UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] |
For the fiscal year ended December 31, 2004
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] | ||
For |
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 incorporation or organization) | (I.R.S. Employer Identification No.) | |
851 West Cypress Creek Road Fort Lauderdale, Florida | 33309 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(954) 267-3000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)
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 þx No o¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ox
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þx No o¨
The aggregate market value of Common Stock held by non-affiliates of the registrant computed by reference to the price of the registrant’s Common Stock as of the last business day of the registrant’s most recently completed second fiscal quarter (based on the last reported sale price on The Nasdaq National Market as of such date) was $1,071,867,321.$3,464,675,126. As of March 7, 20038, 2005 there were 164,990,942169,486,037 shares of the registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required pursuant to Part III of this report is incorporated by reference from the Company’s definitive proxy statement, relating to the annual meeting of stockholders to be held in May 2003,2005, pursuant to Regulation 14A to be filed with the Securities and Exchange Commission.
General
Citrix Systems, Inc. (“Citrix” or the “Company”), is a Delaware corporation founded on April 17, 1989, is a leading supplier of1989. The Company designs, develops and markets access infrastructure software, services and services that enable the effective and efficient enterprise-wide deployment and management of applications and information, including those designed for Microsoft® Windows® operating systems, for UNIX® operating systems, such as Sun SolarisTM, HP-UX or IBM® AIX® (collectively “UNIX operating systems”) and for Web-based information systems. The Company’s MetaFrame® products permit organizations to provide secure access to Windows based, Web-based and UNIX applications without regard to location, network connection, or type of client hardware platforms.appliances. The Company markets and licenses its products through multiple channels such as value-added resellers, channel distributors, system integrators, and independent software vendors managed by the Company’s worldwide sales force.and its websites. The Company also promotes its products through relationships with a wide variety of industry participants, including Microsoft Corporation (“Microsoft”).
Business Strategy
Citrix is committed to achieving its vision of making every organization an on-demand enterprise where information is securely, easily and instantly accessible from virtually anywhere using any device. The Business Need for Simplified AccessCompany’s business strategy leverages its ability to Informationcreate and lead new markets through innovation and execution in all phases of product development, marketing and fulfillment.
Globalization, increasing worker mobility
The Company’s first wave of innovation, in the mid-1990s, enabled the virtualization of the Windows desktop, which made thin-client computing possible. The Company’s second wave of innovation, in the late-1990s, enabled the virtualization and centralization of most application types, making server-based computing possible. The Company’s third and ongoing wave of innovation is focused on creating access infrastructure that connects devices, networks and applications into a core business system that makes on-demand computing a reality.
Citrix Access Infrastructure as a Core Business System
The Company believes that access infrastructure has the potential of being viewed as a core business system because it solves a core business problem: getting the right information securely, easily and instantly to everyone who needs it, when they need it, wherever they are. This is becoming more difficult to accomplish as more and more people conduct business in remote and mobile situations – unpredictably moving from location to location, using multiple access devices, and connecting with a wide range of heterogeneous applications over wired, wireless and Web networks.
To meet this challenge, Citrix’s access infrastructure addresses one of the expectation of “instant” results set bybasic technical challenges businesses face today: the Internet have made it vital for businessesneed to supply users with fast, simple andprovide secure access to private information over both trusted and untrusted networks. Access infrastructure accomplishes this by connecting devices, networks and applications sointo a system that they can work effectivelyprovides secure, easy and instant access to virtually any information source, for any authorized user, from virtually anywhere, using any connection.
The Company believes that its Citrix access infrastructure helps to transform any organization into an on-demand enterprise. This means that, for a single investment in access infrastructure, businesses get two key benefits: improved operational efficiency that reduces the cost of running Citrix’s business, and accelerated agility that enables the business to capitalize on any typemore opportunities for growing the business.
When used together, Citrix access infrastructure products, including software, services and appliance-based solutions provide a set of device or network connection. However, enterprises face significant roadblockscapabilities that meet the access needs of end-users on the demand side of the information supply chain, as well as the needs of IT administrators on the supply side of the information supply chain. These capabilities include:
• | SmartAccess – Senses and responds to any access scenario for tailored secure access control. |
• | SmoothRoaming – Delivers continuous access across devices, networks and locations for maximum mobility. |
• | Instant collaboration – Easily shares workspaces and information from anywhere to increase workgroup and meeting productivity. |
• | On-Demand assistance – Instantly access remote user support to increase business productivity and customer loyalty. |
• | Robust and resilient foundation – Ensures scalability and continuous availability to support business changes. |
• | Secure by design – Builds infrastructure with security as a foundation, not an afterthought. |
• | Integrated identity management – Activate and manages the complete access lifecycle for improved workforce agility. |
• | End-to-end visibility– Observes, monitors and measures access infrastructure resources for informed decision-making. |
Citrix access infrastructure is sold as the Citrix MetaFrame Access Suite, as Citrix Online services, and beginning in 2005 as Citrix Gateway appliances. In addition to its access especially complexitiesinfrastructure solution portfolio of products and incompatibilities among computing platformsservices, Citrix also offers customers consulting services, technical support services and infrastructures, applicationsproduct training and communications protocols. Demand has increased for systems that offer userscertification services.
The Citrix® MetaFrame® Access Suite Products
The Citrix MetaFrame Access Suite enables organizations to provide a standard, consistent interface on any device, fast transmissionsecure, single point of data over a variety of networks, and the abilityaccess to deliverenterprise applications and information securelyon demand. The MetaFrame Access Suite centralizes access to local and remote users over public networks, especially the Internet. Some of the challenges to true virtual access are:
Enabling “The On-Demand Enterprise”
Citrix aims to address these challenges by enabling any number of people, from anywhere in the world, using any kind of computing device, over any network connection, to access the on-demand enterprise.
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Citrix access infrastructure software enables organizations to reducereduces the costs of corporate computing, increase employee productivity, gain flexibilitydeploying and administering hundreds of heterogeneous applications and delivering them to technological change within their data centers, improve resilienceend-users on demand virtually anywhere, anytime, to business interruption and gain greater controlany device, over the quality of enterprise IT services.
The Citrix® Software Suite For Enterprise Resource Accessany connection.
Citrix’s strategy is
In the MetaFrame Access Suite, each component product solves a particular access challenge for an organization, while all of the products work together seamlessly to provide an integrated suite of technologies, products and services that allow customers to achieveenable the following business solutions for enterprise resource access:on-demand enterprise.
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Citrix Technology
Citrix products are based on a full range of industry-standard technologies. In addition, some Citrix products also include the Company’s proprietary technologies known as the Independent Computing Architecture (“ICA”) protocol, which allows an application’s graphical user interface to be displayed on virtually any client device while the application logic is executed on a central server. Because the ICA® protocol moves client-based application processing to the server, this approach enables centralized management of applications, users, servers, licenses and other system components for greater efficiency and lower cost.
The Company’s ICA® technology also minimizes the amount of data traveling across a user’s network as only encrypted screen refreshes, keystrokes and mouse clicks are transported to and from the client device. This increases remote access security, improves application performance and allows even wireless access to the latest, most powerful applications and information.
The Citrix products are also based on the industry-standard Extensible Markup Language (“XML”). Leveraging XML assures open systems interaction for customers regardless of data source or platform. And by supporting XML, which is the standard for future Web services-based applications, Citrix helps customers get from the client/server world of today to the Web services environments of tomorrow.
Citrix Products
The Company’s products are marketed under the Citrix MetaFrame® brand and include MetaFrame 1.8 for Windows Terminal Server and the MetaFrame XP™ presentation servers and the MetaFrame Secure Access Manager. Citrix MetaFrame products run primarily on Microsoft Windows server operating systems. The Company also provides a MetaFrame presentation server that runs on UNIX operating systems. This suite of infrastructure software and services enable organizations to better deploy, manage and access applications across the extended enterprise to a variety of client devices, operating platforms or network connections.
The MetaFrame software suite includes two products that work together and can also be used separately. These products are licensed with software subscription, or Citrix Subscription AdvantageTM, offering customers all updates, when and if they become available during the first year of their license.
• | Citrix® MetaFrame® Password Manager. Citrix MetaFrame Password Manager provides password security and enterprise single sign-on access to Windows, Web, and host-based applications – whether or not those applications are locally installed, Web-based, or running in the Citrix Access Suite environment. End-users authenticate once with a single password, and MetaFrame Password Manager does the rest, automatically logging into password-protected information systems, enforcing password policies, and even automating end-user tasks, including |
password changes. MetaFrame Password Manager saves end-users time and saves businesses money by lowering help-desk support costs. |
• | Citrix® MetaFrame® Conferencing Manager. Citrix MetaFrame Conferencing Manager adds intuitive application conferencing to MetaFrame Presentation Server and eliminates the geographical distance between team members, increases the productivity of meetings, and allows easy collaboration. Teams can now share application sessions, work together on document editing, and conduct online training regardless of the location of individual team members or the access devices or network connections they are using. |
Collectively, these products accounted for approximately 50%, 63% and 69% of the Company’s net revenues in 2004, 2003 and 2002, respectively and are included in software licenses revenue in the accompanying consolidated statements of income.
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Citrix Online Services
Collectively, these
In February 2004, the Company acquired Expertcity.com, Inc. (“Expertcity”), a market leader in Web-based desktop access as well as a leader in Web-based training and customer assistance products. During 2004, Expertcity was integrated into the Company as the Citrix Online division. The Company’s portfolio of access services now includes the following:
• | Citrix® GoToAssist™. Citrix GoToAssist transforms technical support into competitive advantage by reducing support costs while improving end-user productivity and increasing customer loyalty. With just a few mouse clicks, support staff can see what end-users see and vice versa, can chat with end-users in real time, guide them through a product demo, “push” a Web page or file transfer, or take permission-based control of the end-user’s mouse and keyboard to show how to resolve a problem. |
• | Citrix® GoToMyPC®. Citrix GoToMyPC is an easy-to-use remote-access solution for accessing desktop resources, whether locally installed on the end-user’s computer or running in the Citrix MetaFrame environment. GoToMyPC works seamlessly with all products in the MetaFrame Access Suite, providing Web-based access to all desktop resources using Citrix’s advanced screen-sharing technology. End-users simply log in to the managed service, select from a list of active and authorized PCs, authenticate with a second password unique to their PC, and then can use and control their remote desktops as if actually sitting in front of them. |
• | Citrix® GoToMeeting™. The instant collaboration solution, Citrix GoToMeeting is an easy-to-use and cost-effective online meeting solution for sharing desktop resources. As a hosted service, GoToMeeting needs minimal deployment, management and maintenance attention from IT staff. Anyone with a PC and Internet browser can host, attend or collaborate in an online meeting within seconds and without hassle. While alternative solutions have overage charges, per-attendee premiums, complex interfaces, and scheduling requirements, GoToMeeting offers All You Can Meet™ licensing that encourages better, more frequent and more spontaneous collaboration for greater productivity. |
Citrix Online services accounted for approximately 89%, 86%, and 85%6.0% of the Company’s net revenues in 2002, 2001,2004 and 2000, respectively.is included in services revenue in the accompanying consolidated statements of income.
Citrix® ServicesCitrix Access Gateway Products
In December 2004, the Company acquired Net6 Inc., a leader in providing secure access gateways. Beginning in 2005, the Company’s portfolio of access gateway appliances will include:
• | Citrix® Access Gateway. The Citrix Access Gateway is a new alternative to Internet Protocol Security (“IPSec”) and traditional Secure Socket Layer Virtual Private Networks (“SSL VPN”) that combines the strengths of IPSec and SSL VPN without their typical weaknesses, offered in an easy-to-deploy appliance. The gateway allows end-users to access IT resources in the same secure way whether they are in front of or behind the firewall, and gives end-users the same experience regardless of their location. For an IT administrator, installation and configuration of both the appliance and client is quick and easy. In addition, as the single point of access, the gateway greatly reduces the complexity and cost involved in managing a variety of different access scenarios for end-users. |
• | Citrix® Application Gateway. The Citrix Application Gateway delivers productivity applications to end-users of Internet Protocol (“IP”) telephones and mobile devices, enabling enterprises to further leverage their IP telephony investment and increase workforce productivity by delivering converged applications to the screens and speakers of IP telephones. The Application Gateway delivers applications to end-users of IP telephones from leading IP PBX vendors including Avaya, Cisco, Mitel, NEC, Nortel Networks and Siemens. |
Citrix Services
Citrix provides a portfolio of technical services designed to allow the Company’s end-customers and entities with which it has a technology relationship to maximize the value of Citrix access infrastructure software. These services are available as a feature of the Company’s business-development program and are available for additional fees to end-customers.
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• | Product Training & Certification.A series of courses are designed to allow customers and channel members to learn new skills and effective strategies to help plan, implement and administer Citrix products. Students may attend courses at one of over 300 Citrix Authorized Learning Centers |
Services revenueThese services accounted for approximately 8% of the Company’s net revenues in 2004, 2003 and 2002 and 7%are included in 2001services revenue in the Company’s accompanying consolidated statements of income.
Citrix Technology
Citrix products are based on a full range of industry-standard technologies. In addition, some Citrix products also include the Company’s proprietary technologies known as the Independent Computing Architecture (“ICA”) protocol, which allows an application’s graphical end-user interface to be displayed on virtually any client device while the application logic is executed on a central server. Because the ICA® protocol moves client-based application processing to the server, this approach enables centralized management of applications, end-users, servers, licenses and 2000.other system components for greater efficiency and lower cost.
The Company’s ICA® technology also minimizes the amount of data traveling across an end-user’s network as only encrypted screen refreshes, keystrokes and mouse clicks are transported to and from the client device. This increases remote access security, improves application performance and allows even wireless access to the latest, most powerful applications and information.
Citrix products are also based on the industry-standard Extensible Markup Language (“XML”). Leveraging XML assures open systems interaction for customers regardless of data source or platform. And by supporting XML, which is the standard for future Web services-based applications, Citrix helps customers get from the client/server world of today to the Web services environments of tomorrow.
Citrix Customers
Citrix’s primary target markets for its currentCitrix offers a portfolio of products and services arethat target small, medium and large and medium-sizedsized organizations in the commercial, government and education sectors. Currently, Citrix has more than 120,000160,000 customers worldwide, including 100% of theFortune100, 95%99% of theFortune500 and 95%97% of theFinancial TimesFortuneFT Europe Global 100. During 2002, Citrix’s enterprise customers included U.S. Department of Health and Human Services, Deutsche Telecom, Banco Bilbao Vizcaya Argentaris, Swiss Federal Railways, Deutsche Angestellten Krankenkasse and Ministry of Finance of the State of North Rhine Westphalia.
The Company’sCompany offers perpetual software licenses are generally perpetualfor MetaFrame Access Suite products, annual subscriptions for Web-based Citrix Online services, and are offeredbeginning in 2005 specialized hardware appliances for Citrix Access Gateway products. Perpetual license software products come in both “shrink wrapped” and electronic-based forms. The Company distributes itsthe software usingin various formats including traditional “boxed” packages for small projects and customers and electronically downloaded formats for its large projects and enterprise customers. The Company’s Web-based services can be accessed over any Internet connection during the subscription period. Hardware appliances come pre-loaded with software for which customers can purchase perpetual licenses.
For medium to large-sized projects, which typically consist of large “multi-server” environments, the Company offers electronic volume-based licensing programs. These programs provide for volume-based licensing that allow usage of the Company’s products both on a department or enterprise-wide basis. These licenses include electronically delivered “software activation keys” that enable feature configuration ordered by the customer. Depending on the license type and customer preference, the software media is delivered by a channel distributor or directly by the Company. The Company has invested, and continues to invest, in large-account relationship professionals, license fulfillment channels and entities with which we have service-oriented system integration relationships to assist these larger customers with broader usage of the Company’s software infrastructure.
These large-account selling investments have contributed to an increase in sales of MetaFrame software under these electronically delivered volume-based licensing arrangements in 2002 as compared to 2001. For the years ended December 31, 2002 and 2001, sales under volume-based licensing arrangements constituted
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Technology Relationships
The Company has entered into a number of technology relationships to develop customer markets for its products, broaden the use of the ICA protocol as an emerging industry standard technology for distributed Windows and non Windows applications and to accelerate the development of its existing and future product lines.
Microsoft.Since its inception, the Company has had a number of license agreements with Microsoft, including licenses relating to Microsoft OS/2, Windows 3.x, Windows for Workgroups, Windows NT®, Windows CE and Internet Explorer. These agreements have provided the Company with access to certain Microsoft source and object code, technical support and other materials. The license agreements had an initial term that expired in September 1994 and was subsequently extended until September 2001.
In May 1997, the Company entered into a five-year joint license, development and marketing agreement with Microsoft, (as amended, the “Microsoft Development Agreement”), pursuant to which the Company licensed its multi-user Windows NT extensions to Microsoft for inclusion in future versions of Windows NT server software. Pursuant to the Microsoft Development Agreement, the Company’s multi-user Windows NT extensions technology was incorporated into Microsoft’s NT Terminal Server, which was released in July 1998, and Windows 2000 Server, which was released in February 2000. Additionally, Microsoft 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, an obligation that expired in November 1999. Since November 1999, Microsoft has been permitted to market or endorse other methods to provide multi-user Windows access to non-Windows client devices, and these methods compete with products of the Company. This agreement with Microsoft expired in May 2002. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Which May Affect Future Results.”
In May 2002, the Company signed an agreement with Microsoft to formalize continuedprovide the Company with access to Microsoft Windows Server source code. Under this agreement, the Company will havecode for current and future Microsoft Server operating systems, including access to source code for Microsoft server operating systems from Windows 2000 Server 2003 and beyond, including access to terminal services source code, during the three-yearthree year term of the agreement. This agreement doeswas terminated in December 2004 and did not provide for payments to or from Microsoft.
In December 2004, the Company entered into a technology collaboration agreement with Microsoft to further enhance the overall extensibility of Windows® Terminal Server. In conjunction with the technology collaboration agreement, the Company and Microsoft entered into a patent cross license and source code licensing agreements to renew the Company’s access to source code for current versions of Microsoft Windows Server that had previously been provided to the Company pursuant to the agreement between Microsoft and the Company dated May 2002. The technology collaboration agreement also provides for access by the Company to the source code for the forthcoming Microsoft Windows Server codenamed “Longhorn.” The technology collaboration agreement has a five-year term which expires in December 2009. The technology collaboration, patent cross license and source code licensing agreements do not provide for payments to or from Microsoft.
There can be no assurances that the Company’s agreements with Microsoft will be extended or renewed by Microsoft upon their respective expirations or that, if renewed or extended, such agreements will be on terms favorable to the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Which May Affect Future Results.”
Additional Relationships.As of December 31, 2002,2004, the Company had entered into approximately 130100 ICA license agreements. Currently, more than 200 differentnumerous devices incorporate Citrix ICA, ranging fromincluding Windows CE devices, Macintosh clients, Linux terminals toTerminals, and other information appliances, such as wireless phones and other handheld devices. ICA licensees include Wyse Technologies, Hewlett-Packard, Neoware, Fujitsu, Hitachi, Motorola, Samsung, Sharp, Symbol TechnologiesMaxSpeed and Nokia,SAP AG, among others.
In addition, the Citrix Business Alliance™ (“CBA”) isaccessPARTNER network includes Citrix Alliance Partners™ , which are a coalition of industry-leading companies from across the IT spectrum who work with the Company to design and market complementary solutions for the Company and CBA customers.the customers of Citrix Alliance Partners. The Company’s existing alliance and channel programs, including the Citrix Business Alliance, are now included as part of the Citrix accessPARTNER network. For further information on the Citrix accessPARTNER network see “— Sales, Marketing and Support.” By the end of 2002, CBA membership2004, the number of Citrix Alliance Partners had grown to approximately 1,2001,800 members, including hardware, software, global and regional consulting alliances. CBA membersCitrix Premier Plus Alliance Partners include Microsoft, Dell, IBM, EMC2, Hewlett-Packard, Siebel Systems, PeopleSoft, SAP AG, JD Edwards, Mercury Interactive, Fujitsu, Verizon Wireless, Sprint PCS, Sun Microsystems and National Semiconductor.Oracle.
Research and Development
The Company focuses its research and development efforts on developing new products and core technologies for its access infrastructure markets and further enhancing the functionality, reliability, performance and flexibility of existing products. In 2004, the Company acquired additional expertise in Web-based services, telephony, voice over internet protocol and secure access appliances. The Company solicits extensive input concerning product development from users,end-users, both directly from end-customers and indirectly through its channel distributors.
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The Company believes that its software development team and core technologies represent a significant competitive advantage for the Company. Included in the software development team is a group focused on research activities that include prototyping ways to integrate emerging technologies and standards into the Company’s product offerings, such as emerging Web services technologies and Microsoft’s newnewest Windows Server 2003 technologies. Other groups within the software development team have expertise in XML-based software development, integration of acquired technology, multi-tier Web-based application development and deployment and secure sockets layers-based (“SSL”) secure access,access. The Company maintains a team working on-site at Microsoft focused on enhancing and application “sandbox” technologies. adding value to the next generation of Microsoft Windows Server products and operating systems.
The software development team also includes a number of key employees who were instrumental in the release of Microsoft’s Window’s NT 4.0 Terminal Server Edition, have expertise in current Microsoft and UNIX operating system environments (Solaris, AIX, HP-UX, and Linux), and were key members from the engineering team that developed the original version of OS/2 at IBM. During 2002, 20012004, 2003 and 2000,2002, the Company incurred research and development expenses of approximately $68.9$86.4 million, $67.7$64.4 million and, $50.6$68.9 million, respectively.
Sales, Marketing and Support
The Company markets and licenses its products primarily through multiple channels worldwide, including value added resellers, channel distributors, System Integratorssystem integrators (“SI”s) and Independent Software Vendorsindependent software vendors (“ISV”s), managed by the Company’s worldwide sales force. The Company provides training and certification to integrators, value-added resellers and consultants for a full-range of MetaFrame-basedCitrix-based application deployment and management solutions and services through its Citrix Solutions Network™ (“CSN”) program.accessPARTNER network.
As of December 31, 2002,2004, the Company had relationships with approximately 10090 distributors and approximately 5,200 CSN providers4,700 Citrix Solution Advisors worldwide. A number of entities with which the Company has channel relationships provide additional end-customer sales channels for the Company’s products under either a Citrix brand or embedded in the licensee’s own software product.
During 2002, For information regarding entities with which the Company took stepshas technology relationships, including Citrix Alliance Partners, see “— Technology Relationships.”
In 2004, the Company established the global network of partners called Citrix accessPARTNER. This network spans the system integrators, value-added distributors, resellers, alliance partners, developers, and certified and education professionals who advise on, sell, implement, and provide training for Citrix products and services. At the core of this community are the Citrix Solution Advisors who deliver strategic and successful access infrastructure solutions to Citrix
customers. Early in 2004, the Company introduced a new program called Citrix Advisor Rewards designed to reward partners for registering projects, submitting forecasts early in the sales process, and providing value-based solutions around Citrix access infrastructure.
