- ----- Net income ........................................ 33.8% 38.0% 34.3% 37.4% 129.4% 144.1% ===== ===== ===== ===== ===== =====
* Not meaningful. Net Revenues. Net revenues were approximately $24.5 million and $9.5 million for the three months ended June 30, 1997 and 1996, respectively, representing an increase of 158.0%. For the six months ended June 30, 1997 and 1996, net revenues were $46.0 million and $17.3 million, respectively, an increase of 166.5%. The increases in net revenues in the second quarter of 1997 compared to the second quarter of 1996 and the respective six month periods then ended were primarily attributable to an increase in volume of shipments of the Company's WinFrame products and, to a lesser extent, increased volume in licensing of OEM products as well as the initial recognition of revenue on the Development Agreement with Microsoft. The increases in net revenues in both periods were partially offset by a decline in the shipments of the Company's WinView products. WinFrame, OEM and Development Agreement revenues approximated 65.1%, 20.5% and 8.5% of revenues, respectively, in the three months ended June 30, 1997, and 65.8%, 23.9% and 4.5% of revenues, respectively, in the six months ended June 30, 1997. Both the Company's WinFrame and OEM revenues represent product license fees based upon the Company's multi-user NT-based technology. Additionally, in the second quarter of 1997, the Company initiated revenue recognition attributable to the initial fee under the terms of the Development Agreement with Microsoft. 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. All development costs incurred in connection with Hydrix will be expensed as incurred as a component of cost of goods sold. The costs incurred in the period ended June 30, 1997 relating to the Development Agreement were immaterial and are included in research and development expenses. 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. 10 Gross Margin. Gross margin increased from 87.0% in the second quarter of 1996 to 90.7% in the second quarter of 1997, and from 87.2% in the first half of 1996 to 90.3% in the first half of 1997. 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. Additionally, the Company recognized revenues related to Hydrix, for which the associated cost of sales were not material during the period ended June 30, 1997. Research and Development Expenses. Research and development expenses were approximately $1.6 million and $1.0 million for the three months ended June 30, 1997 and 1996, respectively, and $3.1 million and $1.9 million for the six months ended June 30, 1997 and 1996, respectively. The increases in research and development expenses for both periods resulted primarily from additional staffing, associated salaries and related expenses required to expand and enhance the Company's products. Sales, Marketing and Support Expenses. Sales, marketing and support expenses approximated $7.5 million and $2.8 million for the three months ended June 30, 1997 and 1996, respectively, and $13.7 million and $5.3 million for the six months ended June 30, 1997 and 1996, respectively. The increases in both periods resulted primarily from increases in promotional activities, such as advertising literature production and distribution, distributor programs and trade shows. Sales staff and associated salaries and related expenses as well as commissions also increased. The overall increases in these expenses were a result of the Company's efforts to expand its distribution channels. General and Administrative Expenses. General and administrative expenses were approximately $2.4 million and $750,000 for the three months ended June 30, 1997 and 1996, respectively, and $3.9 million and $1.6 million for the six months ended June 30, 1997 and 1996, respectively. The increases in general and administrative expenses for both periods are primarily due to increased legal fees as well as expenses associated with increased staff, associated salaries and related expenses necessary to support overall increases in the scope of the Company's operations. The increases in general and administrative expenses for both periods are also partially due to increases in the provision for doubtful accounts resulting from the higher credit risk associated with an increased level of accounts receivable attributable to each period's respective increase in sales. Interest Income, Net. Interest income, net, amounted to approximately $2.3 million and $900,000 for the three months ended June 30, 1997 and 1996, respectively, and $3.8 million and $1.5 million for the six months ended June 30, 1997 and 1996, respectively. The increases in both periods are primarily due to interest income generated from the net proceeds of the Company's second public offering completed in June 1996 as well as cash generated from operating activities. To the extent the Company is able to effectively invest its funds, including the initial license fee received in connection with the Development Agreement, in interest bearing securities and such funds are not alternatively utilized, interest income will increase. Income Taxes. The Company's effective tax rate amounted to 36% and 22% for the three months ended June 30, 1997 and 1996, respectively, and 36% and 16% for the six months ended June 30, 1997 and 1996, respectively. The increase in estimated