The Company regularly takes actions to improve the effectiveness of its channel relationships. The Company plans to continue to take actions toand strengthen its channel relationships, including improving channel incentive programs, eliminating non-performing channel relationships,partners, adding new memberspartners with expertise in selling into new vertical markets, and forming additional relationships with global and regional SIs and ISVs. During 2004 and 2003, the Company particularly focused on streamlining and simplifying sales processes, improving channel incentive programs to reward solution-selling, and training. The Company combined its existing channel programs, including the Citrix Solutions Network™, into the Citrix accessPARTNER network, a single, global network that spans the solution advisors, SIs, value-added distributors, resellers, alliance partners, and certified education professionals who advise on, sell, implement and provide training for the Citrix MetaFrame Access Suite and related products and services. At the core of this community are Solution Advisors — value-added resellers who deliver strategic and successful access infrastructure solutions for customers. SIs and ISVs are currently expected to becomebecoming a more central part of Citrix’s strategy in the large enterprise and government markets. New programs supporting each group were launched in 2002. The SI program includes members such as IBM, HP, Computer Sciences Corporation, Electronic Data Systems Corporation, Schlumberger, Siemens and Unisys.Northrop Grumman. The ISV program has a strong representation acrossfrom targeted industry verticals such as healthcare, telecom, financial manufacturing, retailservices and government. Vendorstelecommunications. Members in the ISV program include Amdocs, Cerner, Dell, McKesson, Siemens Medical Health Solutions, Reynolds & Reynolds, ESRI and ESRI.Ericsson, among others.
The Company’s sales and marketing organization actively supports its distributors and resellers. The Company’s marketing department provides training, sales event support, sales collateral, advertising, direct mail and public relations coverage to its indirect channels to aid in market development and in attracting new customers. The Company’s sales organization consists of field-based systems sales engineers and corporate sales professionals. Additional sales personnel, based in North America, Europe, Africa, Asia, Australia and South America, support these field personnel. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” and Note 12 to the Company’s Notes to Consolidated Financial Statements for information regarding the Company’s geographic segments. These additional sales personnel recruit prospective customers, provide technical advice with respect to the Company’s products and work closely with key distributors and resellers of the Company’s products. During 2002,2004 and 2003, the Company grew its end-customer sales force of sales professionals that work closely with partners to sell to medium and large enterprise customers to achieve the appropriate combination of relationships for licensing, integration and consulting to meet customers’ needs. These and other account penetration efforts are part of the Company’s strategy to increase the usage of Citrix software within the customer’s IT organization.
The Company’s marketing department provides training, sales event support, sales collateral, advertising, direct mail and public relations coverage to its indirect channels to aid in market development and in attracting new customers. In 2003, the Company launched a multi-million-dollar, worldwide advertising campaign. Beginning September 2003, and extending throughout 2004 and into 2005, this multi-media campaign combines CIO-targeted and customer-focused print, Web, billboard and radio advertisements to raise Citrix’s brand awareness using the CIOs of household-name customers to describe the benefits of becoming an on-demand enterprise with Citrix access infrastructure.
The Company provides most of its distributors with product return rights only for the purpose of stock balancing.balancing and price protection rights. These transactions are estimated and provided for at the time of sale as a reduction of revenue. Stock balancing rights permit distributors to return products to the Company up to the forty-fifth day of the fiscal quarter, subject to ordering an equal dollar amount of other Citrix products.products prior to the last day of the same fiscal quarter. The Company is not obligated to accept product returns from its
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The majority of
Except for the Web-based desktop access services offered by the Citrix Online division, the Company’s other service activities are related to post-sale technical support, pre- and post-sale consulting and product training services. Post-sale technical support is offered through Citrix-operated support centers located in the United States, Ireland, Tokyo and Australia. TheIn most cases, the Company provides technical advice to channel distributors and entities with which the Company has a technology relationship, who act as the first line of technical assistance for end-customers, in most cases.end-customers. In some cases, end-customers can also choose from a Citrix-delivered fee-based support program ranging from one-time incident charges
to an enterprise-level support agreement covering multiple sites and servers. In addition, the Company also provides free technical advice through on-line support systems, including its Web-based “Knowledge Center.” For pre-andpre- and post-sale consulting, Citrix Consulting, Services (“CCS”), a consulting services organization, provides both exploratory and fee-based consulting services. These services include on-site systems design and implementation services targeted primarily at enterprise-level clients with complex IT environments. The CCS organizationCitrix Consulting is also responsible for the development of best practice knowledge that is disseminated to businesses with which Citrix has a business relationship and end-customers through training and written documentation. Leveraging these best practices enables the Company’s integration resellers to provide more complex systems, reach new buyers within existing customer organizations and provide more sophisticated system proposals to prospective customers. Training services in selling techniquesfor business, end-customers and technical expertise areaspartners are provided through the Company’s CALC program which includes approximately 300 of the world’s leading IT training organizations. These training programs are designed for businesses and end-customers and include courses for system administration and advanced system integration.eLearning. CALCs are staffed with instructors that have been certified by Citrix and teach their students using Citrix-developed courseware. Over 300 of the world’s leading IT training organizations are CALCs. eLearning is available through both CALCs and from Citrix’s website.
Operations
The Company controls all purchasing, inventory, scheduling, order processing and accounting functions related to its operations. Production, warehousing and shipping are performed both internally in the United States and by independent contractors on a purchase order basis in the United States and in Ireland, depending upon the customer’s geographic market. Master software CD-ROMs, development of user manuals, packaging designs, initial product quality control and testing are performed at the Company’s facilities. In some cases, independent contractors duplicate CD-ROMs, print documentation, and package and assemble product to the Company’s specifications. To date, the Company has not experienced any material difficulties or delays in the manufacture and assembly of its products. Internal manufacturing capabilities and independent contractors provide a redundant source of manufacture and assembly.
The Company generally ships products upon receipt of an order. As a result, the Company does not have significant backlog at any given time, and does not consider backlog to be a significant indicator of future performance.
Competition
The Company believes that other software companies have entered or could enter
As the market with solutions that involve a similar approach to the Citrix access infrastructure software. In particular, Tarantella Inc., GraphOn Corporation, Netilla Networks, Inc., and New Moon Systems, Inc. market products that claim to have functions similar to those found in Citrix MetaFrame.
In addition, alternative products exist that directly or indirectly compete with the Company’s products and anticipated future product offerings. Existing or new products that extend Internet software to provide database access or interactive computing could materially impact the Company’s ability to sell its products in this market. Competitors in this market include Microsoft, IBM, Oracle, Sun Microsystems and other makers
8
In addition, alternative products for secure, remote access in the Internet software and hardware markets directly and indirectly compete with the Company’s current products and anticipated future product offerings. Existing or new products that extend Internet software and hardware to provide Web-based information and application access or interactive computing can materially impact the Company’s ability to sell its products in this market. The Company’s competitors in this market include Cisco, Juniper Networks, Oracle, Sun Microsystems, WebEx Communications, Inc. and other potential competitors often have significantly greater financial, technical, sales, marketing, support and other resources than the Company. There can be no assurance that the Company will be able to establish and maintain a market position in the facemakers of increased competition. Additionally, price competition could become more significant in the future; although the Company believes that price has historically been a less significant competitive factor than product performance, reliability and functionality. The Company may not be able to maintain its historic prices, which could adversely affect the Company’s business, results of operations and financial condition.
See “— Technology Relationships” and “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Certain Factors Which May Affect Future Results.” The announcement of the release, and the actual release, of products competitive to the Company’s existing and future product lines, could cause existing and potential customers of the Company to postpone or cancel plans to license certain of the Company’sits existing and future product offerings, which would adversely impact the Company’s business, results of operations and financial condition.
Proprietary Technology
The Company’s success is dependent upon certain proprietary technologies and core intellectual property. The Company has been awarded a number of domestic and foreign patents and has a number of pending patent applications in the United States and foreign countries. The Company’s technology is also protected under copyright laws. However, patent protection and existing copyright laws afford only limited protection forAdditionally, the Company’s technology. In addition, the laws of some foreign countries do not protect the Company’s proprietary rights to the same extent, as do the laws of the United States. Accordingly, the Company also relies on trade secret protection and confidentiality and proprietary information agreements to protect its proprietary technology. The Company has trademarks or registered trademarks in the United States and other countries, including Citrix(R)Citrix®, ICA(R)ICA®, MetaFrame(R)MetaFrame®, MetaFrameXP®, GoToMyPC®, GoToAssistTM®, GoToMeetingTM and the Citrix(R)Citrix® logo. The loss of any material trade secret, trademark, trade name or copyright could have a material adverse effect on the Company. There can be no assurance that the Company’s efforts to protect its proprietary technology rights will be successful. Despite the Company’s precautions, it could be possible for unauthorized third parties to copy certain portions of the Company’s products or to obtain and use information that the Company regards as proprietary. A significant portion of the Company’s sales is derived from the licensing of Company packaged products under “shrink wrap” and “click-to-accept” electronic license agreements that are not signed by licensees and volume-based licensing agreements that are delivered electronically, all of which could be unenforceable under the laws of many jurisdictions in which the Company licenses its products. Additionally, third parties have asserted infringement claims against the Company and, as the number of products and competitors in its industry segments increases and the functionality of these products overlap, the Company could become increasingly subject to infringement claims. Companies and inventors are more frequently seeking to patent software and business methods because of developments in the law that could extend the ability to obtain such patents. As a result, the Company could receive more patent infringement claims. Responding to any infringement claim, regardless of its validity, could result in costly litigation or require the Company to obtain a license to intellectual property rights of those third parties. Licenses may not be available on reasonable terms or at all. In addition, attention to these claims could divert management’s time and attention from developing the Company’s business. Although the Company does not believe that its products infringe on the rights of third parties, if a successful claim is made against the Company and the Company fails to develop or license a substitute technology, the Company’s business, results of operations, financial condition or cash flows could be materially adversely affected.
While the Company’s competitive position could be affected by its ability to protect its proprietary information, the Company believes that because of the rapid pace of technological change in the industry, factors such as the technical expertise, knowledge and innovative skill of the Company’s management and technical personnel, its technology relationships, name recognition, the timeliness and quality of support services provided by the Company and its ability to rapidly develop, enhance and market software products
9
Available Information
The Company’s Internet address ishttp://www.citrix.com.www.citrix.com. The Company makes available, free of charge, on or through the Company’s Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statementstatements on Form DEF 14A and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
Employees
Employees
As of December 31, 2002,2004, the Company had approximately 1,6702,656 employees. The Company believes its relations with employees are good. TheIn certain countries outside of the United States, the Company’s relations with its French employees are governed by certain labor regulations in the region.
ITEM 2. PROPERTIES
The Company’s corporate offices are located in Fort Lauderdale, Florida. The Company has either subleased or plans to sublease certain of the space in various buildings for the remainder of their respective lease terms. The Company’s corporate offices occupyinclude leased and subleased office space totaling approximately 390,000461,000 square feet, including leased space under the Company’s synthetic lease. For more information regarding the Company’s synthetic lease, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and Note 10 to the Consolidated Financial Statements.feet. In addition, the Company leases approximately 139,000142,000 square feet of office space in other locations in the United States and Canada.
The Company leases and subleases a total of approximately 238,000240,000 square feet of office space in various other facilities in Europe, Latin America, the Asia-Pacific region, the Middle East and the Asia Pacific region.Africa. In addition, the Company owns land and buildings in the United Kingdom with approximately 48,000 square feet of office space.
ITEM 3. LEGAL PROCEEDINGS
In February 2002, a stockholder filed a complaint (the “Complaint”) in the Court of Chancery of the State of Delaware against the Company and certain of its current and former officers and directors. The Complaint purported to state a direct claim on behalf of a putative class of stockholders and a derivative claim nominally on behalf of the Company for breach of fiduciary duty based on the Company’s alleged failure to disclose all material information concerning the Company’s business and operations in connection with a proposal to be voted on at the Company’s annual meeting of stockholders in May 2000. The Complaint asserted claims similar to those alleged by such stockholder in a suit that was filed in September 2000, and subsequently voluntarily dismissed without prejudice in July 2001. The Complaint sought compensatory damages, rescission of the Company’s 2000 Director and Officer Stock Option and Incentive Plan, and other related relief. The parties have since agreed to a non-monetary settlement of the action not involving the validity of the 2000 Director and Officer Stock Option and Incentive Plan. The settlement is subject to approval by the court. A hearing on the approval of the settlement has not yet been scheduled.
In addition, theThe Company is a defendant in various litigation matters of litigation generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that anythe ultimate liability wouldoutcome will not materially affect the Company’s business, financial position, resultresults of operations or cash flows.
None.
None.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, |
Price Range of Common Stock and Dividend Policy
The Company’s Common Stockcommon stock is currently traded on The Nasdaq National Market under the symbol “CTXS.” The following table sets forth the high and low closing prices for the Company’s Common Stockcommon stock as reported on The Nasdaq National Market for the periods indicated, as adjusted to the nearest cent. Such information reflects inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions.
High | Low | ||||||||
Year Ended December 31, 2003: | |||||||||
First quarter (through March 7, 2003) | $ | 14.76 | $ | 11.59 | |||||
Year Ended December 31, 2002: | |||||||||
Fourth quarter | $ | 13.33 | $ | 5.87 | |||||
Third quarter | $ | 6.52 | $ | 5.00 | |||||
Second quarter | $ | 17.39 | $ | 5.51 | |||||
First quarter | $ | 23.98 | $ | 13.50 | |||||
Year Ended December 31, 2001: | |||||||||
Fourth quarter | $ | 25.80 | $ | 19.81 | |||||
Third quarter | $ | 36.69 | $ | 18.38 | |||||
Second quarter | $ | 34.90 | $ | 18.19 | |||||
First quarter | $ | 36.63 | $ | 17.31 |
High | Low | |||||
Year Ended December 31, 2005: | ||||||
First quarter (through March 8, 2005) | $ | 24.00 | $ | 23.28 | ||
Year Ended December 31, 2004: | ||||||
Fourth quarter | $ | 25.82 | $ | 19.07 | ||
Third quarter | $ | 19.16 | $ | 15.09 | ||
Second quarter | $ | 23.10 | $ | 18.86 | ||
First quarter | $ | 22.72 | $ | 18.50 | ||
Year Ended December 31, 2003: | ||||||
Fourth quarter | $ | 26.94 | $ | 21.16 | ||
Third quarter | $ | 24.50 | $ | 16.93 | ||
Second quarter | $ | 23.26 | $ | 13.30 | ||
First quarter | $ | 14.76 | $ | 10.98 |
On March 7, 2003,8, 2005 the last reported sale price of the Common StockCompany’s common stock on The Nasdaq National Market was $11.65$23.70 per share. As of March 7, 2003,8, 2005, there were approximately 1,1291,141 holders of record of the Common Stock.Company’s common stock.
The Company currently intends to retain any earnings for use in its business, for investment in acquisitions and to repurchase shares of its Common Stock.common stock. The Company does not currently anticipate paying any cash dividends on its capital stock in the foreseeable future.
In connection
Equity Compensation Plan Information
See Part III, Item 12 for information regarding securities authorized for issuance under the Company’s equity compensation plans.
Issuer Purchases of Equity Securities
The Company’s Board of Directors has authorized an ongoing stock repurchase program with a total repurchase authority granted to the Company of $1.0 billion, of which $200 million was authorized in February 2005. The objective of the stock repurchase program is to manage actual and anticipated dilution and to improve shareholders’ returns. At December 31, 2004, approximately $42.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. The following table shows the monthly activity related to the Company’s stock repurchase program for the three month period ending December 31, 2004:
Approximate dollar (in thousands) October 1, 2004 through October 31, 2004 November 1, 2004 through November 30, 2004 December 1, 2004 through December 31, 2004 Total Total Number of
Shares Purchased (1) Average
Price Paid
per Share Total Number
of Shares
Purchased as Part
of Publicly
Announced Plans
or Programs
value of Shares that
may yet be
Purchased under the
Plans or Programs 155,590 $ 20.17 (2) 155,590 $ 81,049 126,463 $ 17.67 (2) 126,463 $ 91,953 (3) 164,051 $ 24.93 (2) 164,051 $ 41,954 446,104 $ 21.21 (2) 446,104 $ 41,954
(1) | Represents shares received under the Company’s prepaid stock repurchase programs and shares acquired in open market purchases. The Company expended a net amount of $39.1 million during the quarter ended December 31, 2004 for repurchases of the Company’s common stock. For more information see Note 7 to the Company’s consolidated financial statements. |
(2) | These amounts represent the cumulative average of the price paid per share for shares acquired in open market purchases and those received under the Company’s prepaid stock repurchase programs, some of which extend over more than one fiscal period. |
(3) | Amount available under the remaining dollar amount the Company has to repurchase shares pursuant to its stock repurchase program increased due to the refund of the notional amount and the receipt of a premium received under one of its prepaid structured programs in November 2004. |
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in October 2000,conjunction with the Board of Directors approved a program authorizing the Company to sell put warrants that entitle the holder of each warrant to sell to the Company, generally by physical delivery, one share of the Company’s Common Stock at a specified price. SeeConsolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” for information regarding the Company’s sale of put warrants during 2002. The issuance of these securities is exempt from registration under Section 4(2) of the Securities Act of 1933.Operations” appearing elsewhere in this Annual Report on Form 10-K.
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Year Ended December 31, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||
Consolidated Statements of Income Data: | ||||||||||||||||||||
Net revenues | $ | 741,157 | $ | 588,625 | $ | 527,448 | $ | 591,629 | $ | 470,446 | ||||||||||
Cost of revenues | 26,423 | 31,072 | 29,841 | 41,451 | 41,549 | |||||||||||||||
Gross margin | 714,734 | 557,553 | 497,607 | 550,178 | 428,897 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Research and development | 86,357 | 64,443 | 68,923 | 67,699 | 50,622 | |||||||||||||||
Sales, marketing and support | 337,566 | 252,749 | 235,393 | 224,108 | 180,384 | |||||||||||||||
General and administrative | 106,516 | 85,672 | 88,946 | 85,212 | 58,685 | |||||||||||||||
Amortization of other intangible assets(a) | 6,204 | 300 | 485 | 37,228 | 17,900 | |||||||||||||||
In-process research and development | 19,100 | — | — | 2,580 | — | |||||||||||||||
Write-down of technology(b) | — | — | — | — | 9,081 | |||||||||||||||
Total operating expenses | 555,743 | 403,164 | 393,747 | 416,827 | 316,672 | |||||||||||||||
Income from operations | 158,991 | 154,389 | 103,860 | 133,351 | 112,225 | |||||||||||||||
Interest income | 14,274 | 21,120 | 30,943 | 42,006 | 41,313 | |||||||||||||||
Interest expense | (11,586 | ) | (18,280 | ) | (18,163 | ) | (20,553 | ) | (17,099 | ) | ||||||||||
Other income (expense), net | 2,754 | 3,458 | (3,483 | ) | (2,253 | ) | (1,422 | ) | ||||||||||||
Income before income taxes | 164,433 | 160,687 | 113,157 | 152,551 | 135,017 | |||||||||||||||
Income taxes | 32,887 | 33,744 | 19,237 | 47,291 | 40,505 | |||||||||||||||
Net income | $ | 131,546 | $ | 126,943 | $ | 93,920 | $ | 105,260 | $ | 94,512 | ||||||||||
Diluted earnings per share(c) | $ | 0.75 | $ | 0.74 | $ | 0.52 | $ | 0.54 | $ | 0.47 | ||||||||||
Diluted weighted-average shares outstanding(c)(d) | 174,734 | 171,447 | 179,359 | 194,498 | 199,731 | |||||||||||||||
December 31, | |||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||
(In thousands) | |||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||
Total assets | $ | 1,286,084 | $ | 1,344,939 | $ | 1,161,531 | $ | 1,208,230 | $ | 1,112,573 | |||||
Current portion of long-term debt | — | 351,423 | — | — | — | ||||||||||
Long term debt, capital lease obligations, put warrants and common stock subject to repurchase | — | — | 350,024 | 362,768 | 346,229 | ||||||||||
Stockholders’ equity | 924,905 | 706,798 | 614,590 | 647,330 | 592,875 |
Year Ended December 31, | ||||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||||||
Consolidated Statements of Income Data: | ||||||||||||||||||||||
Net revenues | $ | 527,448 | $ | 591,629 | $ | 470,446 | $ | 403,285 | $ | 248,636 | ||||||||||||
Cost of revenues (excluding amortization, presented separately below) | 19,030 | 29,848 | 29,054 | 14,579 | 16,682 | |||||||||||||||||
Gross margin | 508,418 | 561,781 | 441,392 | 388,706 | 231,954 | |||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Research and development | 68,923 | 67,699 | 50,622 | 37,363 | 22,858 | |||||||||||||||||
Sales, marketing and support | 235,393 | 224,108 | 180,384 | 121,302 | 74,855 | |||||||||||||||||
General and administrative | 88,946 | 85,212 | 58,685 | 37,757 | 20,131 | |||||||||||||||||
Amortization of intangible assets(a) | 11,296 | 48,831 | 30,395 | 18,480 | 10,190 | |||||||||||||||||
In-process research and development | — | 2,580 | — | 2,300 | 18,416 | |||||||||||||||||
Write-down of technology(b) | — | — | 9,081 | — | — | |||||||||||||||||
Total operating expenses | 404,558 | 428,430 | 329,167 | 217,202 | 146,450 | |||||||||||||||||
Income from operations | 103,860 | 133,351 | 112,225 | 171,504 | 85,504 | |||||||||||||||||
Interest income | 30,943 | 42,006 | 41,313 | 25,302 | 10,878 | |||||||||||||||||
Interest expense | (18,163 | ) | (20,553 | ) | (17,099 | ) | (12,532 | ) | (133 | ) | ||||||||||||
Other expense, net | (3,483 | ) | (2,253 | ) | (1,422 | ) | (1,549 | ) | (777 | ) | ||||||||||||
Income before income taxes | 113,157 | 152,551 | 135,017 | 182,725 | 95,472 | |||||||||||||||||
Income taxes | 19,237 | 47,291 | 40,505 | 65,781 | 34,370 | |||||||||||||||||
�� | ||||||||||||||||||||||
Net income | $ | 93,920 | $ | 105,260 | $ | 94,512 | $ | 116,944 | $ | 61,102 | ||||||||||||
Diluted earnings per share(c) | $ | 0.52 | $ | 0.54 | $ | 0.47 | $ | 0.61 | $ | 0.33 | ||||||||||||
Diluted weighted-average shares outstanding(c)(d) | 179,359 | 194,498 | 199,731 | 192,566 | 182,594 | |||||||||||||||||
December 31, | ||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Working capital | $ | 186,410 | $ | 153,554 | $ | 427,344 | $ | 433,249 | $ | 158,900 | ||||||||||
Total assets | 1,161,531 | 1,208,230 | 1,112,573 | 1,037,857 | 431,380 | |||||||||||||||
Long term debt, capital lease obligations, put warrants and common stock subject to repurchase | 350,024 | 362,768 | 346,229 | 313,940 | 48 | |||||||||||||||
Stockholders’ equity | 614,590 | 647,330 | 592,875 | 533,070 | 297,454 |
(a) | On January 1, 2002 the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible |
(b) | |
(c) | Diluted earnings per share and diluted weighted-average shares outstanding have been adjusted to reflect |
12
(d) | Pursuant to the Company’s stock repurchase programs, the effect on the calculation of |
13
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
We design, develop market, license and supportmarket access infrastructure software, services and services that enable effective and efficient enterprise-wide deployment and management of applications and information, including those designed for Microsoft Windows operating systems, for UNIX operating systems, such as Sun Solaris, HP-UX or IBM-AIX, or collectively UNIX operating systems, and for Web-based information systems. Our largest source of revenue is the MetaFrame XPTM Presentation Server products. Our MetaFrame products, which we began shipping in the second quarter of 1998, permit organizations to provide access to Windows based, Web-based, and UNIX applications without regard to location, network connection or type of client hardware platforms.appliances. We market and license our products through multiple channels such as value-added resellers, channel distributors, system integrators, and independent software vendors managed byand our worldwide sales force.websites. We also promote our products through relationships with a wide variety of industry participants, including Microsoft Corporation.Corporation (“Microsoft”).