effective annual tax rate is primarily due to the Company's increased profitability and lack of net operating loss carryforwards to offset taxable income in the current year. Such net operating loss carryforwards were included in the computation of the effective tax rate utilized in 1996. Liquidity and Capital Resources During the six months ended June 30, 1997, the Company generated positive operating cash flows primarily from the receipt of an initial license fee of $75 million related to the Development Agreement. The revenues from this Development Agreement are being recognized ratably over the contract period of five years, which caused a substantial increase in deferred revenues relating to the Development Agreement. Additionally, the Company increased profitability during the same period. Also during the period, the Company recorded additional income taxes payable, along with a corresponding increase in deferred tax assets, which were both caused primarily by the initial fee received under the terms of the Development Agreement. The Company also recognized tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of approximately $3.4 million. Positive operating cash flows in the six months ended June 30, 1996, were primarily due to increased profitability during that period. The Company purchased and sold short-term investments for approximately $48.2 million and $30.0 million, respectively, during the six months ended June 30, 1997. Additionally, the Company expended approximately $2.4 million in the same 11 period for the purchase of leasehold improvements and equipment. These capital expenditures were primarily associated with the Company's relocation and expansion in its new facilities. The Company currently plans on occupying an additional 24,000 square feet in the facility into which it recently relocated and anticipates that it will occupy approximately 30,000 square feet in a nearby facility as well as approximately 10,000 square feet for remote engineering and administrative support centers. At June 30, 1997, the Company had approximately $172.5 million in cash and cash equivalents, $56.4 million in short-term investments and $193.2 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 $7.3 million in accounts receivable, net of allowances, and $75.9 million of deferred revenues, of which the Company anticipates $18.0 million will be earned over the next twelve months. 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 has not paid, and does not intend to pay in the foreseeable future, 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 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 (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, code-named Hydrix 4.x and Hydrix 5.x. 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 Hydrix base platform from a wide variety of computing devices, such as a Company developed plug-in 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, the Company will be eligible to receive royalty payments of up to an additional $100 million based on Microsoft's release and shipment of Hydrix 4.x and Hydrix 5.x products. 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, for a period of at least two and one-half years, 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 Hydrix-based platforms will allow Microsoft to create plug-in products that could become competitive with at least some of the Company's current WinFrame products and future Hydrix-related plug-in product offerings. 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 for a period of two and one-half years. After the two and one-half year period expires, it is possible that Microsoft will market or endorse other methods to provide non-Windows client devices multi-user Windows access. Finally, the 12 Company's royalties pursuant to the Development Agreement rely significantly on Microsoft's ability to market the Hydrix 4.x and 5.x products. 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 or (3) is unable to successfully market the Hydrix-based products, 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 make its ICA protocol 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 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 Microsoft, have significantly greater financial, technical, sales and marketing and other resources than the Company. The Company and Microsoft have agreed to work together to develop Hydrix 4.x and Hydrix 5.x, a Microsoft Windows NT-based product providing multi-user capability. The resulting Hydrix base platform will allow Microsoft to create plug-in products that could become competitive with at least some of the Company's current WinFrame products and future Hydrix-related plug-in product offerings. To the extent Microsoft or another competitor or potential competitor releases such competitive products, the Company's net revenues, cash flows from operating activities and financial condition may be adversely impacted. 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 its recently announced product, code-named pICAsso, 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. The Company's ability to generate revenue from its pICAsso product will be highly dependent on market acceptance of Hydrix 4.x and Hydrix 5.x products, with which pICAsso is intended to be combined to provide capabilities similar to those currently offered in the WinFrame product 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. Additionally, the Company anticipates that WinView revenues will continue to decline as a percentage of the Company's net revenues in future periods. 