Acquisitions
In May 1997, we entered into a five-year joint license, development and marketing agreement with Microsoft, which expired in May 2002. Under that agreement, or the Microsoft Development Agreement, we licensed our multi-user Windows NT extensions to Microsoft for inclusion in certain versions of its Windows NT server software. We recognized revenue from the Microsoft Development Agreement ratably over the five-year term of the contract in other revenues in the accompanying consolidated statements of income.
Net6
In May 2002, we signed an agreement with Microsoft to formalize continued access to Microsoft Windows Server source code. Under this agreement, we will have access to source code for current and future Microsoft server operating systems from Windows 2000 Server and beyond, including access to terminal services source code, during the three-year term of the agreement. This agreement does not provide for payments to or from Microsoft.
Acquisitions
We have acquired technology related to our strategic objectives. In April 2001, we acquired Sequoia Software Corporation for $182.6 million in cash. Sequoia provided XML-based portal software. The Sequoia technology is a core component of our MetaFrame Secure Access Manager software that was launched in June 2002 as NFuse Elite.
In February 2000,On December 8, 2004, we acquired all of the operating assetsissued and outstanding capital stock of Innovex Group,Net6, Inc. or Net6, a leader in providing secure access gateways. The acquisition extends our ability to provide easy and secure access to virtually any resource, both data and voice, on-demand. The results of operations of Net6 are included in our results of operations beginning after December 8, 2004 as part of our Americas geographic segment. The consideration for this transaction was approximately $47.8$49.2 million paid in cash. In addition to the purchase price, there were direct transaction costs associated with the acquisition of approximately $1.7 million. The sources of funds for consideration paid in this transaction consisted of available cash and investments.
Expertcity
On the dateFebruary 27, 2004, we acquired all of the acquisition, we paidissued and outstanding capital stock of Expertcity.com, Inc. or Expertcity, a market leader in Web-based desktop access as well as a leader in Web-based training and customer assistance products. The results of operations of Expertcity are included in our results of operations beginning after February 27, 2004.
The consideration for this transaction was approximately $28.9$241.4 million, comprised of approximately $112.6 million in cash, including closing costs. Underapproximately 5.9 million shares of our common stock valued at approximately $124.4 million and direct transaction costs of approximately $4.4 million. These amounts include additional common stock earned by Expertcity upon the termsachievement of certain revenue and other financial milestones during 2004 pursuant to the merger agreement, which will be issued during 2005. The fair value of the acquisition agreement, we were required to pay the remainingcommon stock earned as additional purchase price plus interest, if certain events occurred. During 2001, these events occurredconsideration was recorded as goodwill on the date earned. The sources of funds for consideration paid in this transaction consisted of available cash and as a result, we paidinvestments and our authorized common stock. There is no further contingent consideration related to the remaining purchase price and the associated interest of $10.5 million in cash in August 2001 and $10.7 million in cash in February 2002. We have no remaining contingent obligations.transaction.
We accountedPurchase Accounting for these acquisitions underOur Acquisitions
Under the purchase method of accounting, in accordance with Accounting Principles Board, or APB, Opinion No. 16,Accounting for Business Combinations.Wethe purchase price was allocated the cost of the acquisitions to theExpertcity’s and Net6’s respective net tangible and intangible assets acquired and the liabilities assumed based on their estimated fair values. Except forIndependent valuation specialists assisted us in determining the Innovex acquisition,fair values of a significant portion of the net assets associated with these transactions.
The allocation of the purchase price is summarized below (in thousands):
Expertcity | Net6 | |||||||||
Purchase Price Allocation | Asset Life | Purchase Price Allocation | Asset Life | |||||||
Current assets | $ | 26,085 | $ | 2,107 | ||||||
Property and equipment | 1,998 | Various | 204 | Various | ||||||
In-process research and development | 18,700 | 400 | ||||||||
Intangible assets | 50,800 | 3-7 years | 20,300 | 3-7 years | ||||||
Goodwill | 165,758 | Indefinite | 33,506 | Indefinite | ||||||
Assets acquired | 263,341 | 56,517 | ||||||||
Current liabilities | 13,617 | 2,836 | ||||||||
Deferred tax liability | 8,292 | 2,812 | ||||||||
Total liabilities assumed | 21,909 | 5,648 | ||||||||
Net assets acquired, including direct transaction costs | $ | 241,432 | $ | 50,869 | ||||||
Net assets acquired intangiblefrom Expertcity consisted mainly of cash and investments, accounts receivable, deferred revenues and other current liabilities. Net liabilities acquired from Net6 consisted mainly of cash, accounts receivable, deferred revenues and other current and long-term liabilities.
Intangible assets were relatedacquired in the Expertcity acquisition are comprised of core and product technologies, trade names, covenants not to compete and customer relationships. Intangible assets acquired in the Net6 acquisition are comprised of core and product technologies, customer relationships and covenants not to compete. The goodwill recorded in relation to these acquisitions is not deductible for tax purposes. The valuation of the trade names for Expertcity was determined based on assigning a royalty rate to the revenue stream that was expected from the services using the trade name. The pre-tax royalty rate was applied to the product revenue and discounted to a present value. The valuation of core and product technology was based on the estimated discounted future cash flows associated with Expertcity’s and Net6’s existing products. The value of customer relationships was determined based on Expertcity’s and Net6’s estimated future discounted cash flows of the relationships in place after considering historical attrition rates.
We expensed purchased in–process research and development that had not reached technological feasibilityof approximately $18.7 million related to the Expertcity acquisition and for which there was no alternative future use.$0.4 million related to the Net6 acquisition immediately upon the closing of the mergers. For more information regarding the in-process research and development acquired from Expertcity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” and note 3 to our consolidated financial statements.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various
14
We believe that the accounting policies described below are critical to understanding our business, results of operations and financial condition because they involve more significant judgments and estimates used in the preparation of our consolidated financial statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our consolidated financial statements. We have discussed the development, selection and application of our critical accounting policies with the audit committee of our board of directors, and our audit committee has reviewed our disclosure relating to our critical accounting policies in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also critical to understanding our consolidated financial statements. The notes to our consolidated financial statements contain additional information related to our accounting policies and should be read in conjunction with this discussion.
Cash Equivalents and Investments.The fair value of certain of our cash equivalents and investments is dependent on the performance of the companies or funds in which we invest, including equity investments that are accounted for under the cost method due to the limited extent of our ownership interest and lack of our ability to exert significant influence, and the volatility inherent in these investment markets. We periodically evaluate the carrying value of our investments to determine if there has been any impairment of value that is other-than-temporary, which would require us to write-down the investments. In assessing potential impairment, we consider the extent to which recorded costs exceed market values, the duration of any decline in market values and the forecasted financial performance of the issuers. During the year ended December 31, 2002, we recorded $1.3 million and during the year ended December 31, 2001, we recorded $7.7 million of write-downs resulting from other-than-temporary declines in fair value of certain of our investments. At December 31, 2002, we had $0.2 million in remaining equity investments classified as long-term investments in our consolidated balance sheet. For further information regarding risks related to our cash and investments balances, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources,” “Quantitative and Qualitative Disclosures About Market Risk” and note 2 to our consolidated financial statements.
We rely on third party valuations in order to adjust the carrying value of certain of our investments and derivative instruments to fair value at the end of each period. Fair values are based on valuation models that use market quotes and, for certain investments, assumptions as to the creditworthiness of the entities issuing those underlying investments.
At December 31, 2002, approximately $63 million in investment securities were pledged as collateral for specified obligations under our synthetic lease. In addition, at December 31, 2002, approximately $109 million in investment securities were pledged as collateral for our credit default contracts. We maintain the ability to manage the composition of the pledged investments and accordingly, these securities are not reflected as restricted investments in our accompanying consolidated balance sheets. For further information see notes 10 and 13 to our consolidated financial statements.
Provision for Doubtful Accounts Receivable.Our judgment is required in the assessment of the collectibility of our customer accounts and other receivables. We provide for potential uncollectible accounts receivable based on an evaluation of customer specific information, historical collection experience and economic market conditions. If market conditions decline, or if the financial condition of our customers or distributors deteriorates, actual collection experience may not meet our prior expectations and could result in increased bad debt expenses. The allowance for doubtful accounts receivable was $6.1 million at December 31, 2002 and $3.7 million at December 31, 2001. The increase during 2002 represents reserves based on the financial condition of certain distributors, none of which are individually significant. In previous years our bad debt write-offs have not been significant.
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Long-lived Assets.The determination of the useful lives of our long-lived assets and whether an asset’s value is impaired involves significant judgment. These judgments include, but are not limited to obsolescence, market conditions and contract life. Useful lives of internal use software, property and equipment are generally from three to seven years. We depreciate buildings over a 40-year period.
We review for impairment of long-lived assets and certain identifiable intangible assets to be held and used whenever we believe that events or changes in circumstances indicate that we may not fully recover the carrying amount of such assets. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. We base measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that our management expects to hold and use on the fair value of the asset. We report long-lived assets and certain identifiable intangible assets to be disposed of at the lower of the carrying amount or fair value minus the costs to sell such assets. During 2002, we recognized $2.0 million in asset impairment charges primarily due to the consolidation of certain of our offices that resulted in the abandonment of certain leasehold improvements. As of December 31, 2002, we have determined that there were no other triggering events requiring additional impairment analysis.
Effective January 1, 2002, we adopted Statement of Financial Accounting Standard, or SFAS, No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets,which establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS No. 144 supersedes SFAS No. 121 and APB Opinion No. 30,Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.Our adoption of these policies did not have a material impact on our consolidated results of operations and financial position.
Core and Product Technology Assets.We review acquired core and product technology assets for impairment on a periodic basis by comparing the estimated net realizable value to the unamortized cost of the technology. The core and product technology assets acquired in our Sequoia acquisition form the basis for our MetaFrame Secure Access Manager product, launched in June 2002 as NFuse Elite. The recoverability of this technology is primarily dependent upon our ability to commercialize these products. The estimated net realizable value of the purchased Sequoia technology is based on the estimated undiscounted future cash flows associated with our MetaFrame Secure Access Manager. Our revenues are forecasted based on data received from pilot evaluations and early adopters, rate projections on our installed customer base, and estimates from our sales channels and end-customer sales force. Our assumptions about future revenues and expenses require significant judgment associated with the forecast of MetaFrame Secure Access Manager. Due to the lack of historical data related to MetaFrame Secure Access Manager, actual revenues and costs could vary significantly from these forecasted amounts. As of December 31, 2002, we estimated that the net realizable value of these core and product technology assets is greater than the $24.5 million unamortized cost of these assets. If these products are not ultimately accepted by our channel or entities with which we have technology relationships or customers, and there is no alternative future use for this technology, we could determine that some or all of the remaining $24.5 million carrying value of the related core and product technology assets are impaired. In the event of impairment, we could be required to incur a charge to earnings that could have a material adverse effect on our results of operations.
Goodwill and Other Intangibles. At December 31, 2002, we had $152.4 million in indefinite lived goodwill and other intangibles primarily related to our acquisition of Sequoia. We operate in a single market consisting of the design, development, marketing and support of access infrastructure software and services for enterprise applications. Our revenues are derived from sales in the Americas, Europe, the Middle East and Africa, or EMEA, and Asia-Pacific regions. These three geographic regions constitute our reportable segments. See note 12 to our consolidated financial statements for additional information regarding our geographic segments. We evaluate goodwill along these geographic segments. Substantially all of our goodwill at December 31, 2002 was associated with our Americas reportable segment.
On January 1, 2002, we adopted SFAS No. 142,Goodwill and Other Intangible Assets. As a result of adopting SFAS No. 142, our goodwill and certain intangible assets are no longer amortized but are subject to an annual impairment test. In accordance with SFAS No. 142, we ceased amortizing goodwill with a net book
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We use judgment in assessing goodwill and other intangible assets for impairment. Goodwill is reviewed for impairment annually, or sooner if events or changes in circumstances indicate that the carrying amount could exceed fair value. Fair values are based on discounted cash flows using a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model. As of December 31, 2002, we concluded that we could realize our goodwill and other intangibles based upon projected discounted cash flows. Due to uncertain market conditions and potential changes in our strategy and product portfolio, it is possible that the forecasts we use to support our goodwill and other intangible assets could change in the future, which could result in non-cash charges that would adversely affect our results of operations and financial condition.
Current and Deferred Tax Assets.We are required to estimate our income taxes in each of the jurisdictions in which we operate as part of the process of preparing our consolidated financial statements. We determined the $55.1 million carrying value of our net deferred tax assets based upon certain estimates and assumptions, including the assumption that we will be able to generate enough future tax deductions in certain tax jurisdictions. If these estimates and assumptions change in the future, we could be required to record valuation allowances against our deferred tax assets resulting in additional income tax expenses.
Revenue Recognition. The accounting related to revenue recognition in the software industry is complex and affected by interpretations of the rules and an understanding of industry practices, both of which are subject to change. As a result, revenue recognition accounting rules require us to make significant judgments. In addition, our judgment is required in assessing the probability of collection, which is generally based on evaluation of customer specificcustomer-specific information, historical collection experience and economic market conditions.
We market and license softwaresell most of our MetaFrame Access Suite products through value-added resellers, channel distributors, system integrators and independent software vendors, managed by our worldwide sales force. Our software licenses are generally perpetual, and are delivered by means of traditional packaged products and electronically, typically under volume-based licensing programs. Our packaged products are typically purchased by medium and small-sized businessesbundled with fewer locations and thean initial subscription for software license is deliveredupdates that provide the end-user with free enhancements and upgrades to the packaged product.
Volume-based license arrangements are used with more complex multi-server environments typically found in larger business enterprises that deploy our productslicensed product on a departmentwhen and if available basis. Customers may also elect to purchase technical support, product training or enterprise-wide basis, which could require differences in product featuresconsulting services. We allocate revenue to software license updates and functionality at various customer locations. The end-customer license agreement with enterprise customers is typically customized based on these factors. Once we receive a purchase order from the channel distributor, the volume-based licenses are electronically delivered to the customer with “software activation keys” that enable the feature configuration ordered by the end-customer. Depending on the size of the enterprise, software may be delivered indirectly by the channel distributor or directly by us pursuant to a purchase order from the channel distributor.
We recognize revenue when it is earned. Our revenue recognition policies are in compliance with the American Institute of Certified Public Accountants Statement of Position, or SOP, 97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations, Software Revenue Recognition. We recognize revenue when all of the following criteria are met: persuasive evidenceany other undelivered elements of the arrangement exists;based on vendor specific objective
evidence, or VSOE, of fair value of each element and such amounts are deferred until the applicable delivery has occurredcriteria and weother revenue recognition criteria have no remaining obligations;been met. The balance of the feerevenue, net of any discounts inherent in the arrangement, is fixed or determinable; and collectibility is probable. We define these four criteria as follows:
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For certain software products that are only sold bundled with PCS, we allocate revenueallocated to the delivered software product using the residual method. Undermethod and recognized at the residual method, we do not selloutset of the arrangement as the software products separatelylicenses are delivered. If we cannot objectively determine the fair value of each undelivered element based on VSOE, we defer revenue recognition until all elements are delivered, all services have been performed, or until fair value can be objectively determined. We must apply judgment in determining all elements of the arrangement and thus we are generally unable to determinein determining the VSOE of fair value for the product. Therefore, we allocate discounts inherent in the arrangement entirely to the software product and the portion of the fee initially allocated to PCS and deferred is generally higher than in arrangements with established VSOE for the software product. Depending on future product releases or changes in customer demand, we may offer additional products that are only sold bundled with PCS. If we do this, the use of the residual method will become more prevalent, which could impact the timing of our revenue recognition since more of the sales proceeds would be allocated to the PCS portion of the arrangement and recognized over the PCS period. We also sell PCS separately through our Citrix Subscription Advantage renewal program, and we determine VSOE by the renewal price charged. We base technical service and PCS revenues from customer maintenance fees for ongoing customer support and product updates and upgrades oneach element, considering the price charged for each product or derived value of the undelivered elements and are recognized ratably over the term of the contract, which is typically 12 to 24 months. We include technical service revenues in net revenues in the consolidated statements of income.applicable renewal rates for software license updates.
In the normal course of business, we do not permit product returns, but we do provide most of our distributors and value added resellers with stock balancing and price protection rights. Stock balancing rights permit distributors to return products to us up to the forty-fifth day of the fiscal quarter, subject to ordering an equal dollar amount of our products.other products prior to the last day of the same fiscal quarter. Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors or resellers if we lower our prices for such products. We establish provisions for estimated returns for stock balancing and price protection rights, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors, estimated distributor inventory levels by product, the impact of any new product releases and projected economic conditions. Actual product returns for stock balancing and price protection provisions incurred are, however,
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AccountingCore and Product Technology Assets. We review acquired core and product technology assets for Stock-Based Compensation.SFAS No. 123,Accountingimpairment on a periodic basis by comparing the estimated net realizable value to the unamortized cost of the technology. We have acquired our core and product technology assets primarily from our Net6, Expertcity and Sequoia acquisitions as well as under other third party agreements. The core and product technology assets acquired in our Net6 acquisition will extend our ability to provide easy and secure access through our MetaFrame Access Suite of products. The core and product technology assets acquired in our Expertcity acquisition form the basis of our Citrix Online division and the assets acquired in our Sequoia acquisition, as well as under other third party agreements, form the basis for Stock-Based Compensation, defines a fairour MetaFrame Secure Access Manager product. The recoverability of these technologies is primarily dependent upon our ability to commercialize these products. The estimated net realizable value method of accounting for issuance of stock optionsthe purchased Sequoia and other equity instruments. Under the fair value method, compensation costtechnology is measured at the grant date based on the fairestimated undiscounted future cash flows associated with our MetaFrame Secure Access Manager. The estimated net realizable value of the awardpurchased Expertcity technology is based on the estimated undiscounted future cash flows associated with our Citrix Online services. Our revenues are forecasted based on historical sales, data received from rate projections on our subscribing customer base and estimates from our sales channels and end-customer sales force. Our assumptions about future revenues and expenses require significant judgment associated with the forecast of MetaFrame Secure Access Manager and our Citrix Online products. Actual revenues and costs could vary significantly from these forecasted amounts. As of December 31, 2004, the estimated undiscounted future cash flows expected from core and product technology assets from these acquisitions is recognized oversufficient to recover their carrying value. If these products are not ultimately accepted by our customers, and there is no alternative future use for this technology, we could determine that some or all of their remaining $36.3 million carrying value is impaired. In the service period,event of impairment, we would record an impairment charge to earnings that could have a material adverse effect on our results of operations.
On December 8, 2004, we acquired Net6, which resulted in additional core and product technology of $13.3 million, net of amortization, at December 31, 2004. For more information concerning our acquisition of Net6, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Acquisitions.”
Goodwill. At December 31, 2004, we had $361.5 million in goodwill primarily related to our acquisitions of Net6, Expertcity and Sequoia. The goodwill recorded in relation to these acquisitions is usuallynot deductible for tax purposes. We operate in a single market consisting of the vesting period. Pursuantdesign, development, marketing and support of access infrastructure software, hardware and services for enterprise applications. Our revenues are derived from sales in the Americas, Europe, the Middle East and Africa, or EMEA, and Asia-Pacific regions and from our Citrix Online division. These three geographic regions and the Citrix Online division constitute our reportable segments. See note 12 to our consolidated financial statements for additional information regarding our reportable segments. We evaluate goodwill along these segments, which represent our reporting units. Substantially all of our goodwill at December 31, 2004 was associated with our Americas and Citrix Online reportable segments.
On January 1, 2002, we adopted Statement of Financial Accounting Standard or SFAS No. 123, companies142,Goodwill and Other Intangible Assets. As a result of adopting SFAS No. 142, our goodwill is no longer amortized but is subject to an annual impairment test. In accordance with SFAS No. 142, we ceased amortizing goodwill with a net book value at January 1, 2002 of $152.4 million, including $10.1 million of acquired workforce previously classified as purchased intangible assets. Excluding goodwill, we have no intangible assets deemed to have indefinite lives.
We use judgment in assessing goodwill for impairment. Goodwill is reviewed for impairment annually, or sooner if events or changes in circumstances indicate that the carrying amount could exceed fair value. Fair values are notbased on discounted cash flows using a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model. In accordance with SFAS No. 142, we completed the required impairment tests of goodwill at the date of adoption and annually as required. There were no impairment charges recorded as a result of the adoption of SFAS No. 142 or annual impairment tests. Due to uncertain market conditions and potential changes in our strategy and product portfolio, it is possible that the forecasts we use to support our goodwill could change in the future, which could result in non-cash charges that would adversely affect our results of operations and financial condition.
Current and Deferred Tax Assets. We are required to adoptestimate our income taxes in each of the fairjurisdictions in which we operate as part of the process of preparing our consolidated financial statements. At December 31, 2004, the Company has $40.8 million in net deferred tax assets. SFAS No. 109,Accounting for Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is not more likely than not that some portion or all of the deferred tax assets will be realized. Management reviews deferred tax assets periodically for recoverability and makes estimates and judgments regarding the expected geographic sources of taxable income, gains from investments, as well as tax planning strategies in assessing the need for a valuation allowance. At December 31, 2004, we determined that a valuation allowance of approximately $1.3 million relating to foreign tax credit carryovers was necessary to reduce our deferred tax assets to the amount that will more likely than not be realized. If the estimates and assumptions used in our determination change in the future, we could be required to revise our estimates of the valuation allowances against our deferred tax assets and adjust our provisions for additional income taxes.
In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain, thus judgment is required in determining the worldwide provision for income taxes. We provide for income taxes on transactions based on our estimate of the probable liability. We adjust our provision as appropriate for changes that impact our underlying judgments. Changes that impact provision estimates include such items as jurisdictional interpretations on tax filing positions based on the results of tax audits and general tax authority rulings. Due to the evolving nature of tax rules combined with the large number of jurisdictions in which we operate, it is possible that our estimates of our tax liability and the realizability of our deferred tax assets could change in the future, which may result in additional tax liabilities and adversely affect our results of operations, financial condition and cash flows.
Stock-based Compensation Disclosures
Our stock option program is a broad based, long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interests. The number and frequency of stock option grants are based on competitive practices, our operating results, the number of options available for grant under our shareholder approved plans, and other factors. All employees are eligible to participate in the stock option program.
As of December 31, 2004, we had six stock-based compensation plans, including plans assumed in acquisitions. We typically grant stock options for a fixed number of shares to employees with an exercise price equal to or above the market value of the shares at the date of grant. As discussed in note 2 to our consolidated financial statements, we apply the intrinsic value method of accounting for employee stock-based transactions. Companies are permitted to account for such transactions under Accounting Principles Board or APB Opinion No. 25,Accounting for Stock Issued to Employees, but are requiredand related interpretations in accounting for our plans except for 51,546 options assumed as part of the Net6 acquisition, which were accounted for in with FASB Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25)because they had an exercise price below market value. No stock-based compensation cost has been reflected in net income except for the amounts related to disclose in a note to the 51,546 options assumed as part of the Net6 acquisition. The impact of our fixed stock plans and our stock purchase plan on our consolidated financial statements pro forma net income andfrom the use of options is reflected in the calculation of earnings per share amounts as if a company had appliedin the methods prescribed by SFAS No. 123.form of dilution.