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. 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. 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 the current year 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 the current year. The Company currently plans on occupying an additional 24,000 square feet in the facility into which it recently relocated and anticipates that it will occupy approximately 30,000 square feet in a nearby facility as well as approximately 10,000 square feet for remote engineering and administrative support centers. 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 the current year 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 the current year. 13 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, enhancements to existing products which will increase the Company's cost of goods sold and operating expenses. 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. 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. 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 revenues, operating results and financial condition. Further, additional general and administrative expenses may be incurred in order to support the overall increases in the scope of the Company's operations as a result of the Development Agreement. However, the Company cannot currently quantify the impact, if any, on these expenses. 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. 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. 14 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. Effective Income Tax Rate. During 1996, the Company used substantially all of its income tax net operating loss carryforwards. Accordingly, while certain tax credit carryforwards are available to effect future taxable income, the Company's effective tax rate in the future will approximate the federal and appropriate states' statutory income tax rates. The anticipated increase in effective tax rate may reduce the Company's net income and cash flows from operating activities in the current year. Pending Litigation. Three purported class action stockholder suits have been filed against the Company and certain of its directors and officers relating principally to certain statements made by the Company, or certain of its representatives, concerning the status of the Company's relationship with Microsoft. The lawsuits are in their early stages, and no estimate of possible loss, if any, can currently be made. There can be no assurance that these lawsuits will ultimately be resolved on terms that are favorable to the Company and that the resolution of these lawsuits will not have a material adverse effect on the Company's business, results of operations and financial condition. Growth Rate. The Company's revenue growth rate in the current year may not approach the level attained in 1996, which was high, due primarily to the introduction of WinFrame in late 1995. However, to the extent the Company's revenue growth continues, the Company believes that its cost of goods sold and certain operating expenses will increase in the current year. Due to the fixed nature of a significant portion of operating 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. Liquidity and Capital Resources. The initial fee payment received in connection with the Development Agreement (see discussion in "Overview") has added substantially to the Company's cash and short-term investments. There can be no assurance that the Company will be able to immediately find effective uses for these funds, in which case the funds will remain invested in interest- bearing securities. The initial payments, as described above, will add substantially to the balances of the Company's cash and short-term investments and have a positive impact on cash flows from operating activities and financial condition, to the extent that such funds are not alternatively utilized. 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 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 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. 15 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. 16 PART II: OTHER INFORMATION Item 1. Legal Proceedings On March 7, 1997, a purported class action lawsuit was filed in the United States District Court for the Southern District of Florida, Southern Division, against the Company, Roger W. Roberts, President, Chief Executive Officer, Secretary and a member of the Board of Directors (the "Board"), Edward E. Iacobucci, Chairman of the Board, Vice President of Strategy and Technology and Chief Technology Officer, and Gregory B. Maffei, a member of the Board. In its complaint, the plaintiff asserts, on behalf of itself and a putative class of purchasers of the Company's common stock during the period from January 20, 1997 through February 26, 1997, claims: (1) under section 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder; and (2) for negligent misrepresentation. On March 19, 1997, a purported class action lawsuit was filed in the United States District Court for the Southern District of Florida, Northern Division, against the Company, Roger W. Roberts, Kevin R. Compton, a member