We apply APB Opinion No. 25
The following table (in thousands, except option price) provides information as of December 31, 2004 about the securities authorized for issuance to our employees and related interpretations, which do not require us to recognizedirectors under our fixed stock compensation cost, in accounting forplans, consisting of our Amended and Restated 1995 Stock Plan, the Third Amended and Restated 1995 Employee Stock Purchase Plan, the Amended and Restated 1995 Non-Employee Director Option Plan and the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan:
(A) | (B) | (C) | |||||
Plan | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A)) | ||||
Equity compensation plans approved by security holders | 36,876 | $ | 25.23 | 42,872 | |||
Equity compensation plans not approved by security holders* | 52 | 3.86 | — | ||||
Total | 36,928 | $ | 25.20 | 42,872 | |||
* | Consists of the Amended and Restated 2000 Stock Incentive Plan of Net6 Inc. and the Amended and Restated 2003 Stock Incentive Plan of Net6 Inc., each of which we assumed in our acquisition of Net6. For more information concerning these plans, see note 6 to our consolidated financial statements. |
The following table provides information about stock options granted toin 2004 and 2003 for employees, and non-employee directors and we have compliedfor certain executive officers. The stock option data for listed officers relates to our Named Executive Officers. The “Named Executive Officers” for the year ended December 31, 2004, consist of our chief executive officer and the four other most highly compensated executive officers who earned total annual salary and bonus in excess of $100,000 in 2004. For further information on 2004 Named Executive Officers, see our 2004 proxy statement that will be filed with the disclosure requirementsSecurities and Exchange Commission not later than 120 days after the close of SFAS No. 123. Exceptour fiscal year ended December 31, 2004. For 2003, the “Named Executive Officers” consist of our chief executive officer and the four other most highly compensated executive officers and one other individual that would have qualified, except that she was not an executive officer at December 2003 that earned total annual salary and bonus in excess of $100,000 in 2003. The 2003 Named Executive Officers are identified in our 2003 Proxy Statement dated April 4, 2004. Named Executive officers for non-employee directors, we haveboth years presented were employees as of the respective year end.
Net grants to all employees, non-employee directors and executive officers as a percent of outstanding shares(1)(2) Grants to Named Executive Officers as a percent of outstanding shares(2) Grants to Named Executive Officers as a percent of total options granted Cumulative options held by Named Executive Officers as a percent of total options outstanding(3) Year ended
December 31, 2004 2003 1.73 % 1.03 % 0.17 % 0.24 % 4.83 % 6.89 % 9.66 % 10.08 %
(1) | Net grants represent total options granted during the period net of options forfeited during the period. |
(2) | Calculation is based on outstanding shares of common stock as of the beginning of the respective period. |
(3) | Calculation is based on total options outstanding as of the end of the respective period. |
The following table presents our option activity from December 31, 2002 through December 31, 2004 (in thousands, except weighted-average exercise price). Some amounts may not granted anyadd due to rounding.
Options Outstanding | |||||||||
Options for | Number Shares | Weighted Average Exercise | |||||||
Balance at December 31, 2002 | 30,001 | 41,221 | $ | 24.51 | |||||
Granted at market value | (5,575 | ) | 5,575 | 16.19 | |||||
Granted above market value | (349 | ) | 349 | 12.00 | |||||
Exercised | — | (4,723 | ) | 11.64 | |||||
Forfeited/cancelled | 4,199 | (4,199 | ) | 28.14 | |||||
Reduction in plan shares (1) | (500 | ) | N/A | N/A | |||||
Additional shares reserved | 9,249 | N/A | N/A | ||||||
Balance at December 31, 2003 | 37,025 | 38,222 | 24.56 | ||||||
Granted at market value | (5,638 | ) | 5,638 | 20.97 | |||||
Granted below market value | (52 | ) | 52 | 3.86 | |||||
Exercised | — | (4,492 | ) | 13.06 | |||||
Forfeited/cancelled | 2,491 | (2,491 | ) | 25.14 | |||||
Additional shares reserved | 9,046 | N/A | N/A | ||||||
Balance at December 31, 2004 | 42,872 | 36,928 | $ | 25.20 | |||||
(1) | The number of shares reserved for issuance under our Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan was reduced by 500,000 shares pursuant to an amendment to such option plan authorized by our Board of Directors on May 15, 2003. |
A summary of our in-the-money and out-of-the-money option information as of December 31, 2004 is as follows (in thousands, except weighted average exercise price). Out-of-the-money options are those options with an exercise price equal to non-employees. or above the closing price of $24.46 per share for our common stock at December 31, 2004.
Exercisable | Unexercisable | Total | |||||||||||||
Shares | Weighted Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||||
In-the-money | 13,700 | $ | 16.48 | 10,190 | $ | 16.20 | 23,890 | $ | 16.36 | ||||||
Out-of-the-money | 11,825 | 42.68 | 1,213 | 28.84 | 13,038 | 41.39 | |||||||||
Total options outstanding | 25,525 | 28.62 | 11,403 | 17.55 | 36,928 | 25.20 | |||||||||
The following table provides information with regard to our stock option grants during 2004 to the 2004 Named Executive Officers:
Individual Grants(1) | |||||||
Number of Securities Underlying Options Granted (#) | Exercise Price ($/share) | Expiration Date | |||||
Mark Templeton | 37,500 37,500 | $ $ | 22.47 17.55 | April 13, 2009 August 2, 2009 | |||
John Burris | 25,000 25,000 25,000 | $ $ $ | 22.47 17.55 22.94 | April 13, 2009 August 2, 2009 October 25, 2009 | |||
David Friedman | 15,000 15,000 | $ $ | 22.47 17.55 | April 13, 2009 August 2, 2009 | |||
Stefan Sjostrom | 12,500 22,500 | $ $ | 22.47 17.55 | April 13, 2009 August 2, 2009 | |||
David Henshall | 17,500 17,500 25,000 | $ $ $ | 22.47 17.55 22.94 | April 13, 2009 August 2, 2009 October 25, 2009 |
(1) | These options vest over 3 years at a rate of 33.3% of the shares underlying the option one year from the date of the grant and at a rate of 2.78%, monthly, thereafter. |
The following table presents certain information regarding option exercises for 2004 and outstanding options held by 2004 Named Executive Officers as of December 31, 2004:
Shares Acquired on Exercise (#) | Value | Number of Securities Underlying Unexercised Options at December 31, 2004 | Values of Unexercised In- the-Money Options at December 31, 2004 ($) | ||||||||||||
Exercisable | Unexercisable | Exercisable | Unexercisable(2) | ||||||||||||
Mark Templeton | — | — | 2,011,458 | 191,042 | $ | 9,656,322 | $ | 1,514,173 | |||||||
John Burris | 30,624 | $ | 571,138 | 435,829 | 144,297 | $ | 729,912 | $ | 1,016,313 | ||||||
David Friedman | — | — | 62,864 | 127,136 | $ | 1,033,877 | $ | 1,711,098 | |||||||
Stefan Sjostrom | 27,187 | $ | 459,186 | 233,432 | 101,631 | $ | 354,767 | $ | 781,473 | ||||||
David Henshall | — | — | 83,333 | 176,667 | $ | 841,663 | $ | 1,372,087 |
(1) | The amounts disclosed in this column were calculated based on the difference between the fair market value of our common stock on the date of exercise and the exercise price of the options in accordance with regulations promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and do not reflect amounts actually received by the named officers. |
(2) | Value is based on the difference between the option exercise price and the fair market value at December 31, 2004 ($24.46 per share), multiplied by the number of shares underlying the option. |
For further information regarding our stock option plans, see note 6 to our consolidated financial statements.
The following discussion relating to the individual financial statement captions, our overall financial performance, operations and financial position should be read in conjunction with the factors and events described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Which May Affect Future Results”Results,” which could impact our future performance and financial position.
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Results of Operations
The following table sets forth our consolidated statements of income data and presentation of that data as a percentage of change from period-to-period.
Year Ended December 31, | 2002 | 2001 | ||||||||||||||||||||
Compared to | Compared to | |||||||||||||||||||||
2002 | 2001 | 2000 | 2001 | 2000 | ||||||||||||||||||
Net revenues | $ | 527,448 | $ | 591,629 | $ | 470,446 | (10.8 | )% | 25.8 | % | ||||||||||||
Cost of revenues (excluding amortization, presented separately below) | 19,030 | 29,848 | 29,054 | (36.2 | ) | 2.7 | ||||||||||||||||
Gross margin | 508,418 | 561,781 | 441,392 | (9.5 | ) | 27.3 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Research and development | 68,923 | 67,699 | 50,622 | 1.8 | 33.7 | |||||||||||||||||
Sales, marketing and support | 235,393 | 224,108 | 180,384 | 5.0 | 24.2 | |||||||||||||||||
General and administrative | 88,946 | 85,212 | 58,685 | 4.4 | 45.2 | |||||||||||||||||
Amortization of intangible assets | 11,296 | 48,831 | 30,395 | (76.9 | ) | 60.7 | ||||||||||||||||
In-process research and development | — | 2,580 | — | * | * | |||||||||||||||||
Write-down of technology | — | — | 9,081 | * | * | |||||||||||||||||
Total operating expenses | 404,558 | 428,430 | 329,167 | (5.6 | ) | 30.2 | ||||||||||||||||
Income from operations | 103,860 | 133,351 | 112,225 | (22.1 | ) | 18.8 | ||||||||||||||||
Interest income | 30,943 | 42,006 | 41,313 | (26.3 | ) | 1.7 | ||||||||||||||||
Interest expense | (18,163 | ) | (20,553 | ) | (17,099 | ) | (11.6 | ) | 20.2 | |||||||||||||
Other expense, net | (3,483 | ) | (2,253 | ) | (1,422 | ) | 54.6 | 58.4 | ||||||||||||||
Income before income taxes | 113,157 | 152,551 | 135,017 | (25.8 | ) | 13.0 | ||||||||||||||||
Income taxes | 19,237 | 47,291 | 40,505 | (59.3 | ) | 16.8 | ||||||||||||||||
Net income | $ | 93,920 | $ | 105,260 | $ | 94,512 | (10.8 | ) | 11.4 | |||||||||||||
Year Ended December 31, | 2004 Compared to 2003 | 2003 Compared to 2002 | ||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||
Revenues: | ||||||||||||||||||
Software licenses | $ | 369,826 | $ | 374,403 | $ | 363,145 | (1.2 | )% | 3.1 | % | ||||||||
Software license updates | 271,547 | 168,793 | 105,682 | 60.9 | 59.7 | |||||||||||||
Services | 99,784 | 45,429 | 44,539 | 119.6 | 2.0 | |||||||||||||
Other | — | — | 14,082 | * | * | |||||||||||||
Total net revenues | 741,157 | 588,625 | 527,448 | 25.9 | 11.6 | |||||||||||||
Cost of revenues: | ||||||||||||||||||
Cost of software license revenues | 3,824 | 13,555 | 12,444 | (71.8 | ) | 8.9 | ||||||||||||
Cost of services revenues | 16,472 | 6,481 | 6,586 | 154.2 | (1.6 | ) | ||||||||||||
Amortization of core and product technology | 6,127 | 11,036 | 10,811 | (44.5 | ) | 2.1 | ||||||||||||
Total cost of revenues | 26,423 | 31,072 | 29,841 | (15.0 | ) | 4.1 | ||||||||||||
Gross margin | 714,734 | 557,553 | 497,607 | 28.2 | 12.0 | |||||||||||||
Operating expenses: | ||||||||||||||||||
Research and development | 86,357 | 64,443 | 68,923 | 34.0 | (6.5 | ) | ||||||||||||
Sales, marketing and support | 337,566 | 252,749 | 235,393 | 33.6 | 7.4 | |||||||||||||
General and administrative | 106,516 | 85,672 | 88,946 | 24.3 | (3.7 | ) | ||||||||||||
Amortization of other intangible assets | 6,204 | 300 | 485 | * | (38.1 | ) | ||||||||||||
In-process research and development | 19,100 | — | — | * | * | |||||||||||||
Total operating expenses | 555,743 | 403,164 | 393,747 | 37.8 | 2.4 | |||||||||||||
Income from operations | 158,991 | 154,389 | 103,860 | 3.0 | 48.7 | |||||||||||||
Interest income | 14,274 | 21,120 | 30,943 | (32.4 | ) | (31.7 | ) | |||||||||||
Interest expense | (4,367 | ) | (18,280 | ) | (18,163 | ) | (76.1 | ) | 0.6 | |||||||||
Write-off of deferred debt issuance costs | (7,219 | ) | — | — | * | * | ||||||||||||
Other income (expense), net | 2,754 | 3,458 | (3,483 | ) | (20.4 | ) | 199.3 | |||||||||||
Income before income taxes | 164,433 | 160,687 | 113,157 | 2.3 | 42.0 | |||||||||||||
Income taxes | 32,887 | 33,744 | 19,237 | (2.5 | ) | 75.4 | ||||||||||||
Net income | $ | 131,546 | $ | 126,943 | $ | 93,920 | 3.6 | 35.2 | ||||||||||
* | not meaningful. |
Net Revenues.Our operations consist of the design, development, marketing and support of access infrastructure software and services that enable effective and efficient enterprise-wide deployment and management of applications and information.
We present net
Net revenues ininclude the following three categories outlined below:categories: Software Licenses, Software License Revenue, TechnicalUpdates, Services, Revenue, and Royalty Revenue. License RevenueOther. Software Licenses primarily represents fees related to the licensing of our MetaFrame products,Access Suite products. These revenues are reflected net of sales allowances and provisions for stock balancing return rights. The MetaFrame Presentation Server product accounted for approximately 93.3% of our Software License revenue for the year ended December 31, 2004, 97.6% of our Software License revenue for the year ended December 31, 2003 and 97.7% of our Software License revenue for the year ended December 31, 2002. Software License Updates consists of fees related to our Subscription Advantage program (our terminology for PCS), additional user licenses and management products (such as load balancing and resource management products). Technical Services Revenue consists primarily of technical support services, product training and certification, and consulting services related to implementation of our software products. We recognize Technical Services and PCS revenues from customer maintenance fees or ongoing customer supportpost contract support) that are recognized ratably over the term of the contract, which is typically 12 to 24 months. Royalty RevenueSubscription Advantage is an annual renewable program that provides subscribers with automatic delivery of software upgrades, enhancements and maintenance releases when and if they become available during the term of the subscription. Services consist primarily of technical support services and Web-based desktop access services revenue recognized ratably over the contract term, revenue from product training and certification, and consulting services revenue related to implementation of our software products, which are recognized as the services are provided. In May 1997, we entered into a five-year joint license, development and marketing agreement with the Microsoft Corporation or the Microsoft Development Agreement, which expired in May 2002. Other revenues in 2002 represents the royalty fees recognized in connection with the Microsoft Development Agreement,Agreement.
Net revenues increased $152.5 million during 2004 compared to 2003. Software License revenue decreased $4.6 million during 2004 primarily due to a weakness in our packaged product sales which expiredare typically purchased by medium and small-sized businesses. Software License Updates revenue increased $102.8 million during 2004 primarily due to a larger base of subscribers and increasing renewal rates related to our Subscription Advantage program. Services revenue increased
$54.4 million during 2004 primarily due to the addition of the Citrix Online division resulting from our February 2004 Expertcity acquisition. We currently expect Subscription Advantage to continue to be of strategic importance to our business in May 2002.2005 because it fosters long-term customer relationships and gives us improved visibility and predictability due to the recurring nature of this revenue stream.
The decrease
In January 2004, we launched our Advisor Rewards Program which gives sales incentives to resellers for the sale of certain license types. In the third quarter of 2004, we extended our Advisor Rewards Program to a broader range of license types, which we anticipate will continue to stimulate demand for our MetaFrame products from smaller customers and projects. Revenues associated with our Advisor Rewards Program is partially offset by the associated incentives to our resellers.
Net revenues increased $61.2 million during 2003 compared to 2002. Software License revenue increased $11.3 million during 2003 primarily due to an increase in net revenues inSoftware Licenses, revenue from the sale of Citrix MetaFrame Presentation Server, under enterprise customer license arrangements. Also, the increase over 2002 was partially due primarily to a decrease in the number of MetaFrame licenses sold, which resulted from a decreaseweakness during 2002 in packaged product sales due to an overall weakness in information technology spendingour distributors and resellers, associated with a reduction in packaged product inventory held by our distributors. Indistributors and overall weakness in IT spending during 2002. Software License Updates revenue increased $63.1 million during 2003 compared to 2002 primarily due to the near term, we do not anticipate further material reductions in packaged product inventory held bycontinued acceptance of our distributors. The decrease in packaged product sales wasrenewable Subscription Advantage program. These increases were partially offset by an increase in volume-based licensing sales, mainly to medium and large customers. In addition, thea decrease in netOther revenue also resulted
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The increase in net revenues in 2001 was primarily attributable to an increase in License Revenue resulting from an increase in the number of MetaFrame licenses sold for Windows operating systems, specifically due to market acceptance of our MetaFrame XP access infrastructure software introduced in February 2001. The increase in net revenues in 2001 also resulted from an increase in Technical Services Revenue due primarily to an increase in larger scale volume-based licensing arrangements that typically require professional services to ensure successful implementation of our technologies.
Deferred revenues, as of December 31, 2002 primarily related to Citrix Subscription Advantage and Technical Services revenues. Excluding those deferred revenues, associated with the Microsoft Development Agreement, deferred Citrix Subscription Advantage and Technical Services Revenues increased approximately $32$60.1 million as compared to December 31, 2001. This2003. The significant increase was due primarily to increased renewals of Citrix Subscription Advantage.Advantage, and the services sold by our Citrix Online division, which were acquired from Expertcity. We expect deferred revenue to increase in 2005 due primarily to currently expected increases in both annual contract adoptions for Citrix Online services and Subscription Advantage renewals.
An analysis of our net revenues is presented below:
Year Ended December 31, | Revenue | Revenue | ||||||||||||||||||
Growth | Growth | |||||||||||||||||||
2002 | 2001 | 2000 | 2001 to 2002 | 2000 to 2001 | ||||||||||||||||
License Revenue | $ | 468,827 | $ | 511,147 | $ | 400,156 | (8.3 | )% | 27.7 | % | ||||||||||
Technical Services Revenue | 44,539 | 40,652 | 30,392 | 9.6 | 33.8 | |||||||||||||||
Royalty Revenue | 14,082 | 39,830 | 39,898 | (64.6 | ) | (0.2 | ) | |||||||||||||
Net Revenues | $ | 527,448 | $ | 591,629 | $ | 470,446 | (10.8 | ) | 25.8 | |||||||||||
International and Segment Revenues.International revenues (sales outside of the United States) accounted for approximately 53.2% of our net revenues for the year ended December 31, 2004, 54.6% of our net revenues for the year ended December 31, 2003, and 53.7% of our net revenues for the year ended December 31, 2002, 48.0% of our net revenues for the year ended December 31, 2001, and 40.3% of our net revenues for the year ended December 31, 2000. During 2002, the significant increase in our international revenues as a percentage of net revenues was primarily due to a weakness in packaged product sales in the United States and the expiration of the Microsoft Development Agreement in May 2002. During 2001, the significant increase in our international revenues as a percentage of net revenues was primarily the result of increased sales and marketing efforts and continued demand for our products in Europe and Asia, as well as the economic impact of slower information technology spending in the United States during 2001. We expect that the difficult economic conditions that existed in 2002 will persist in 2003.
An analysis of our geographicreportable segment net revenue as a percentage of net revenue is presented below:
Year Ended December 31, | Revenue | Revenue | ||||||||||||||||||
Growth | Growth | |||||||||||||||||||
2002 | 2001 | 2000 | 2001 to 2002 | 2000 to 2001 | ||||||||||||||||
Americas(1) | 48.4 | % | 48.9 | % | 52.8 | % | (11.6 | )% | 16.4 | % | ||||||||||
EMEA(2) | 39.7 | 36.6 | 33.7 | (3.3 | ) | 36.6 | ||||||||||||||
Asia-Pacific | 9.2 | 7.8 | 5.0 | 5.2 | 95.8 | |||||||||||||||
Other(3) | 2.7 | 6.7 | 8.5 | (64.6 | ) | (0.2 | ) | |||||||||||||
Consolidated net revenues | 100.0 | % | 100.0 | % | 100.0 | % | (10.8 | ) | 25.8 | |||||||||||
Year Ended December 31, | Revenue Growth 2003 to 2004 | Revenue Growth 2002 to 2003 | |||||||||||||
2004 | 2003 | 2002 | |||||||||||||
Americas(1) | $ | 335,436 | $ | 291,470 | $ | 255,438 | 15.1 | % | 14.1 | % | |||||
EMEA(2) | 293,690 | 243,890 | 209,520 | 20.4 | 16.4 | ||||||||||
Asia-Pacific | 67,930 | 53,265 | 48,408 | 27.5 | 10.0 | ||||||||||
Citrix Online division | 44,101 | — | — | 100.0 | — | ||||||||||
Other(3) | — | 14,082 | — | (100.0 | ) | ||||||||||
Consolidated net revenues | $ | 741,157 | $ | 588,625 | $ | 527,448 | 25.9 | 11.6 | |||||||
(1) | Our Americas segment is comprised of the United States, Canada and Latin America. |
(2) | Defined as Europe, Middle East and Africa. |
(3) | Represents royalty fees in connection with the Microsoft Development Agreement, which expired |
With respect to our geographic segment revenues, the decreaseincrease in net revenues during 20022004 as compared to 20012003 was due primarily to the factors mentioned above across all geographic segments, particularly Europe. The increase in net revenues during 2003 as well as a decline in packaged product sales in Europe. During 2001, revenues notably increased in our Asia-Pacific segment, particularlycompared to 2002 was due primarily to increased
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Cost of Revenues.Cost of revenues consistedconsists primarily of the costcompensation costs and other personnel-related costs of royalties,providing services and amortization of core and product technology, as well as costs of product media and duplication, manuals, packaging materials and shipping expense.expense service capacity costs and royalties. Cost of software licenses revenues decreased $9.7 million in 2004 as compared to 2003 due primarily to a decrease in royalties due to the expiration of certain
license agreements. Cost of services revenues increased $10.0 million in 2004 compared to 2003 primarily due to the addition of our Citrix Online division resulting from the February 2004 Expertcity acquisition. Amortization of core and product technology decreased $4.9 million in 2004 as compared to 2003 primarily due to the reclassification of certain intangible tax assets related to a 2001 acquisition from a product technology intangible asset to goodwill resulting in an approximately $7.2 million reduction in amortization expense partially offset due to an increase in amortization expense related to core and product technology intangible assets acquired in the Expertcity acquisition. Cost of revenues also consisted of compensation and other personnel-related costs of providing consulting services. We expensed all development costs incurred in connection with the Microsoft Development Agreement as incurred infor software licenses revenues, cost of other revenues. Our cost ofservices revenues excludesand amortization of core and product technology which is shown as a component of amortization expense in our consolidated statements of income. During 2001, we implemented a new enterprise resource planning system. As a result of this implementation, we have an enhanced ability to obtain information regarding personnel-related costs of providing consulting services revenues. The decrease in the cost of revenues for 2002 as2003 remained relatively unchanged compared to 2001, is primarily attributable to our ability to identify certain non-revenue generating services expenses and classify such costs as operating expenses. Volume-based license sales are typically fulfilled with a nominal level of product media and the licenses are delivered electronically. The cost of fulfilling such sales is less than traditional packaged product sales, thereby reducing costs of revenues as a percentage of revenue.2002.