of the Board, James J. Felcyn, Jr., Chief Financial Officer, Treasurer, Vice President of Finance and Administration and Assistant Secretary, and Bruce C. Chittenden, Vice President--Engineering. In the complaint, the plaintiffs assert, on behalf of themselves and a putative class of purchasers of the Company's common stock during the period from January 21, 1997, through February 26, 1997, claims under section 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. On April 9, 1997, a purported class action lawsuit was filed in the United States District Court for the Southern District of Florida, Northern Division, against the Company, Roger W. Roberts, James J. Felcyn, Jr., Edward E. Iacobucci, Bruce C. Chittenden, Kevin R. Compton, and Gregory B. Maffei. In the Complaint, the plaintiffs assert, on behalf of themselves and a putative class of purchasers of the Company's common stock during the period from October 21, 1996 through February 26, 1997, claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The claims in each of the lawsuits relate principally to certain statements made by the Company, or certain of its representatives, concerning the status of the Company's relationship with Microsoft. The complaints seek unspecified damages and costs, including attorneys' and experts' fees and other disbursements. The outcome of litigation cannot yet be determined. Accordingly, no provision for any liability that may result from these matters has been recognized in the accompanying condensed consolidated financial statements. There can be no assurances, however, that the outcome of this litigation will not have a material adverse effect on the Company's business, results of operations, and financial condition. Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of stockholders held May 15, 1997 (the "1997 Annual Meeting"), the Company's stockholders took the following action: The Company's stockholders elected Edward E. Iacobucci and Gregory B. Maffei as Class II directors, each to serve for a three-year term expiring at the Company's annual meeting of stockholders in the year 2000 or until his successor has been duly elected and qualified or until his earlier resignation or removal. Election of the directors was determined by a plurality of the votes cast at the 1997 Annual Meeting. With respect to such matter, the votes were cast as follows: 16,767,925 shares voted for the election of Mr. Iacobucci and 16,692,495 shares voted for the election of Mr. Maffei, and 35,350 shares 17 were withheld from the election of Mr. Iacobucci and 110,780 shares were withheld from the election of Mr. Maffei. No other persons were nominated, or received votes, for election as directors of the Company at the 1997 Annual Meeting. The other directors of the Company whose term of office continued after the annual meeting were: Kevin R. Compton, Stephen R. Dow, Roger W. Roberts, Tyrone F. Pike and Robert N. Goldman. 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 19 of this report and are incorporated herein by this reference. (b) Reports on Form 8-K May 9, 1997. Item 5 - Other Events, to disclose the consummation of the License, Development and Marketing Agreement between the Company and Microsoft Corporation. 18 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. --------------------------------------- Roger W. Roberts President, Chief Executive Officer and Secretary (Principal Executive Officer) --------------------------------------- James J. Felcyn, Jr. Vice-President of Finance and Administration and Chief Financial Officer (Principal Financial Officer) --------------------------------------- Marc-Andre Boisseau Controller (Principal Accounting Officer) 19 Exhibit Index
Page Number ----------- 11 Computation of Earnings Per Share 21 27 Financial Data Schedule 22
EX-11 2 COMPUTATION OF EARNINGS PER SHARE Citrix Systems, Inc. Exhibit 11 Computation of Earnings Per Share (In Thousands, Except Per Share Data)
Three Months ended June 30, Six Months ended June 30, 1997 1996 1997 1996 ------------------------------------ ------------------------------------ Primary and fully diluted: Average shares outstanding 27,176 24,179 27,019 24,006 Net effect of dilutive stock options based on the treasury stock method 1,903 2,079 1,833 2,122 ----------------- --------------- ---------------- ---------------- Total 29,079 26,258 28,852 26,128 ================= =============== ================ ================ Net income $ 8,299 $ 3,617 $ 15,792 $ 6,470 ================= =============== ================ ================ Per share amount $ 0.29 $ 0.14 $ 0.55 $ 0.25 ================= =============== ================ ================
EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS 6-MOS DEC-31-1997 DEC-31-1997 APR-01-1997 JAN-01-1997 JUN-30-1997 JUN-30-1997 172,531,872 172,531,872 56,412,533 56,412,533 10,290,304 10,290,304 2,948,241 2,948,241 822,282 822,282 242,344,311 242,344,311 4,955,243 4,955,243 1,076,806 1,076,806 268,793,998 268,793,998 49,191,241 49,191,241 0 0 0 0 0 0 27,309 27,309 161,700,448 161,700,448 268,793,998 268,793,998 24,517,149 46,037,754 24,517,149 46,037,754 2,290,551 4,484,381 2,290,551 4,484,381 11,528,160 20,722,125 0 0 0 0 12,967,006 24,674,432 4,668,121 8,882,795 8,298,885 15,791,637 0 0 0 0 0 0 8,298,885 15,791,637 0.29 0.55 0.29 0.55
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