The increase in cost of revenues for 2001 was due to an overall increase in our packaged product sales and increases in compensation and other costs of providing services revenues. These increases were offset in part by a reduction of the level of inventory necessary to fulfill customer orders due to increased market acceptance of volume-based licenses.
Gross Margin. Gross margin as a percent of revenue was 96.4% for 2002, 95.0%2004, 94.7% for 20012003 and 93.8%94.3% for 2000.2002. The increase in gross margin as a percentage of net revenue from 2001in 2004 compared to 20022003 was primarily due to the decrease in cost of revenues as discussed above. The increase in gross margin as a percentage of net revenue from 2000 to 2001 was primarily due to larger reserves for obsolete inventory recorded in 2000. To a lesser extent, the increase in gross margin during 2001 was also due to an increase in volume-based licensing, as discussed above. We currently anticipate that in the next 12twelve months, gross margin as a percentage of net revenues will remain relatively unchanged as compared with current levels. However, grossGross margin, couldhowever, will fluctuate from time to time based on a number of factors attributable to the cost of revenues as describeddiscussed above.
Operating Expenses. As further discussed below, during 2002 we reduced our worldwide workforce by approximately 10% (approximately 200 employees) and consolidated certain functions from our Salt Lake City, Utah and Columbia, Maryland facilities into our Fort Lauderdale, Florida facility. As a result of such actions, we incurred expenses of approximately $10.9 million, primarily for severance and related facility expenses, of which approximately $7.0 million were included in research and development expenses, $2.8 million were included in sales, marketing and support expenses and $1.1 million were included in general and administrative expenses. We
Our results of operations are subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks one year in advance of anticipated foreign currency expenses. As a result of this policy, foreign currency denominated expenses will be higher or lower in the current year depending on the weakness or strength of the dollar in the prior year. Since the U.S. dollar was generally weak in 2004, we currently expect that increasesoperating expenses will be higher in insurance premiums2005 but further dollar weakness in 2005 will not have a further material adverse impact on our operating expenses until 2006.
As permitted by SFAS No. 123,Accounting for Stock-based Compensation,we currently account for share-based payments to employees using the APB Opinion No. 25 intrinsic value method and, higher foreign currency expenses, impacted byas such, generally recognize no compensation cost for employee stock options. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R,Share-Based Payment.SFAS No. 123R requires companies to expense the value of employee stock options and similar awards. SFAS No. 123R permits public companies to adopt its requirements using one of two methods: A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. A “prospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123R for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a weaker dollar exchange rate,financing cash flow, rather than as an operating cash flow as required under current literature. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. We are currently in the process of determining the effects on our financial position, results of operations and investments in new products,cash flows that will offset savingsresult from these actions.the adoption of SFAS No. 123R.
Research and Development Expenses. Research and development expenses consistedconsist primarily of personnel-related costs. We expensedexpense substantially all development costs included in the research and development of software products and enhancements to existing products as incurred except for certain core technologies acquired.with alternative future use. Research and development expenses increased approximately $21.9 million during 20022004 as compared to 2003 primarily fromdue to increased headcount and related personnel costs, as well as an increase in staffing and associated salaries that primarilypersonnel costs related to the Sequoia acquisitionExpertcity acquisition. During 2005, we expect research and development expenses to increase as we continue to make investments in the second quarter of 2001, additional costs forour business and hire personnel to achieve our product development goals.
Research and development expenses decreased approximately $4.5 million during 2003 as compared to 2002, primarily due to severance, for the worldwide workforce reduction, and relocation and reduced headcount costs and related facility related charges associated with the consolidation of our Salt Lake City, Utah and Columbia, Maryland development teams into our remaining engineering facilities in Fort Lauderdale, Florida during 2002. These decreases were partially offset by an increase in costs for external consultants and developers.
Sales, Marketing and Support Expenses. Sales, marketing and support expenses increased approximately $84.8 million during 2004 as compared to 2003, primarily due to the hiring of additional sales personnel and related personnel costs and increases in commissions and other variable compensation costs due to the achievement of targeted sales goals and an increase in staffing and associated personnel costs related to the Expertcity acquisition. In addition, there was an increase in marketing program costs resulting from our worldwide brand awareness and advertising campaign and from the marketing of services related to our Citrix Online division, which were introduced in the first quarter of 2004. These increases were partially offset by a reductionan increase in costs for third party software, external consultantsthe allocation of certain revenue generating services expenses from operating expense to cost of services revenues. During 2005, we currently expect sales, marketing and developers and a decreasesupport expenses to increase as we continue to make investments in personnel costs dueour business to the worldwide workforce reduction.achieve our strategic goals.
Research and development expenses increased in 2001 primarily from additional staffing, associated salaries and related expenses. The increase in 2001 was also due to costs incurred for third party software and
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Sales, Marketing and Support Expenses.Sales, marketing and support expenses increased approximately $17.4 million during 2003 as compared to 2002 primarily due to increases in commissions and other variable compensation costs due to the achievement of targeted sales goals. In addition and to a lesser extent, the increase in marketing program costs resulted primarily from additional end-customer salesour launch of a worldwide brand awareness and advertising campaign and increases in product training costs and reseller commissions associated with the increase in our software license updates.
General and Administrative Expenses. General and administrative expenses increased approximately $20.8 million during 2004 as compared to 2003 primarily due to an increase in external consulting and services associated with regulatory compliance requirements and information systems, an increase in headcount and related personnel hired during 2001 and 2002 particularly for medium to large customers,costs as well as an increase in staffing and associated salariespersonnel costs related to the Sequoia acquisition during 2001, and severance charges associated with our worldwide workforce reduction. To a lesser extent, the reallocation of certain non-revenue generating services expense from cost of revenues to operating expenses also contributed to the increase. The increase was partially offset by a reduction in marketing costs due to a refocus in marketing programs spending based on the current operating environment, and the reallocation of certain overhead expenses to other departments, primarily depreciation expense to certain general and administrative cost centers.Expertcity acquisition.
Sales, marketing and support expenses increased in 2001 primarily from increased personnel for sales, services and marketing and associated salaries, commissions and related expenses focused on our sales, consulting and marketing efforts. Included in such marketing efforts in 2001 was the expansion of our end-customer sales force in connection with marketing to large corporate enterprise accounts. The increase was also due to a higher level of marketing programs directed at customer and business partner acquisition and retention, and additional promotional activities related to specific products, such as MetaFrame XP introduced in February 2001.
General and Administrative Expenses.General and administrative expenses increaseddecreased approximately $3.3 million during 2003 as compared to 2002 due primarily to a decrease in 2002 primarilydepreciation expense resulting from a reallocationasset maturities and the abandonment of certain overhead expensesleasehold improvements during 2002 and a decrease in our provision for doubtful accounts. These decreases were partially offset by an increase in incentive compensation resulting from other departments to general and administrative expenses, primarily depreciation expense from certain sales, marketing and support cost centers into certain general and administrative cost centers.
General and administrative expenses increased in 2001 primarily from increased staff, associated salaries and related expenses necessary to support overall increases in the scopeachievement of our operations. The increase during 2001 also resulted from increased depreciation from our enterprise resource planning system implemented in 2001, as well as the reallocation of certain overhead costs from other departments into certain general and administrative cost centersfinancial targets and an increase in consulting and accounting fees.insurance costs.
Amortization of Intangible Assets. On January 1, 2002, we adopted SFAS No. 142,Goodwill and Other Intangible AssetsAssets.. Under the new rules, we no longer amortize goodwill and Amortization of other intangible assets deemedincreased approximately $5.9 million in 2004 as compared to have indefinite lives but subject them2003 primarily due to an annual impairment test. At the date of adoption, we had unamortized goodwill, includingincrease in amortization expense related to intangible assets acquired workforce, in the amount of $152.4 million, which is no longer amortized. The decrease in amortization of intangible assets during 2002 was substantially due to the adoption of SFAS No. 142. Other intangibles of $36.6 million at January 1, 2002 continue to be amortized over their useful lives.Expertcity acquisition. As of December 31, 2002,2004, we had unamortized other identified intangible assets with estimable useful lives in the net amount of $30.8$29.4 million. We recorded $11.3Amortization of intangible assets remained relatively unchanged in 2003 compared to 2002. Amortization expense totaled $6.2 million during 2002 and $48.82004, $0.3 million during 20012003 and $0.5 million in 2002. We currently expect amortization expense.
In accordance with SFAS No. 142, we completed the required impairment tests of goodwill and indefinite-lived intangible assets at the date of adoption and againexpense to increase during the fourth quarter of 2002. There were no impairment charges recorded2005 as a result of our acquisitions. For more information regarding the adoption of SFAS No. 142 or impairment tests. SeeNet6 and Expertcity acquisitions see, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Factors Which May Affect Future Results.”
The increase in amortization of goodwillAcquisitions” and identifiable intangible assets in 2001 was primarily duenote 3 to our acquisition of Sequoia in April 2001. This acquisition resulted in additional goodwill and identifiable intangible assets of approximately $169.9 million at the date of acquisition. Additionally, for 2001, the increase was also due to additional goodwill of approximately $16.2 million associated with contingent purchase price payments related to the acquisition of Innovex.consolidated financial statements.
In-Process Research and Development. In April 2001, During 2004, we acquired Sequoia,Expertcity and Net6 and an aggregate of which $2.6approximately $19.1 million of the respective purchase price wasprices were allocated to in-process research and development, or IPR&D. The amounts allocated to
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Write-Down of Technology. We periodically review our finite lived intangible assets to determine if any impairment exists. In June 1998, we completed the acquisition of APM Ltd., or APM. The acquired core technology consisted primarily of a Java software product that would operate in a MetaFrame server environment. At the time of the acquisition, we anticipated that there would be a growing demand for Java client applications. After the acquisition, the market did not develop as we originally anticipated. In the second quarter of 2000, we changed the Java application server product to a Java Performance Pack product, which adds performance enhancements2003 and management tools to our other products. By the fourth quarter of 2000, we had developed a Java Performance Pack and had assessed the market demand for this technology. As of December 31, 2000, we did not believe that there were sufficient projected cash flows to support the net book value of the core technology associated with the APM acquisition. In addition, we determined that there was no alternative future use for the acquired technology. As a result, we recorded a write-down of $7.3 million, representing the net book value of the APM core technology as of December 31, 2000.
In July 1998, we completed the acquisition of VDOnet Corporation Ltd., or VDOnet. The acquired core technology consisted primarily of the ICA Video Services project, which allowed video applications and applications containing videos to be viewed on an ICA client. Subsequent development efforts resulted in the VideoFrame™ 1.0 product, which shipped in the third quarter of 1999, but resulted in few sales to end-customers. After the acquisition, we explored alternative uses for the acquired technology. By the third quarter of 2000, we had explored uses related primarily to delivering video applications in a server-based computing environment and video streaming with ICA devices. In the fourth quarter of 2000, we reviewed potential modifications to our cash flow projections based on identified alternative uses for the technology. As a result of our evaluation, we did not believe that there were sufficient projected cash flows to support the carrying value of the core technology. As a result, we recorded a write-down of $1.8 million, representing the net book value of the VDOnet core technology as of December 31, 2000.
Interest Income. Interest income decreased during 2002 primarily due to a decrease in interest rates. During 2002, we terminated an interest rate swap agreement with a notional amount of $174.6 million and in December 2002, we sold the investments underlying this swap agreement. As a result, the decrease in interest income during 2002 was partially offset by interest income of approximately $3.4 million recognized as a result of the termination of this interest rate swap and the hedging relationship.2002. For more information regarding the acquisitions, see “Liquidity“Management’s Discussion and Capital Resources”Analysis of Financial Condition and Results of Operations — Acquisitions” and note 133 to our consolidated financial statements.
Our efforts with respect to the acquired technologies currently consist of design and development that may be required to support the release of the technologies into updated versions of existing service offerings and potentially new product and service offerings by our Citrix Online division. We currently expect that we will successfully develop new products or services utilizing the acquired in-process technology, but there can be no assurance that commercial viability of future product or service offerings will be achieved. Furthermore, future developments in the software industry, changes in
technology, changes in other products and offerings or other developments may cause us to alter or abandon product plans. Failure to complete the development of projects in their entirety, or in a timely manner, could have a material adverse impact on our financial condition and results of operations.
The fair value assigned to IPR&D was based on valuations prepared using methodologies and valuation techniques consistent with those used by independent appraisers. All fair values were determined using the income approach, which includes estimating the revenue and expenses associated with a project’s sales cycle and by estimating the amount of after-tax cash flows attributable to the projects. The future cash flows were discounted to present value utilizing an appropriate risk-adjusted rate of return, which ranged from 17% to 25%. The rate of return included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.
Interest Income.Interest income increased in 2001decreased approximately $6.8 million during 2004 as compared to 2000 principally2003 due to lower levels of cash and investments held in 2004 that resulted from our decision to change the compositionmaturity of AAA-zero coupon corporate securities of $195.4 million in March 2004, the payment of approximately $355.7 million for the redemption of our investment portfolioconvertible subordinated debentures in the fourth quarterMarch 2004 and our payment of 2000 from tax-exemptapproximately $161.8 million in cash for our Expertcity and taxable to predominantly taxable securities, partially offset by a decrease in interest ratesNet6 acquisitions. Interest income decreased approximately $9.8 million during 2001.
Interest Expense. The decrease in interest expense for 20022003 as compared to 2001 was due primarily to interest expense incurred during 2001 on contingent payments associated with the Innovex acquisition.
The increase in interest expense for 2001 as compared to 2000 was2002 primarily due to decreases in interest on contingent payments associated with the Innovex acquisition, as well as the accretionrates. For more information see “Management’s Discussion and Analysis of the original issue discount relatedFinancial Condition and Results of Operations — Acquisitions” and “— Liquidity and Capital Resources” and notes 3 and 8 to our consolidated financial statements.
Interest Expense. Interest expense decreased $13.9 million during 2004 compared to 2003 primarily due to the zero couponredemption of our convertible subordinated debentures issued inon March 1999.22, 2004. Interest expense remained relatively unchanged during 2003 compared to 2002 and primarily represented non-cash interest accretion on our convertible subordinated debentures. For more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and note 8 to our consolidated financial statements.
Write-off of Deferred Debt Issuance Costs. In 2004, we incurred a charge of approximately $7.2 million for our remaining prepaid issuance costs as a result of the redemption of our convertible subordinated debentures. For more information on our convertible subordinated debentures see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity” and note 8 to our consolidated financial statements.
Other Expense,Income (Expense), Net. Other expense,income (expense), net is primarily comprised of remeasurement and foreign currency transaction gains (losses), other-than-temporary declines in the value of our equity investments and realized gains (losses) on the sale of available-for-sale investments, as well as, remeasurement and foreign currency transaction gains (losses).investments. Other income (expense), net remained relatively constant during 2004 compared to 2003. The $6.9 million increase in other expense,income (expense), net for 2002 asduring 2003 compared to other expense, net in 20012002 was the result of $2.1 million of losses from other-than-temporary declines in the fair value of certain of our equity investments and realized losses on the sale of available-for-sale securities, as well as approximately $1.1 milliondue primarily to a decline in remeasurement and foreign currency transaction losses.
The change in other expense, net for 2001losses, as compared to other expense, net for 2000 waswell as, realized gains on the result of $7.7 million of losses recorded in 2001 resulting from other-than-temporary declines in the fair valuesale of certain of our equityavailable-for-sale investments as well as approximately $2.4 million in remeasurement and foreign currency
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Income Taxes. On October 22, 2004, the American Jobs Creation Act, or the AJCA, was signed into law. The decreaseAJCA includes a deduction for 85% of certain foreign earnings that are repatriated, as defined in the effectiveAJCA. We may elect to apply this provision to qualifying earnings repatriations in 2005. We have started an evaluation of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provides guidance concerning key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the anticipated guidance. Based on the provisions of the AJCA, the range of possible amounts that we are eligible to repatriate under this provision is between zero and $500 million. As such, the related potential range of income tax rate from 31%is between zero and $52 million.
We maintain certain operational and administrative processes in 2001 to 17% in 2002 was due primarily to the adoption of SFAS No. 142, pursuant to which amortization of goodwill, which previously increased taxable income in the determination of our effective tax rate, ceased. The reduction in the tax rate was also due to higher tax credits related tooverseas subsidiaries and our foreign operations and research and development, and the cessation of revenues from the Microsoft Development Agreement, which expired in May 2002.
The increase in the effective tax rate from 30% in 2000 to 31% in 2001 resulted primarily from non-deductible goodwill associated with the acquisition of Sequoia offset in part by a rate decrease resulting from increased foreign earnings which wereare taxed at lower foreign tax rates. Other than through the one-time repatriation provision within the AJCA, we do not expect to remit earnings from our foreign subsidiaries. Accordingly, since 2000 we have not provided for deferred taxes on foreign earnings.
In 2004, our effective tax rate decreased to 20% from 21% in 2003, primarily due to an increase in annual taxable income in our geographic locations that are taxed at a lower rate. In 2003, our effective tax rate increased to 21% from 17% in 2002 primarily due to an increase in annual taxable income in our geographic locations that are taxed at a higher rate. Our effective tax rate may fluctuate throughout 2005 based on a number of factors including variations in estimated taxable
income in our geographic locations, repatriation of foreign earnings in accordance with the AJCA, completed and potential acquisitions, and changes in statutory tax rates, among others.
Liquidity and Capital Resources
During 2002,2004, we generated positive operating cash flows of $187.1$265.3 million. These cash flows related primarily to net income of $93.9$131.5 million, adjusted for, among other things, tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of $25.7$20.9 million, non-cash charges, including depreciation and amortization expenses of $41.4$33.6 million, provisionsthe write off of in-process research and development associated with the Net6 and Expertcity acquisitions of $19.1 million, the write-off of deferred debt issuance costs on our convertible subordinated debentures of $7.2 million, provision for product returns of $25.3$6.7 million, (primarily due to our stock rotation program) and the accretion of original issue discount and amortization of financing costs on our convertible subordinated debentures of $17.7 million. These cash inflows were partially offset by$4.3 million and an aggregate decreaseincrease in cash flow from our operating assets and liabilities of $16.9$42.5 million. Our investing activities provided $0.1$39.3 million of cash consisting primarily of the net proceeds, after reinvestment, from sales and maturities of our available-for-sale and held-to-maturity investments of $29.0$221.3 million partially offset by cash paid for the Expertcity and Net6 acquisitions, net of cash acquired, of $140.8 million, the expenditure of $19.1$24.4 million for the purchase of property and equipment and net cash paid for acquisitions (a contingent payment resulting from the February 2000 Innovex acquisition)licensing agreements and core technology of approximately $10.7$16.8 million. Our financing activities used cash of $184.2$414.1 million related primarily to the expenditure$355.7 million of $192.1 millioncash paid for the stockredemption of our convertible subordinated debentures and debt$121.9 million of cash paid under our stock repurchase programs partially offset by the$63.5 million in proceeds received from employee stock compensation plans and the sale of put warrants of $8.0 million.plans.
During 2001,2003, we generated positive operating cash flows of $229.8$255.4 million. These cash flows related primarily to net income of $105.3$126.9 million, adjusted for, among other things, tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of $28.0$10.3 million, non-cash charges, including depreciation and amortization expenses of $79.6$34.3 million, provisions for product returns of $22.5 million (primarily due to our stock rotation program) and the accretion of original issue discount and amortization of financing costs on our convertible subordinated debentures of $17.9 million. These cash inflows were partially offset by$18.2 million and an aggregate decreaseincrease in cash flow from our operating assets and liabilities of $38.3 million.$60.9 million, primarily resulting in an increase in deferred revenue due to the success of our Subscription Advantage program. Our investing activities used $382.2cash of $89.3 million of cash consisting primarily of net cash paid for acquisitions (primarily in connection with the acquisition of Sequoia) of $183.8 million, the net purchasepurchases of investments, net of $137.9proceeds from sales and maturities, of $75.3 million and $60.6the expenditure of $11.1 million for ourthe purchase of property and equipment and costs associated with our enterprise resource planning, or ERP, system implementation. Approximately $12.0 million was capitalized through December 31, 2001, related to our ERP system. We used $83.0 million in cash inequipment. Our financing activities used cash of $65.5 million related primarily to ourthe expenditure of $210.2$124.6 million for the stock repurchase programs,program, partially offset by the proceeds received from the issuance of common stock under our employee stock compensation plans of $117.4 million$58.4 million.
Cash and $12.0 million generated from premiums received upon the sale of put warrants.Investments
As of December 31, 2002,2004, we had $719.4$417.1 million in cash and investments including $142.7compared to $751.8 million in cash and cash equivalents. In addition, we had $186.4 million in working capital at December 31, 2002.2003. Additionally, at December 31, 2004, we had $149.1 million of restricted cash equivalents and investments, see “— Restricted Cash Equivalents and Investments” below. The $27.3$334.7 million decrease in cash and investments as compared to December 31, 2001, is2003, was due primarily to continued common stockthe redemption of our convertible subordinated debentures and debt repurchases, capital expenditures related to our Expertcity and a contingent acquisition payment as discussed above,Net6 acquisitions partially offset by positive cash flow from operations.operations and stock option exercises. We generally invest our cash and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash
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In December 2000, we invested $158.1
Included in short-term investments in 2003 were $192.5 million in a trust managed by an investment advisor. The purpose of the trust is to maintain sufficient liquidity in the eventAAA-rated zero coupon corporate securities classified as held-to-maturity investments that our debentures are redeemed in March 2004. Our investment in the trust maturesmatured on March 22, 2004. At December 31, 2004, we had no investments classified as held-to-maturity.
Restricted Cash Equivalents and comprises allInvestments
As of December 31, 2004, we had $149.1 million in restricted cash equivalents and investments. Approximately $62.8 million in investment securities and cash equivalents were pledged as collateral for specified obligations under our synthetic lease and approximately $86.3 million in investment securities were pledged as collateral for certain of our credit default contracts and interest rate swaps. The $2.6 million increase in restricted cash and investments compared to December 31, 2003 is primarily due to an increase in the liability position of the trust’s assets. The trust’s assets primarily consist of AAA-rated zero-coupon corporate securities. The trust entered into a credit risk swap agreement with the investment advisor, which effectively increased the yield on the trust’s assets and for which value the trust assumed the credit risk of ten investment-grade companies. The effective yield of the trust, including the credit risk swap agreement, is 6.72% and the principal balance will accrete to $195 million in March 2004. Therefore, beginning with the quarter ending March 31, 2003, we will classify the investment as a short-term investment in our consolidated balance sheet to reflect the amount that will be due within one year of the balance sheet date. We record our investment in the trust and the underlying investments and swap as held-to-maturity zero-coupon corporate security in our consolidated financial statements. We do not recognize changes in the fair value of the held-to-maturity investment unless a decline in the fair value of the trust is other-than-temporary, in which case we would recognize a loss in earnings. Our investment is at risk to the extent that one of the underlying corporate securities has a credit event resulting in non-payment to the counterparty that may include bankruptcy, dissolution, or insolvency of the issuers. There have been no lossesinterest rate swaps associated with the trust’s underlying corporate securities to date. The amortized cost of our investment in the trust was approximately $180.4 millioncontracts being
collateralized. Restricted cash at December 31, 20022004 is comprised of cash equivalents, short-term and $169.0 million at December 31, 2001, which we classified as long-term corporate investments in our consolidated balance sheets. At December 31, 2002,investments. We maintain the fair valueability to manage the composition of the trust’s assets was $180.2 million.
In addition, we have invested in other instruments with similarrestricted cash equivalents and investments within certain limits to withdraw and use excess investment earnings from the pledged collateral for operating purposes. For further information regarding our synthetic lease, credit risk features. This means that these investments are at risk to the extent that the entities issuing the underlying corporate securities have credit events above specified amounts that result in a loss to the counterparty. There have been no credit events associated with the entities issuing the underlying corporate securities to date. For more informationdefault contracts and interest rate swaps, see notes 410 and 13 to our consolidated financial statements.
In November 2001, we entered into an interest rate swap agreement with a notional amount of approximately $174.6 million. The interest rate swap agreement effectively converted a like amount of floating rate notes in our investment portfolio to a synthetic zero coupon investment due in March 2004 with a maturity value of approximately $190 million. In October 2002, we terminated this interest rate swap agreement. Upon termination, we received a cash payment of $9.2 million as settlement under the swap agreement, and gained approximately $2.4 million in accumulated other comprehensive income (loss), net of taxes. We previously accounted for the interest rate swap as a cash flow hedge in accordance with the provisions of SFAS No. 133. During December 2002, certain investments underlying the swap were sold, and hedge accounting was terminated and the associated other comprehensive income was recognized through earnings.Accounts Receivable, Net
At December 31, 2002,2004, we had approximately $69.5$108.4 million in accounts receivable, net of allowances. The modest increase of $20.9 million in accounts receivable as compared to 2001 is2003 was primarily attributeddue to an increase in sales, particularly in the Asia-Pacific regionlast month of the year. Our allowance for the fourth quarter of 2002 asreturns is $2.3 million at December 31, 2004 compared to the fourth quarter$3.0 million at December 31, 2003. The decrease of 2001,$0.7 million is comprised of $7.4 million in credits issued for stock balancing rights during 2004 partially offset by an increase$6.7 million of provisions for returns recorded during 2004. The overall decrease in worldwide allowances.our allowance for returns is primarily due to a reduction in packaged product inventory held by our distributors. Our allowance for doubtful accounts is $2.6 million at December 31, 2004 compared to $3.4 million at December 31, 2003. The decrease of $0.7 million is comprised of $2.7 million of uncollectible accounts written off, net of recoveries, partially offset by $1.1 million of provisions for doubtful accounts recorded during the year and $0.9 million of provisions for doubtful accounts associated with accounts receivable acquired in our Expertcity and Net6 acquisitions. From time to time, we could maintain individually significant accounts receivable balances from our distributors or customers, which are comprised of large business enterprises, governments and small and medium-sized businesses. If the financial condition of our distributors or customers deteriorates, our operating results could be adversely affected. One such distributor accounted for approximately 7% of gross accounts receivable as ofAt December 31, 2002. In 2001, this distributor accounted for 14% of gross accounts receivable. During these periods,2004 and 2003, no other distributor or customer accounted for more than 10% of our accounts receivable.
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Convertible Subordinated Debentures
In March 1999, we sold $850 million principal amount at maturity of our zero coupon convertible subordinated debentures, or the Debentures, due in March 22, 2019, in a private placement. The debenturesDebentures were priced with a yield to maturity of 5.25%. Our and resulted in net proceeds wereto us of approximately $291.9 million, net of original issue discount and net of debt issuance costs of approximately $9.6 million. Except under limited circumstances, we will pay no interest prior to maturity. The security holders can convert the debentures at any time on or before the maturity date at a conversion rate of 14.0612 shares of our common stock for each $1,000 principal amount at maturity of the debentures, subject to adjustment in certain events. We can redeem the debentures on or after March 22, 2004, and the holders of the debentures can require us to repurchase the debentures on fixed dates and at set redemption prices (equal to the issue price plus accrued original issue discount) beginning on March 22, 2004. Accordingly, beginning with the quarter ended March 31, 2003, we will classify the debentures as a current liability on our consolidated balance sheet to reflect the amount that will be payable on demand within one year of the balance sheet date. We will maintain sufficient liquidity in the event that holders of the debentures require us to redeem or we elect to repurchase the debentures.
In October 2000, our boardthe Board of directorsDirectors approved a program authorizing us to spendrepurchase up to $25 million to repurchase debenturesof the Debentures in open market purchases. Additionally, in April 2002, our boardthe Board of directorsDirectors granted us the additional authority of $100 million to us to repurchase up to $100 million in debenturesDebentures through private transactions, bringing ourthe total repurchase authority up to $125 million. The Board of Directors’ authorization to repurchase the Debentures allowed us to repurchase Debentures when market conditions were favorable. As of December 31, 2002, we have repurchased2003, 76,000 units for approximately $29.9 million, which representsof our Debentures representing $76.0 million in principal amount at maturity. During 2002,maturity, had been repurchased under these programs for $29.9 million. On March 22, 2004, we adopted SFAS No. 145,Rescissionredeemed all of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correctionsearlier than required, and therefore we recordedthe outstanding Debentures for an operating gainaggregate redemption price of approximately $1.6 million during 2002 as a result of our debenture repurchases. The board of directors’ limited authorization to repurchase the debentures allows us to repurchase debentures when market conditions are favorable.
In December 2000, we invested $158.1 million in investments accounted for as held-to-maturity corporate securities to maintain sufficient liquidity in the event that our debentures are redeemed in March 2004. Based on the $195.0 million expected maturity value of the investments in March 2004,$355.7 million. We used the proceeds of thefrom our held-to-maturity investments will be sufficientthat matured on March 22, 2004 and cash on hand to fund the redemption. At the date of redemption, we incurred a charge for the associated deferred debt issuance costs of approximately 55%$7.2 million.
Stock Repurchase Program
As of the debentures, if required. We believe that we will have sufficient cash and investments to fund the redemption of the remaining debentures inDecember 31, 2004, if required.
Ourour board of directors has authorized $600 million ofan ongoing stock repurchase program with a total repurchase authority undergranted to us of $800 million. In February 2005, the Company’s board of directors authorized the repurchase of an additional $200 million, increasing the total authority to $1 billion. The objective of our stock repurchase program in orderis to manage actual and anticipated dilution. We record alldilution and to improve shareholders’ return. At December 31, 2004, approximately $42.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased sharesare recorded as treasury stock.
We are authorized to make open market purchases of our common stock using general corporate funds. During 2002, we purchased 9,300,000 shares of outstanding common stock on the open market for approximately $75.7 million (at an average per share price of $8.14).
FromAdditionally, from time to time, we enterhave entered into structured stock repurchase arrangements with large financial institutions using general corporate funds as part of our sharestock repurchase program in order to lower our average cost to acquire shares. These arrangements are described below.
We were partyprograms include terms that require us to two agreements, executed during 2001 and 2000, withmake up front payments to a largecounterparty financial institution to purchase approximately 7.3 million sharesand result in the receipt of our common stock during or at various times in private transactions. Under the termsend of the agreements, we paid this institution an aggregateperiod of $150 million, with the ultimate numberagreement or the receipt of shares repurchasedeither stock or cash at the maturity of the agreement. Delivery of stock under certain programs may be dependent on market conditions. In May 2002, the agreements were terminated and, upon termination,Prior to June 2003, we received 3.0 million of the remaining shares. We received a total of 7,209,286 shares pursuant to these agreements. During 2002, we entered into a new agreement, as amended, with this financial institution in a private transaction to purchase up to 3.8 million shares of our common stock at various times through February 2003. Pursuant to the terms of the agreement, we paid $25 million to this institution during the third quarter of 2002. During 2002, we received 2,655,469 shares under this agreement with a total value ofsold
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During 2002, we entered into two private structured stock repurchase transactions with a large financial institution. Under the terms of the first agreement and in exchange for an up front payment of $25 million, we were entitled to receive shares of our common stock or a predetermined cash amount at the expiration of the agreement dependent upon the closing price of our common stock at maturity. Upon expiration of the agreement in December 2002, we received approximately $29.3 million in cash. Under the terms of the second agreement and in exchange for an up front payment of $25 million, we are entitled to receive approximately 2.2 million shares of our common stock or a predetermined cash amount at expiration of the agreement in March 2003. The form of settlement at maturity of the second transaction will be dependent upon the closing market price of our common stock.
We sell put warrants that entitleentitled the holder of each warrant to sell to us, generally by physical delivery, one share of our common stock at a specified price. During 2002, we sold 2,300,000At December 31, 2004 there were no put warrants at an average strike price of $11.10 and received premium proceeds of $3.3 million. During 2002, we paid $42.9 million for the purchase of 2,050,000 shares upon the exercise of outstanding put warrants, and 600,000 put warrants expired unexercised. As of December 31, 2002, 950,000 put warrants with exercise prices ranging from $7.18 to $12.58 were outstanding, and expired on various dates between January and March 2003. As of December 31, 2002, we had a total potential repurchase obligation of approximately $9.9 million associated with the outstanding put warrants, of which $7.3 million is classified as a put warrant obligation on our consolidated balance sheet. The remaining $2.6 million of outstanding put warrants permit a net-share settlement at our option and are not recorded as a put warrant obligation in our consolidated balance sheet. The outstanding put warrants classified as a put warrant obligation in our consolidated balance sheet will be reclassified to stockholders’ equity when the warrant is exercised or when it expires. Under the terms of the put warrant agreements, we must maintain certain levels of cash and investment balances. As of December 31, 2002, we were in compliance with those required levels.outstanding.
In December 2002, we entered into an agreement with a counterparty, which required that the counterparty sell to us up to 1,560,000 shares of our common stock at fixed prices if our common stock trades at designated levels between December 16, 2002 and January 23, 2003. As of December 31, 2002, we had a potential remaining repurchase obligation associated with this agreement of approximately $9.1 million, which is classified as common stock subject to repurchase in our consolidated balance sheet. During January 2003, this agreement expired and no shares were repurchased.
We expended an aggregate of $161.1$121.9 million and $123.9 million during 20022004 and $198.2 million during 2001,2003, respectively, net of premiums received, under all stock repurchase transactions. During 2004, we took delivery of a total of 4,458,740 shares of outstanding common stock with an average per share price of $18.77; and during 2003, we took delivery of a total of 8,859,381 shares of outstanding common stock with an average per share price of $15.86. Some of these shares were received pursuant to prepaid programs. Since inception of our stock repurchase programs, the average cost of shares acquired was $16.41$16.55 per share compared to an average close price during open trading windows of $20.26$19.83 per share. DueIn addition, a significant portion of the funds used to repurchase stock was funded by proceeds from employee stock option exercises and the fact thatrelated tax benefit. We remain committed to our ongoing stock repurchase program. As of December 31, 2004, we have remaining prepaid notional amounts of approximately $53.1 million under our stock repurchase agreements. As the amount of certaintotal shares to be received willfor the open repurchase agreements at December 31, 2004 is not be determineddeterminable until contract maturity, thesethe contracts mature in 2005, the above price per share amounts exclude up front payments under structured stock repurchase contractsthe remaining shares to be received subject to the agreements.
Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2005. We believe that had a maturity subsequentour existing cash and investments together with cash flows expected from operations will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. We could from time to time seek to raise additional funds through the issuance of debt or equity securities for larger acquisitions.
Contractual Obligations and Off-Balance Sheet Arrangement
Contractual Obligations
We have certain contractual obligations that are recorded as liabilities in our consolidated financial statements. Other items, such as operating lease obligations, are not recognized as liabilities in our consolidated financial statements, but are required to be disclosed in the notes to our consolidated financial statements.
The following table summarizes our significant contractual obligations at December 31, 2002.
Payments due by period | |||||||||||||||
Total | Less than 1 Year | 1-3 Years | 4-5 Years | More than 5 Years | |||||||||||
Operating lease obligations | $ | 106,243 | $ | 20,813 | $ | 29,524 | $ | 17,407 | $ | 38,499 | |||||
Synthetic lease obligations | 11,563 | 2,252 | 5,290 | 4,021 | — | ||||||||||
Total contractual obligations (1) | $ | 117,806 | $ | 23,065 | $ | 34,814 | $ | 21,428 | $ | 38,499 | |||||
(1) | |
As of December 31, 2004, we did not have any individually material long-term debt obligations, capital lease obligations, purchase obligations, or other material long-term commitments reflected on our consolidated balance sheets.
In April
Off-Balance Sheet Arrangement
During 2002, we entered intobecame a party to a synthetic lease with a substantive lessorarrangement totaling approximately $61.0 million for our corporate headquarters office space in Fort Lauderdale, Florida. The synthetic lease represents a form of off-balance sheet financing under which an unrelated third party lessor funded 100% of the costs of acquiring the property and leases the asset to us. The synthetic lease qualifies as an operating lease for accounting purposes and as a financing lease for tax purposes. We do
not include the property or the lease debt as an asset or a liability on our accompanying consolidated balance sheet.sheets. Consequently, we include payments made pursuant to the lease are recorded as operating expenses in our consolidated statements of income. We entered into the synthetic lease in order to lease our headquarters properties under more favorable terms than under our previous lease arrangements. We do not materially rely on off-balance sheet arrangements for our liquidity or as capital resources. For information regarding cash outflows associated with our lease payments see “— Contractual Obligations.”
The initial term of the synthetic lease is seven years. Upon approval by the lessor, we can renew the lease twice for additional two-year periods. The lease payments vary based on the London Interbank Offered Rate,
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The synthetic lease includes certain financial covenants including a requirement for us to maintain a pledgedrestricted balance of approximately $63.0$62.8 million as collateral, which is classified as restricted cash equivalents and investments in cash and/or investment securities as collateral.our accompanying consolidated balance sheets. We maintain the ability to manage the composition of restricted investments within certain limits and to withdraw and use excess investment earnings from the pledged investments and investment earnings are availablecollateral for operating purposes. Additionally, we must maintain a minimum net cash and investment balance, of $100.0 million, excluding our debentures, collateralized investments and equity investments, of $100.0 million, as of the end of each fiscal quarter. As of December 31, 2002,2004, we had approximately $113.5$316.7 million in cash and investments in excess of thosethis required levels.level. The synthetic lease includes non-financial covenants, including the maintenance of the propertiesproperty and adequate insurance, prompt delivery of financial statements to the lenderadministrative agent of the lessor and prompt payment of taxes associated with the properties.property. As of December 31, 20022004, we were in compliance with all material provisions of the arrangement.
Estimated
In January 2003, the FASB issued FASB Interpretation, or FIN, No. 46,Consolidation of Variable Interest Entities, which addresses the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. In December 2003, the FASB issued FIN No. 46 (revised), which replaced FIN No. 46. FIN No. 46 (revised) was effective immediately for certain disclosure requirements and variable interest entities referred to as special-purpose entities for periods ending after December 15, 2003 and for other types of entities for financial statements for periods ending after March 15, 2004. We determined that we are not required to consolidate the lessor, the leased facility or the related debt associated with our synthetic lease in accordance with FIN No. 46 (revised). Accordingly, there was no impact on our financial position, results of operations or cash flows from adoption. However, if the lessor were to change its ownership of the property or significantly change its ownership of other properties that it currently holds, we could be required to consolidate the entity, the leased facility and the debt in a future payments due under this lease are $1.4 million for 2003, $2.6 million for 2004, $3.6 million for 2005, $3.7 for 2006 million and $3.7 million for 2007. Estimated lease payments thereafter total $4.8 million. We have subleased to other entities some of our leased real property under the synthetic lease.period.
We lease a significant portion of our worldwide facilities under non-cancelable operating leases. Future payments due under these non-cancelable operating leases are $18.2 million for the year ending December 31, 2003, $15.7 million for the year ending December 31, 2004, $15.2 million for the year ending December 31, 2005, $14.3 million for the year ending December 31, 2006 and 11.6 million for the year ending December 31, 2007. Thereafter, payments due total $41.2 million.
Commitments
Capital expenditures were $24.4 million during 2004, $11.1 million during 2003 and $19.1 million during 2002, $60.6 million during 2001 and $43.5 million during 2000.2002. During 2002,2004, capital expenditures were primarily related to computer equipment purchases associated with our research and development activities and leasehold improvements on newly occupied buildings.improvements. The decrease, asincrease of $13.3 million in capital expenditures during 2004 compared to 2001,2003 is due to expenditures in 20012004 for buildings, landpurchases of computer equipment related to existing and our ERP system.new research and development projects and leasehold improvements on renovations to currently occupied buildings. In the normal course of business, we enter into commitments related to capital expenditures, however, we currently have no material contractual commitments for capital expenditures over the next 12 months.
During 2002 and 2001, we took actions to consolidate certain of our offices, including the exit of certain leased office space and the abandonment of certain leasehold improvements. Lease obligations related to these existing operating leases continue to October 20182025 with a total remaining obligation at December 31, 2004 of approximately $28.5$22.5 million, of which $6.8$3.0 million net of anticipated sublease income, was accrued for as of December 31, 2002,2004, and is reflected in accrued expenses and other liabilities in our
consolidated financial statements. In calculating this accrual, we made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. IfWe periodically re-evaluate our estimates; and if actual circumstances prove to be materially worse than management has estimated, the total charges for these vacant facilities could be significantly higher.
During 2002 and 2001, significant portions of our cash inflows were generated by operations. Although we believe existing cash and investments together with cash flow expected from operations will be sufficient to meet operating and capital expenditures requirements for the next 12 months, future operating results and expected cash flow from operations could vary if we experience a decrease in customer demand or a decrease in customer acceptance of future product offerings. We could from time to time seek to raise additional funds through the issuance of debt or equity securities. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. Such
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Certain Factors Which May Affect Future Results
Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees could contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Form 10-K, and in the documents incorporated by reference into this Form 10-K, that are not historical facts, including, but not limited to statements concerning new products, product development and offerings, Subscription Advantage, product and price competition, Citrix Online division, competition and strategy, product price and inventory, contingent consideration payments, deferred revenues, the Microsoft source licensing agreement, economic and market conditions, revenue recognition, profits, growth of revenues, product concentration, market competition,cost of revenues, operating expenses, sales, marketing efforts,and support expenses, research and development expenses valuations of investments and derivative instruments, technology relationships, investments in foreign operations and markets, reinvestment or repatriation of foreign earnings, gross margins, goodwill,amortization expense and intangible assets, interest income, interest expense, impairment charges, accounts receivable, amortization, reserves, in-process research and development valuation, foreign currency hedging transactions, interest income, anticipated operating and capital expenditure requirements, reductions in operating expenses, expenses related to workforce reductions,cash inflows, contractual obligations in-process research and development, advertising campaigns, tax rates, leasing and subleasing activities, acquisitions, debt redemption obligations, stock repurchases, investment transactions, liquidity, litigation matters, intellectual property matters, including proprietary technology protection, distribution channels, packaged product inventories, stock price, deferred tax assets, licensing models, sales cycles, trading plansAdvisor Rewards Program, third party licenses and potential debt or equity financings constitute forward-looking statements and are made under the safe harbor provisions of the PrivateSection 27 of the Securities Litigation Reform Act of 1995.1933 as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition have varied and could in the future vary significantly from those stated in any forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-K, in the documents incorporated by reference into this Form 10-K or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition.
Microsoft is the leading provider of desktop operating systems. We depend upon the license of key technology from Microsoft, including certain source and object code licenses and technical support. In May 2002, we signed an agreement with Microsoft to formalize continued access to Microsoft Windows Server source code. Under this agreement, we will have access to source code
Our long sales cycle for current and future Microsoft server operating systems, including access to terminal services source code, during the three year term of the agreement. Our relationship with Microsoft is subject to the following risks and uncertainties, which individually, or in the aggregate,enterprise-wide sales could cause a material adverse effectsignificant variability in our business,revenue and operating results of operations and financial condition:
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Our agreements with Microsoft are short in duration. There can be no assurances that our current agreements with Microsoft will be extended or renewed by Microsoft after their respective expirations or that, if renewed such agreements will be on terms favorable to us. Our failure to renew certain terms of these agreements with Microsoft could result in an adverse effect on our business, results of operations and financial condition.
The demand for our products depends substantially upon the general demand for business-related computer hardware and software, which fluctuates based on numerous factors, including capital spending levels, the spending levels and growth of our current and prospective customers and general economic conditions. Fluctuations in the demand for our products could have a material adverse effect on our business, results of operations and financial condition. In 2002, adverse economic conditions decreased demand for our products and negatively impacted our financial results. If the current trend of decreased and slower informational technology spending continues, it could continue to negatively impact our business, results of operations and financial condition.
In recent quarters, a growing number of our large and medium-sized customers have decided to implement our volume-based licensing programsenterprise customer license arrangements on a department or enterprise-wide basis. For convenience, the licenses under these arrangements are electronically delivered to our customers. Our long sales cycle for these large-scale deployments makes it difficult to predict when these sales will occur, and we may not be able to sustain these sales on a predictable basis. For example, our electronically delivered licensing arrangements constituted 39% of our product sales in the year ended December 31, 2002, a portion of which has been deferred.
We have a long sales cycle for these enterprise-wide sales because:
The continued long sales cycle for these large-scale deployment sales could make it difficult to predict the quarter in which sales will occur. Delays in sales could cause significant variability in our revenue and operating results for any particular period.
We have adopted accounting policies thatface intense competition, which could require us to take a charge to earnings related to our Sequoia acquisition. In July 2001, we adopted SFAS No. 141,Business Combinations,result in fewer customer orders and in January 2002, we adopted SFAS No. 142,Goodwill and Other Intangible Assets. As a result, we no longer amortize goodwill
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In particular, at December 31, 2002, we had $30.8 million, net, of unamortized identified intangibles with estimable useful lives, of which $24.5 million consists of product and core technology we purchased in the acquisition of Sequoia. We commercialized and currently market the Sequoia technology through our secure access infrastructure software, which includes Citrix MetaFrame Secure Access Manager. However, our channel distributors and entities with which we have technology relationships, customers or prospective customers may not purchase or widely accept our new line of products. If we are unsuccessful in selling this new line of products, we could determine that the value of the purchased technology is impaired in whole or in part and take a charge to earnings. An impairment charge could have a material adverse effect on our results of operations and financial condition.
The markets for our products are characterized by:
Our future success depends on our ability to continually enhance our current products and develop and introduce new products that our customers choose to buy. If we are unable to keep pace with technological developments and customer demands by introducing new products and enhancements, our business, results of operations and financial condition could be adversely affected. Our future success could be hindered by:
For example, we cannot guarantee that our secure access infrastructure software, Citrix MetaFrame Secure Access Manager, will achieve the broad market acceptance by our channel and entities with which we have a technology relationship, customers and prospective customers necessary to generate significant revenue. In addition, we cannot guarantee that we will be able to respond effectively to technological changes or new product announcements by others. If we experience material delays or sales shortfalls with respect to our new products or new releases of our current products, those delays or shortfalls could have a material adverse effect on our business, results of operations and financial condition.
We believe that we could incur additional costs and royalties as we develop, license or buy new technologies or enhancements to our existing products. These added costs and royalties could increase our cost ofreduced revenues and operating expenses. However, we cannot currently quantify the costs for such transactions that have not yet occurred. In addition, we may need to use a substantial portion of our cash and investments to fund these additional costs.margins.
We compete in intensely competitive markets. Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than us.
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we do.
Microsoft includes its Remote Desktop Protocol, or RDP, as a component in certain Windows Server Operating Systems, which has certain of the capabilities of our ICA® protocol, and offers customers a competitive solution. Further,
For example, our ability to market the Citrix MetaFrame product suite, theline, and its individual products including: Citrix MetaFrame Presentation Server, Citrix MetaFrame Secure Access Manager, productsCitrix MetaFrame Conferencing Manager and Citrix MetaFrame Password Manager, and other future product offerings could be affected by Microsoft’s licensing and pricing scheme for client devices, which attach to Windows Server Operating Systemsservers and utilize our products. Moreover,applications. Further, the announcement of the release, and the actual release, of new Window basedWindows-based server operating systems or products incorporating similar features to our products could cause our existing and potential customers to postpone or cancel plans to license certain of our existing and future product offerings, which could adversely impact our business, results of operations and financial condition. Future product offerings by Microsoft could be competitive with our current MetaFrame software suite, and any of our future productservice offerings.
Furthermore, the Microsoft Development Agreement expired in May 2002. Consequently, Microsoft is no longer contractually restricted from changing its Windows Server Operating Systems to render them inoperable with our MetaFrame product offerings. Further, Microsoft is no longer restricted from assisting third parties to compete with our MetaFrame products.
In addition, alternative products for Web applicationssecure, remote access in the Internet software marketand hardware markets directly and indirectly compete with our current Citrix MetaFrame product line and our Web-based desk-top access products and services, including GoToAssist, GoToMyPC and GoToMeeting and anticipated future product and service offerings.
Existing or new products and services that extend Internet software and hardware to provide Web-based information and application access or interactive computing (such as Microsoft Windows Server 2003 products) can materially impact our ability to sell our products and services in this market. Our current competitors in this market include Microsoft, Oracle Corporation, Sun Microsystems, Inc., Cisco Systems, Inc., Webex Communications, Inc., Symantec Corporation, and other makers of Web application server software.secure remote access solutions.
As the markets for our products and services continue to develop, additional companies, including companies with significant market presence in the computer hardware, software and networking industries could enter the markets in which we compete and further intensify competition. In addition, we believe price competition could become a more significant competitive factor in the future. As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.
We continually re-evaluateSales of products within our licensing programs, including specific license models, delivery methods, and terms and conditions, to market our current and future products and services. We could implement new licensing programs, including offering specified and unspecified enhancements to our current and futureMetaFrame product and service lines. For example, on October 1, 2002, we implemented new volume-based licensing programs. We could recognize revenues associated with those enhancements after the initial shipment or licensing of the software product or over the product’s life cycle. We could implement different licensing models in certain circumstances, for which we would recognize licensing fees overline constitute a longer period, which could decrease our current revenue. For example, we recognize Citrix Subscription Advantage and Technical Services revenues from customer maintenance fees or ongoing customer support ratably over the term of the contract, which is typically 12 to 24 months. Deferred revenues from Citrix Subscription Advantage and Technical Services increased by approximately $32 million in 2002 as compared to 2001. The timing of the implementation of new licensing programs, the timing of the release of such enhancements and other factors could impact the timingsubstantial majority of our recognition of revenues and related expenses associated with our products, related enhancements and services and could adversely affect our operating results and financial condition.revenue.
We conduct significant sales and customer support operations in countries outside of the United States. For the year ended December 31, 2002, we derived 53.7% of our revenues from sales outside the United States. Our continued growth and profitability could require us to further expand our international operations.
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Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or other factors will not adversely affect our business or operating results. In particular, a decrease in demand for software and services in any particular region could adversely affect our future operating results.
Our results are subject to fluctuations in foreign currency exchange rates. Changes in the value of foreign currencies in 2002 relative to the value of the U.S. dollar were generally hedged to minimize adverse impacts on our operating profit. However, since we generally hedge only one year in advance of anticipated foreign currency expenses, operations will be impacted adversely in fiscal 2003. The U.S. dollar weakened during 2002 relative to other currencies. If the value of the U.S. dollar continues to weaken relative to other currencies in which we do business, our results could be adversely affected in 2004 as well when these currencies are remeasured for the purposes of converting them to U.S. dollars for our financial statements.
We anticipate that sales of products within our MetaFrame product suiteline and related enhancements will constitute a substantial majority of our revenue for the foreseeable future. Our ability to continue to generate revenue from our MetaFrame product line will depend on market acceptance of Windows Server Operating Systems and/or UNIX Operating Systems. Declines in demand for our MetaFrame products could occur as a result of:
If our customers do not continue to purchase our MetaFrame products as a result of these or other factors, our revenue would decrease and our results of operations and financial condition would be adversely affected.
If we do not develop new products and services or enhancements to our existing products and services, our business, results of operations and financial condition could be adversely affected.
The markets for our products and services are characterized by:
Our future success depends on our ability to continually enhance our current products and services and develop and introduce new products and services that our customers choose to buy. If we are unable to keep pace with technological developments and customer demands by introducing new products and services and enhancements to our existing products and services, our business, results of operations and financial condition could be adversely affected. Our future success could be hindered by:
For example, we cannot guarantee that our access infrastructure software will achieve the broad market acceptance by our channel and entities with which we have a strategic or technology relationship, customers and prospective customers necessary to generate significant revenue. In addition, we cannot guarantee that we will be able to respond effectively to technological changes or new product announcements by others. If we experience material delays or sales shortfalls with respect to our new products and services or new releases of our current products and services, those delays or shortfalls could have a material adverse effect on our business, results of operations and financial condition.
Our business could be adversely impacted by the failure to renew our agreements with Microsoft for source code access.
In December 2004, we entered into a five-year technology collaboration and licensing agreement with Microsoft Corporation or Microsoft. The arrangement includes a new technology initiative for closer collaboration on terminal server functionality in future server operating systems, continued access to source code for key components of Microsoft’s current and future server operating systems, and a patent cross-licensing agreement. This technology collaboration and licensing agreement replaces the agreement we signed with Microsoft in May 2002, that provided us access to Microsoft Windows Server source code for current and future Microsoft server operating systems, including access to Windows Server 2003 and terminal services source code. There can be no assurances that our current agreements with Microsoft will be extended or renewed by Microsoft after their respective expirations. In addition, Microsoft could terminate the current agreements before the expiration of the term for breach or upon a change in our control. The early termination or the failure to renew certain terms of these agreements with Microsoft in a manner favorable to us could negatively impact the timing of our release of future products and enhancements.
Our business could be adversely impacted by conditions affecting the information technology market.
The demand for our products and services depends substantially upon the general demand for business-related computer hardware and software, which fluctuates based on numerous factors, including capital spending levels, the spending levels and growth of our current and prospective customers and general economic conditions. Fluctuations in the demand for our products and services could have a material adverse effect on our business, results of operations and financial condition. In the past, adverse economic conditions decreased demand for our products and negatively impacted our financial results.
Future economic projections for the IT sector are uncertain. If an uncertain IT spending environment persists, it could negatively impact our business, results of operations and financial condition.
The anticipated benefits to us of acquiring Expertcity may not be realized.
We acquired Expertcity, now known as Citrix Online in February 2004, with the expectation that the acquisition would result in various benefits including, among other things, enhanced revenue and profits, greater market presence and development, and enhancements to our product portfolio and customer base. We expect that the acquisition will enhance our position in the access infrastructure market through the combination of our technologies, products, services, distribution channels and customer contacts with those of Citrix Online, and will enable us to broaden our customer base to include individuals, professionals and small office/home office customers as well as extend our presence in the enterprise access infrastructure market. We may not fully realize some of these benefits and the acquisition may result in the deterioration or loss of significant business. For example, if our business or Citrix Online’s business fails to meet the demands of the marketplace, customer acceptance of the products and services of the combined companies could decline, which could have a material adverse effect on our results of operations and financial condition. Costs incurred and potential liabilities assumed in connection with the acquisition also could have an adverse effect on our business, financial condition and operating results.
Achieving the expected benefits of the acquisition will depend in part on the integration of Citrix Online’s and our businesses in a timely and efficient manner. The challenges involved in this integration include difficulties integrating Citrix Online’s operations, technologies and products as well as coordinating the efforts of Citrix Online’s sales organization with our larger and more widely dispersed sales organization. Although the integration of the two businesses is ongoing, it is still complex, time consuming and expensive, disruptive to our business and may result in the loss of customers or key employees or the diversion of the attention of management which could have an adverse effect on our business, financial condition and operating results.
Acquisitions present many risks, and we may not realize the financial and strategic goals we anticipate at the time of an acquisition.
Our growth is dependent upon market growth, our ability to enhance existing products and services, and our ability to introduce new products and services on a timely basis. We intend to continue to address the need to develop new products and services and enhance existing products and services through acquisitions of other companies, product lines and/or technologies.
Acquisitions, including those of high-technology companies, are inherently risky. We cannot assure anyone that our previous acquisitions or any future acquisitions will be successful in helping us reach our financial and strategic goals either for that acquisition or for us generally. The risks we commonly encounter are:
These factors could have a material adverse effect on our business, results of operations and financial condition. We cannot guarantee that the combined company resulting from any acquisition can continue to support the growth achieved by
the companies separately. We must also focus on our ability to manage and integrate any acquisition. Our failure to manage growth effectively and successfully integrate acquired companies could adversely affect our business and operating results.
If we determine that any of our goodwill or intangible assets, including technology purchased in acquisitions, are impaired, we would be required to take a charge to earnings, which could have a material adverse effect on our results of operations.
We have a significant amount of goodwill and other intangible assets, such as product and core technology, related to our acquisition of Sequoia Software Corporation in 2001 and Expertcity and Net6 in 2004. We do not amortize goodwill and intangible assets that are deemed to have indefinite lives. However, we do amortize certain product and core technologies, trademarks, patents and other intangibles. We periodically evaluate our intangible assets, including goodwill, for impairment. As of December 31, 2004 we had $361.5 million of goodwill. We review for impairment annually, or sooner if events or changes in circumstances indicate that the carrying amount could exceed fair value. Fair values are based on discounted cash flows using a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model. Due to uncertain market conditions and potential changes in our strategy and product portfolio, it is possible that the forecasts we use to support our goodwill could change in the future, which could result in non-cash charges that would adversely affect our results of operations and financial condition.
At December 31, 2004, we had $87.2 million, net, of unamortized identified intangibles with estimable useful lives, of which $5.6 million consists of core technology we purchased in the acquisition of Sequoia, $22.1 million relates to product and core technology purchased in the Expertcity acquisition, $13.3 million relates to product and core technology purchased in the Net6 acquisition and $16.8 million represents core technology purchased under third party licenses. We have commercialized and currently market the Sequoia and other licensed technology through our secure access infrastructure software, which includes Citrix MetaFrame Secure Access Manager and Citrix MetaFrame Password Manager. We currently market the technologies acquired in the Expertcity and Net6 acquisitions through our Citrix Online and Citrix Gateway divisions. However, our channel distributors and entities with which we have technology relationships, customers or prospective customers may not purchase or widely accept our new line of products and services. If we fail to complete the development of our anticipated future product offerings, if we fail to complete them in a timely manner, or if we are unsuccessful in selling these new products and services, we could determine that the value of the purchased technology is impaired in whole or in part and take a charge to earnings. We could also incur additional charges in later periods to reflect costs associated with completing those projects that could not be completed in a timely manner. If the actual revenues and operating profit attributable to acquired product and core technologies are less than the projections we used to initially value product and core technologies when we acquired it, such intangible assets may be deemed to be impaired. If we determine that any of our intangible assets are impaired, we would be required to take a related charge to earnings that could have a material adverse effect on our results of operations.
We recorded approximately $216.6 million of goodwill and intangible assets in connection with our acquisition of Expertcity and $53.8 million of goodwill and intangible assets in connection with our acquisition of Net6. If the actual revenues and operating profit attributable to acquired intangible assets are less than the projections we used to initially value these intangible assets when we acquired them, then these intangible assets may be deemed to be impaired. If we determine that any of the goodwill or other intangible assets associated with our acquisitions of Expertcity or Net6 are impaired, then we would be required to reduce the value of those assets or to write them off completely by taking a related charge to earnings. If we are required to write down or write off all or a portion of those assets, or if financial analysts or investors believe we may need to take such action in the future, our stock price and operating results could be materially adversely affected.
If we fail to manage our operations and grow revenue or fail to continue to effectively control expenses, our future operating results could be adversely affected.
Historically, the scope of our operations, the number of our employees and the geographic area of our operations and our revenue have grown rapidly. In addition, we have acquired both domestic and international companies. This growth and the assimilation of acquired operations and their employees could continue to place a significant strain on our managerial, operational and financial resources. To manage our growth, if any, effectively, we need to continue to implement and improve additional management and financial systems and controls. We may not be able to manage the current scope of our operations or future growth effectively and still exploit market opportunities for our products and services in a timely and cost-effective way. Our future operating results could also depend on our ability to manage:
In addition, to the extent our revenue grows, if at all, we believe that our cost of revenues and certain operating expenses could also increase. We believe that we could incur additional costs and royalties as we develop, license or buy new technologies or enhancements to our existing products and services. These added costs and royalties could increase our cost of revenues and operating expenses. However, we cannot currently quantify the costs for such transactions that have not yet occurred. In addition, we may need to use a substantial portion of our cash and investments or issue additional shares of our common stock to fund these additional costs.
We attribute most of our growth during recent years to the introduction of the MetaFrame software for Windows operating systems in mid-1998. We cannot assure you that the access infrastructure software market, in which we operate, will grow. We cannot assure you that the release of our access infrastructure software suite of products or other new products will increase our revenue growth rate.
We cannot assure you that our operating expenses will be lower than our estimated or actual revenues in any given quarter. If we experience a shortfall in revenue in any given quarter, we likely will not be able to further reduce operating expenses quickly in response. Any significant shortfall in revenue could immediately and adversely affect our results of operations for that quarter. Also, due to the fixed nature of many of our expenses and our current expectation for revenue growth, our income from operations and cash flows from operating and investing activities could be lower than in recent years.
We could change our licensing programs, which could negatively impact the timing of our recognition of revenue.
We continually re-evaluate our licensing programs, including specific license models, delivery methods, and terms and conditions, to market our current and future products and services. We could implement different licensing models in certain circumstances, for which we would recognize licensing fees over a longer period. Changes to our licensing programs, including the timing of the release of enhancements, discounts and other factors, could impact the timing of the recognition of revenue for our products, related enhancements and services and could adversely affect our operating results and financial condition.
As our international sales and operations grow, we could become increasingly subject to additional risks that could harm our business.
We conduct significant sales and customer support operations in countries outside of the United States. During 2004, we derived approximately 53% of our revenues from sales outside the United States. Our continued growth and profitability could require us to further expand our international operations. To successfully expand international sales, we must establish additional foreign operations, hire additional personnel and recruit additional international resellers. Our international operations are subject to a variety of risks, which could cause fluctuations in the results of our international operations. These risks include:
Our results of operations are also subject to fluctuations in foreign currency exchange rates. In order to minimize the impacts on our operating results, we generally initiate our hedging of currency exchange risks one year in advance of anticipated foreign currency expenses. As a result of this practice, foreign currency denominated expenses will be higher or lower in the current year depending on the weakness or strength of the dollar in the prior year. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the one year timeframe for which we hedge our risk. Because the dollar was generally weak in 2004, operating expenses are higher in 2005, but further dollar weakness in 2005 will not have an additional material impact on our operating expenses until 2006.
Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or other factors will not adversely affect our business or operating results.
Our proprietary rights could offer only limited protection. Our products could infringe third-party intellectual property rights, which could result in material costs.
Our efforts to protect our proprietary rights may not be successful. We rely primarily on a combination of copyright, trademark, patent and trade secret laws, confidentiality procedures and contractual provisions, to protect our proprietary rights. The loss of any material trade secret, trademark, trade name, patent or copyright could have a material adverse effect on our business. Despite our precautions, it could be possible for unauthorized third parties to copy or reverse engineer certain portions of our products or to otherwise obtain and use our proprietary information. If we cannot protect our proprietary technology against unauthorized copying or use, we may not remain competitive. Any patents owned by us could be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope we seek, if at all, and if issued, may not provide any meaningful protection or competitive advantage.
In addition, our ability to protect our proprietary rights could be affected by:
We are subject to risks associated with our strategic and technology relationships.
Our business depends on strategic and technology relationships. We cannot assure you that those relationships will continue in the future. In addition to our relationship with Microsoft, we rely on strategic or technology relationships with such companies as SAP, International Business Machines Corporation, Hewlett-Packard Company, Dell Inc. and others. We depend on the entities with which we have strategic or technology relationships to successfully test our products, to
incorporate our technology into their products and to market and sell those products. We cannot assure you that we will be able to maintain our current strategic and technology relationships or to develop additional strategic and technology relationships. If any entities in which we have a strategic or technology relationship are unable to incorporate our technology into their products or to market or sell those products, our business, operating results and financial condition could be materially adversely affected.
If we lose access to third party licenses, releases of our products could be delayed.
We believe that we will continue to rely, in part, on third party licenses to enhance and differentiate our products. Third party licensing arrangements are subject to a number of risks and uncertainties, including:
If we lose or are unable to maintain any of these third party licenses or are required to modify software obtained under third party licenses, it could delay the release of our products. Any delays could have a material adverse effect on our business, results of operations and financial condition.
The market for our Web-based training and customer assistance products is volatile, and if it does not develop or develops more slowly than we expect, our Citrix Online division will be harmed.
The market for our Web-based training and customer assistance products is new and unproven, and it is uncertain whether these services will achieve and sustain high levels of demand and market acceptance. Our success with our Citrix Online division will depend to a substantial extent on the willingness of enterprises, large and small, to increase their use of application services in general and for GoToMyPC, GoToMeeting and GoToAssist, in particular. Many enterprises have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to application services. Furthermore, some enterprises may be reluctant or unwilling to use application services because they have concerns regarding the risks associated with security capabilities, among other things, of the technology delivery model associated with these services. If enterprises do not perceive the benefits of application services, then the market for these services may not further develop at all, or it may develop more slowly than we expect, either of which would significantly adversely affect our financial condition and the operating results for our Citrix Online division.
Our success depends on our ability to attract and retain and further penetrate large enterprise customers.
We must retain and continue to expand our ability to reach and penetrate large enterprise customers by adding effective channel distributors and expanding our consulting services. Our inability to attract and retain large enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Large enterprise customers usually request special pricing and generally have longer sales cycles, which could negatively impact our revenues. By granting special pricing, such as bundled pricing or discounts, to these large customers, we may have to defer recognition of some portion of the revenue from such sales. This deferral could reduce our revenues and operating profits for a given reporting period. Additionally, as we attempt to attract and penetrate large enterprise customers, we may need to increase corporate branding and marketing activities, which could increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.
Our success may depend on our ability to attract and retain small-sized customers.
In order to successfully attract new customer segments to our MetaFrame products and expand our existing relationships with enterprise customers, we must reach and retain small-sized customers and small project initiatives within our larger enterprise customers. We have begun a marketing initiative to reach these customers that includes extending our Advisor Rewards program to include a broader range of license types. We cannot guarantee that our small-sized customer marketing
initiative will be successful. Our failure to attract and retain small sized customers and small project initiatives within our larger enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Additionally, as we attempt to attract and retain small sized customers and small project initiatives within our larger enterprise customers, we may need to increase corporate branding and broaden our marketing activities, which could increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.
Our business could be adversely affected if we are unable to expand and diversify our distribution channels.
We currently intend to continue to expand our distribution channels by leveraging our relationships with independent hardware and software vendors and system integrators to encourage them to recommend or distribute our products. In addition, an integral part of our strategy is to diversify our base of channel relationships by adding more channel members with abilities to reach larger enterprise customers. This will require additional resources, as we will need to expand our internal sales and service coverage of these customers. If we fail in these efforts and cannot expand or diversify our distribution channels, our business could be adversely affected. In addition to this diversification of our base, we will need to maintain a healthy mix of channel members who cater to smaller customers. We may need to add and remove distribution members to maintain customer satisfaction and a steady adoption rate of our products, which could increase our operating expenses. Through our accessPARTNER network, Citrix Authorized Learning Centers and other programs, we are currently investing, and intend to continue to invest, significant resources to develop these channels, which could reduce our profits.
We rely on indirect distribution channels and major distributors that we do not control.
We rely significantly on independent distributors and resellers to market and distribute our products. We do not control our distributors and resellers. Additionally, our distributors and resellers are not obligated to buy our products and could also represent other lines of products. Some of our distributors and resellers maintain inventories of our packaged products for resale to smaller end-users. If distributors and resellers reduce their inventory of our packaged products, our business could be adversely affected. Further, we could maintain individually significant accounts receivable balances with certain distributors. The financial condition of our distributors could deteriorate and distributors could significantly delay or default on their payment obligations. Any significant delays or defaults could have a material adverse effect on our business, results of operations and financial condition.
Our products could contain errors that could delay the release of new products and may not be detected until after our products are shipped.
Despite significant testing by us and by current and potential customers, our products, especially new products or releases, could contain errors. In some cases, these errors may not be discovered until after commercial shipments have been made. Errors in our products could delay the development or release of new products and could adversely affect market acceptance of our products. Additionally, our products depend on third party products, which could contain defects and could reduce the performance of our products or render them useless. Because our products are often used in mission-critical applications, errors in our products or the products of third parties upon which our products rely could give rise to warranty or other claims by our customers.
Our synthetic lease is an off-balance sheet arrangement that could negatively affect our financial condition and results.
In April 2002, we entered into a seven-year synthetic lease with a substantive lessor for our headquarters office buildings in Fort Lauderdale, Florida. The synthetic lease qualifies for operating lease accounting
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Under the lease, we must maintain a pledged balance of approximately $63 million in cash and/or investment securities with an affiliate ofconsolidate the lessor serving as collateral agent. We are able to manageentity, the compositionleased facility or the related debt upon adopting of the pledged investments and investment earnings are available for operating purposes. If we defaultFIN No. 46 (revised). Accordingly, there was no impact on our commitments under the synthetic lease and cannot remedy the default in a timely manner,financial position, results of operations or cash flows from adoption. However, if the lessor could take the pledged assets and transferwere to change its ownership of the real estate to us.
We could purchase the property at any time during the lease term, with thirty days’ written notice, for the original property cost plus transaction fees and lease breakage fees. If we purchase the property, we will be required to add the property to our consolidated balance sheet. At any time during the lease term, we could also re-lease the property or remarket the property for sale to a third party. If we remarket the property for sale to a third party,significantly change its ownership of other properties that it currently holds, we could be required to find alternate headquarter facilities on termsconsolidate the entity, the leased facility and the debt at that may not be as favorable as the current arrangement. time.
If we elect not to purchase the property at the end of the lease term, we have guaranteed a minimum residual value of approximately $51.9 million to the lessor. Therefore, if the fair value of the property declines below $51.9 million, we would have to make up the difference under our residual value guarantee would require us to pay the difference to the lessor, which could have a material adverse effect on our results of operations and financial condition. For further information on
If our synthetic lease, please refer to “Liquiditysecurity measures are breached and Capital Resources” and note 10unauthorized access is obtained to our consolidatedCitrix Online division customers’ data, our services may be perceived as not being secure and customers may curtail or stop using our service.
Use of our GoToMyPC, GoToMeeting or GoToAssist services involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to one of our online customers’ data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If any compromises of security were to occur, it could have the effect of substantially reducing the use of the Web for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt our network or make it inaccessible to our Citrix Online division customers. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers for our Citrix Online division, which would significantly adversely affect our financial statements.
Our efforts
Evolving regulation of the Web may adversely affect our Citrix Online division.
As Web commerce continues to protectevolve, increasing regulation by federal, state or foreign agencies becomes more likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our proprietary rightsonline customers’ ability to use and share data and restricting our ability to store, process and share data with these customers. In addition, taxation of services provided over the Web or other charges imposed by government agencies or by private organizations for accessing the Web may also be imposed. Any regulation imposing greater fees for Web use or restricting information exchange over the Web could result in a decline in the use of the Web and the viability of Web-based services, which would significantly adversely affect our financial condition and the operating results for our Citrix Online division.
If we do not generate sufficient cash flow from operations in the future, we may not be successful. We rely primarily on a combination of copyright, trademark, patent and trade secret laws, confidentiality procedures and contractual provisions, to protect our proprietary rights. The loss of any material trade secret, trademark, trade name, patent or copyright could have a material adverse effect on our business. Despite our precautions, it could be possible for unauthorized third parties to copy or reverse engineer certain portions of our products or to otherwise obtain and use our proprietary information. If we cannot protect our proprietary technology against unauthorized copying or use, we may not remain competitive. Any patents owned by us could be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope we seek, if at all, and if issued, may not provide any meaningful protection or competitive advantage.
In addition, our ability to protect our proprietary rights could be affected by:
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Our business depends on technology relationships. We cannot assure you that those relationships will continue in the future. In addition to our relationship with Microsoft, we rely on technology relationships with IBM, HP, Dell and others. We depend on the entities with which we have technology relationships to successfully test our products, to incorporate our technology into their products and to market and sell those products. We cannot assure you that we will be able to maintainfund our current technology relationships or to develop additional technology relationships. If any entities in which we have a technology relationship are unable to incorporate our technology into their products or to market or sell those products, our business, operating results and financial condition could be materially adversely affected.
We believe that we will continue to rely, in part, on third party licenses to enhance and differentiate our products. Third party licensing arrangements are subject to a number of risks and uncertainties, including:
If we lose or are unable to maintain any of these third party licenses, it could delay the shipment or release of our products. Any delays could have a material adverse effect on our business, results of operations and financial condition.fulfill our future obligations.
We must retain and continue to expand our ability to reach and penetrate large enterprise customers by adding effective channel distributors and expanding our consulting services. Our inability to attract and retain large enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Large enterprise customers usually request special pricing and generally have longer sales cycles, which could negatively impact our revenues. Additionally, as we attempt to attract and penetrate large enterprise customers, we could need to increase corporate branding and marketing activities, which could increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.
We intend to continue to expand our distribution channels by leveraging our relationships with independent hardware and software vendors and system integrators to encourage them to recommend or distribute our products. In addition, an integral part of our strategy is to diversify our base of channel relationships by adding more channel members with abilities to reach larger enterprise customers. This will require additional resources as we will need to expand our internal sales and service coverage of these customers. If we fail in these efforts and cannot expand or diversify our distribution channels, our business could be adversely affected. In addition to this diversification of our base, we will need to maintain a healthy mix of members who cater to smaller customers. We could need to add and remove distribution members to maintain customer satisfaction and a steady adoption rate of our products, which could increase our operating expenses. We are currently investing, and intend to continue to invest, significant resources to develop these channels, which could reduce our profits.
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Our ability to generate sufficient cash flow from operations to fund our operations and product development, including the payment of cash consideration in acquisitions and offerings and make payments onthe payment of our debt and other obligations, depends on a range of economic, competitive and business factors, many of which are outside our control. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized on schedule or at all, or that we will be able to liquidate our investments, repatriate cash and investments held in our overseas subsidiaries, sell assets or raise equity or debt financings when needed or desirable. In December 2000, we invested $158.1 million in a trust managed by an investment advisor in order to maintain sufficient liquidity in the event that our debentures are redeemed in March 2004. If the value of the investments in the trust significantly decreases, the proceeds of the trust combined with our other cash and investments may not be sufficient to fund the redemption of our outstanding debentures in 2004, if required. An inability to fund our operations or fulfill outstanding obligations could have a material adverse effect on our business, financial condition and results of operations. For further information, please refer to “Liquidity“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
We rely significantly on independent distributors and resellersIf we lose key personnel or cannot hire enough qualified employees, our ability to market and distribute our products. We do not control our distributors and resellers. Additionally, our distributors and resellers are not obligated to buy our products and could also represent other lines of products. Some of our distributors and resellers maintain inventories of our packaged products for resale to our smaller end-user customers. If distributors and resellers reduce their inventory of our packaged products,manage our business could be adversely affected. In the quarter ended December 31, 2002, we believe that our distributors and resellers held smaller inventories of packaged products as compared to inventories they held in prior quarters. Further, we could maintain individually significant accounts receivable balances with certain distributors. For example, one of our distributors accounted for approximately 7% of gross accounts receivable as of December 31, 2002. As of December 31, 2001, the same distributor accounted for 14% of gross accounts receivable. The financial condition of our distributors could deteriorate and distributors could significantly delay or default on their payment obligations. Any significant delays or defaults could have a material adverse effect on our business, results of operations and financial condition.
Despite significant testing by us and by current and potential customers, our products, especially new products or releases, could contain errors. In some cases, these errors may not be discovered until after commercial shipments have been made. Errors in our products could delay the development or release of new products and could adversely affect market acceptance of our products. Additionally, our products depend on third party products, which could contain defects and could reduce the performance of our products or render them useless. Because our products are often used in mission-critical applications, errors in our products or the products of third parties upon which our products rely could give rise to warranty or other claims by our customers.
In the past we have re-evaluated the amounts charged to in-process research and development in connection with acquisitions and licensing arrangements. The amount and rate of amortization of those amounts are subject to a number of risks and uncertainties. The risks and uncertainties include the effects of any changes in accounting standards or guidance adopted by the SEC or the accounting profession. Any changes in accounting standards or guidance adopted by the SEC could materially adversely affect our future results of operations through increased amortization expense. We cannot assure you that actual revenues and operating profit attributable to acquired in-process research and development will match the projections we used to initially value in-process research and development when we acquired it. Ongoing operations and
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Furthermore, we cannot guarantee that we will succeed in our efforts to integrate and further develop our acquired technologies. In 1999 and 2001, we acquired certain in-process software technologies from ViewSoft and Sequoia. We are currently working on integrating some of the acquired technologies into our anticipated future product offerings and on associated design, development and rework required to integrate the technologies. However, we cannot guarantee we will be successful in our efforts to integrate and further develop these technologies. If we fail to complete the development of our anticipated future product offerings, or if we fail to complete them in a timely manner, our financial condition and results of operations could be materially adversely affected. We cannot currently determine the impact those delays could have on our business, future results of operations and financial condition. We could incur additional charges in later periods to reflect costs associated with completing those projects.
Acquisitions of high-technology companies are inherently risky. We cannot assure anyone that our previous acquisitions, including the purchase of Sequoia, or any future acquisitions will be successful. The risks we commonly encounter are:
These factors could have a material adverse effect on our business, results of operations and financial condition. We cannot guarantee that the combined company resulting from any acquisition can continue to support the growth achieved by the companies separately. We must also focus on our ability to manage and integrate any acquisition. Our failure to manage growth effectively and successfully integrate acquired companies could adversely affect our business and operating results.
Our success depends, in large part, upon the services of a number of key employees. WeExcept for certain key employees of acquired businesses, we do not have long-term employment agreements with any of our key personnel. Any officer or employee can terminate his or her relationship with us at any time. The effective management of our growth, if any, could depend upon our ability to retain our highly skilled technical, managerial, finance and marketing personnel. If any of those employees leave, we will need to attract and retain replacements for them. We could also need to add key personnel in the future.
The market for these qualified employees is competitive. We could find it difficult to successfully attract, assimilate or retain sufficiently qualified personnel.personnel in sufficient numbers. Furthermore, we may hire key personnel in connection with our future acquisitions; however, any of these employees will be able to terminate his or her relationship with us at any time. If we cannot retain and add the necessary staff and resources for these acquired businesses, our ability to develop acquired products, markets and customers could be adversely affected. Also, we couldmay need to hire additional personnel to develop new products, product enhancements and technologies. If we cannot add the necessary staff and resources, our ability to develop future enhancements and features to our existing or future products could be delayed. Any delays could have a material adverse effect on our business, results of operations and financial condition.
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Failure to obtain approval from our shareholders of new stock plans could adversely affect our ability to attract and retain employees. |
Several of our stock plans terminate in 2005. Accordingly, our Board of Directors has recommend to our shareholders the approval of new stock plans for the issuance of stock options and other forms of equity-based compensation to our employees, officers and directors. We may not be able to secure approval for these new stock plans from our shareholders. If we do not get such approvals, we will be forced to curtail our stock option issuances, which will adversely impact our ability to retain existing employees and attract qualified candidates.
If stock balancing returns or price adjustments exceed our reserves, our operating results could be adversely affected.
We provide most of our distributors with productstock balancing return rights, only for the purpose of stock balancing, which generally permit our distributors to return products to us by the forty-fifth day of a fiscal quarter, subject to ordering an equal dollar amount of our products.products prior to the last day of the same fiscal quarter. We also provide price protection rights to most of our distributors. Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors if we lower our prices for those products within a specified time period. To cover our exposure to these product returns and price adjustments, we establish reserves based on our evaluation of historical product trends and current marketing plans. However, we cannot assure you that our reserves will be sufficient to cover our future product returns and price adjustments. If we inadequately forecast reserves, our operating results could be adversely affected.
Increasing politicalOur stock price could be volatile, and social turmoil, such as terrorist and military actions, can be expected to put further pressure on economic conditions inyou could lose the United States and foreign jurisdictions. These conditions make it difficult for us, and our customers, to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and resultsvalue of operations.your investment.
Our stock price has been volatile and has fluctuated significantly to date. The trading price of our stock is likely to continue to be highly volatile and subject to wide fluctuations. Your investment in our stock could lose value. Some of the factors that could significantly affect the market price of our stock include:
The stock market in general, The Nasdaq National Market and the market for software companies and technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors could materially and adversely affect the market price of our stock, regardless of our actual operating performance.
Historically, the scope of our operations, the number of our employees
Our business and the geographic area of our operations have grown rapidly. In addition, we have acquired both domesticinvestments could be adversely impacted by unfavorable economic political and international companies. This growth and the assimilation of acquired operations and their employees could continue to place a significant strain on our managerial, operational and financial resources. To manage our growth, if any, effectively, we need to continue to implement and improve additional management and financial systems and controls. We may not be able to manage the current scope of our operations or future growth effectively and still exploit market opportunities for our products and services in a timely and cost-effective way. Our future operating results could also depend on our ability to manage:
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social conditions.
We took steps to reduce operating expenses commencing in the fourth quarter of 2002, however our operating expenses in 2003 could exceed our operating expenses in 2002. An increase in operating expenses could reduce our income from operations and cash flows from operating activities in the future.
General economic and market conditions, and other factors outside our control including terrorist and military actions, could adversely affect our business and impair the value of our investments. Any further downturn in general economic conditions could result in a reduction in demand for our products and services and could harm our business. These conditions make it difficult for us, and our customers, to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations. In addition, an economic downturn could result in an impairment in the value of our investments requiring us to record losses related to such investments. An impairmentImpairment in the value of these investments may disrupt our ongoing business and distract management. As
of December 31, 2002,2004, we had $576.7$479.9 million of short and long-term investments, including restricted investments, with various issuers and financial institutions. In many cases we do not attempt to reduce or eliminate our market exposure on these investments and could incur losses related to the impairment of these investments. Fluctuations in economic and market conditions could adversely effectaffect the value of our investments, and we could lose some of our investment portfolio. A total loss of an investment could adversely affect our results of operations and financial condition. For further information on these investments, please refer to “Liquidity“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We attribute most of our growth during recent years to the introduction of the MetaFrame software for Windows operating systems in mid-1998. We cannot assure you that the infrastructure software markets in which we operate, will grow. We cannot assure that the release of our secure access infrastructure software suite, including the MetaFrame Secure Access Manager, or other new products will increase our revenue growth rate.
In addition, to the extent our revenue grows, if at all, we believe that our cost of revenues and certain operating expenses could also increase. In the third quarter of 2002, we took actions to reduce operating expenses starting in the fourth quarter of 2002. We cannot assure you that our operating expenses will be lower than our estimated or actual revenues in any given quarter. If we experience a shortfall in revenue in any given quarter, we likely will not be able to further reduce operating expenses quickly in response. Any significant shortfall in revenue could immediately and adversely affect our results of operations for that quarter. Also, due to the fixed nature of many of our expenses and our current expectation for revenue growth, our income from operations and cash flows from operating and investing activities could be lower than in recent years.
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The following discussion about our market risk includes “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The analysis methods we used to assess and mitigate risk discussed below should not be considered projections of future events, gains or losses.
We are exposed to financial market risks, including changes in interestforeign currency exchange rates and foreign currency exchangeinterest rates that could adversely affect our results of operations or financial condition. To mitigate foreign currency and interest rate risk, we utilize derivative financial instruments. The counter-parties to our derivative instruments are major financial institutions. All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of December 31, 2002.2004. Actual results could differ materially.
Discussions of our accounting policies for derivatives and hedging activities are included in notes 2 and 13 to our consolidated financial statements.
Exposure to Exchange Rates
A substantial majority of our overseas expense and capital purchasing activities are transacted in local currencies, primarilyincluding Euros, British pounds sterling, Euros, Swiss francs, Australian dollars and Japanese yen and Australian dollars.yen. To reduce exposure to reduction in U.S. dollar value and the volatility of future cash flows caused by changes in currency exchange rates, we have established a hedging program. We use foreign currency forward contracts to hedge certain forecasted foreign currency expenditures. Our hedging program significantly reduces, but does not entirely eliminate, the impact of currency exchange rate movements.
At December 31, 20022004 and 2001,2003, we had in place foreign currency forward sale contracts with a notional amount of $48.9$39.0 million and $13.1$37.2 million, respectively, and foreign currency forward purchase contracts with a notional amount of $128.4$165.0 million and $60.9$160.9 million, respectively. At December 31, 20022004 and 2001,2003, these contracts had an aggregate fair value of $3.6$8.0 million and $0.2$7.9 million, respectively. Based on a hypothetical 10% appreciation of the U.S. dollar from December 31, 20022004 market rates the fair value of our foreign currency forward contracts would decrease by $8.3$13.3 million. Conversely, a hypothetical 10% depreciation of the U.S. dollar from December 31, 20022004 market rates would increase the fair value of our foreign currency forward contracts by $8.3$13.3 million. Foreign operating costs in these hypothetical movements would move in the opposite direction. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates quantified above, changes in exchange rates could also change the dollar value of sales and affect the volume of sales as competitorscompetitors’ products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a potential change in levels of local currency prices or sales reported in U.S. dollars. We do not anticipate any material adverse impact to our consolidated financial position, results of operations, or cash flows as a result of these forward foreign exchange contracts.
Exposure to Interest Rates
We have interest rate exposures resulting from our interest-based available-for-sale securities. In order to better manage our exposure to interest rate risk, in December 2002 we entered into 12are a party to 19 interest rate swap agreements. The swap agreements, with an aggregate notional amount of $208.0$182.4 million convert the fixed rate return on 12certain of our available-for-sale securities, to a floating rate. The aggregate fair value of the interest rate swaps at December 31, 20022004 was a liabilityan asset of $3.4$1.1 million. Based upon a hypothetical 1% increase in the market interest rate as of December 31, 2002,2004, the fair value of these aggregated liabilitiesassets would have decreasedincreased by approximately $8.2$4.2 million. Based on a hypothetical 1% decrease in the market interest rate as of December 31, 2002,2004, the fair value of these aggregated liabilities would have increased by approximately $8.4$4.2 million. The underlying assets would experience offsetting gains and losses. We also maintain available-for-sale and held-to-maturity investments in debt securities, which limits the amount of credit exposure to any one issue, issuer, or type of instrument. The securities in our investment portfolio are not leveraged. The securities classified as available-for-sale are subject to interest rate risk. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes that ending fair values include principal plus accrued interest dividends and reinvestment income. If
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discussed above, as the interest rate risk related to those investments has been effectively hedged. For more information see note 13 to our consolidated financial statements.
These amounts are determined by considering the impact of the hypothetical interest ratesrate movements on our interest rate swap agreements and its available-for-sale and held-to-maturity investment portfolios. This analysis does not consider the effect of credit risk as a result of the reduced level of overall economic activity that could exist in such an environment.
In April 2002, we entered into a synthetic lease with a substantive lessor totaling approximately $61$61.0 million related to office space utilized for our corporate headquarters. Payments under this synthetic lease are indexed to a variable interest rate (LIBOR plus a margin). Based upon our interest rate exposure under this synthetic lease at December 31, 2002,2004, a 100 basis point change in the current interest rate would have an immaterial effect on our financial position and results of operations. In addition to interest rate exposure, if the fair value of our headquarters building in Fort Lauderdale, Florida were to significantly decline, there could be a material adverse effect on our results of operations and financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Company’s Consolidated Financial Statements and related financial statement schedule, together with the reportreports of independent certifiedregistered public accountants,accounting firm, appear at pages F-1 through F-37, respectively,F-33 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with our independent registered public accountants on accounting or financial disclosure matters during the Company’s two most recent fiscal years.
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PART IIIITEM 9A. CONTROLS AND PROCEDURES
The information required under this item is incorporated herein by reference toEvaluation of Disclosure Controls and Procedures
As of December 31, 2004, the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2002.
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2002.
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2002.
The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2002.
As of a date (the “Evaluation Date”) within ninety days prior to the filing date of this Annual Report on Form 10-K, the Company, under the supervision andmanagement, with the participation of the Company’s management, including the Company’sPresident and Chief Executive Officer and the Company’s Vice President Finance and Acting Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-1513a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s President and Chief Executive Officer and the Company’s Vice President Finance and Acting Chief Financial Officer concluded that, as of the Evaluation Date,December 31, 2004, the Company’s disclosure controls and procedures arewere effective in ensuring that material information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Vice President Finance and Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2004, there were no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a – 15(f). Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment we believe that, as of December 31, 2004, our internal control over financial reporting is effective based on those criteria. Our management’s assessment of the effectiveness or our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Citrix Systems, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Citrix Systems, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Citrix Systems Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Citrix Systems, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Citrix Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Citrix Systems, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2004 and our report dated March 10, 2005 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Certified Public Accountants
West Palm Beach, Florida
March 10, 2005
The Company’s policy governing transactions in its securities by its directors, officers and employees permits its officers, directors and certain other persons to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The Company has been advised that its President and Chief Executive Officer, Mark B. Templeton, its Senior Vice President, Worldwide Sales and Services, John C. Burris, its Vice President, EMEA, Stefan Sjostrom, and a director, John W. White, each entered into a trading plan during the fourth quarter of 2004 in accordance with Rule 10b5-1 and the Company’s internal controlspolicy governing transactions in its securities. The Company undertakes no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by reference to the knowledgeCompany’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company, in other factors that could significantly affectCompany’s fiscal year ended December 31, 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by reference to the Company’s internal controls subsequentdefinitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required under this item is incorporated herein by reference to the Evaluation Date.Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the Company’s fiscal year ended December 31, 2004.
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The information required under this item is incorporated herein by reference to the Company’s definitive proxy statement pursuant to Regulation 14A, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the Company’s close of the fiscal year ended December 31, 2004.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | |
(a) 1. Consolidated Financial Statements.
For a list of the consolidated financial information included herein, see Index on Page F-1.
2. Financial Statement Schedules.
The following consolidated financial statement schedule is included in Item 8:
Valuation and Qualifying Accounts
3. List of Exhibits.
Exhibit No. | No. Description | ||
2.1 | (6) | Agreement and Plan of Merger, dated as of March 20, 2001, by and among Citrix Systems, Inc., Soundgarden Acquisition Corp. and Sequoia Software Corporation | |
2.2 | (10) | Agreement and Plan of Merger dated as of December 18, 2003 by and among Citrix Systems, Inc., EAC Acquisition Corporation, Expertcity.com, Inc., Edward G. Sim and Andreas von Blottnitz | |
2.3 | Agreement and Plan of Merger dated as of November 21, 2004 by and among Citrix Systems, Inc., Hal Acquisition Corporation, Net6, Inc., and Tim Guleri | ||
3.1 | (1) | Amended and Restated Certificate of Incorporation of the Company | |
3.2 | (12) | Amended and Restated By-laws of the Company | |
3.3 | (2) | Certificate of Amendment of Amended and Restated Certificate of Incorporation | |
4.1 | (1) | Specimen certificate representing the Common Stock | |
10.1 | (11)* | Fourth Amended and Restated 1995 Stock Plan | |
10.2 | (14)* | Second Amended and Restated 1995 Non-Employee Director Stock Option Plan | |
10.3 | (8)* | Third Amended and Restated 1995 Employee Stock Purchase Plan | |
10.4 | (9)* | Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan | |
10.5 | (13)* | 2000 Director and Officer Stock Option and Incentive Plan, Non-Qualified Stock Option Agreement | |
10.6 | (13)* | 2000 Director and Officer Stock Option and Incentive Plan, Incentive Stock Option Agreement | |
10.7 | * | Amended and Restated 2000 Stock Incentive Plan of Net6 Inc. (a subsidiary of Citrix Systems, Inc.) | |
10.8 | * | Amended and Restated 2003 Stock Incentive Plan of Net6 Inc. (a subsidiary of Citrix Systems, Inc.) | |
10.9 | (4) | License, Development and Marketing Agreement dated May 9, 1997 between the Company and Microsoft Corporation | |
10.10 | (5) | Amendment No. 1 to License, Development and Marketing Agreement dated May 9, 1997 between the Company and Microsoft Corporation |
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10.11 | Microsoft Master Source Code Agreement by and between the Company and Microsoft dated | |||
10.12 | License Form by and between the Company and Microsoft Corporation dated | |||
10.13(7) | Participation Agreement dated as of April 23, 2002, by and among Citrix Systems, Inc., Citrix Capital Corp., Selco Service Corporation and Key Corporate Capital, Inc. (the “Participation Agreement”) (with certain information omitted pursuant to a | |||
10.14(7) | Amendment No. 1 to Participation Agreement dated as of June 17, 2002 (with certain information omitted pursuant to a | |||
10.15(7) | Master Lease dated as of April 23, 2002 by and between Citrix Systems, Inc. and Selco Service Corporation (with certain information omitted pursuant to a | |||
10.16(15)* | ||||
21.1 | List of Subsidiaries | |||
23.1 | Consent of Ernst & Young LLP | |||
24.1 | Power of Attorney (Included in signature page) | |||
31.1 | Rule 13a-14(a) / 15d-14(a) Certifications | |||
31.2 | Rule 13a-14(a) / 15d-14(a) Certifications | |||
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||
* | Indicates a management contract or any compensatory plan, contract or arrangement. |
(1) | ||
Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 33-98542), as amended. |
Incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. |
Incorporated herein by reference to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. |
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Incorporated herein by reference to Exhibit 10 of the Company’s Current Report on Form 8-K dated as of May 9, 1997. |
Incorporated herein by reference to Exhibit 10 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. |
Incorporated by reference herein to Exhibit 2 of the Company’s Schedule 13D Report dated as of March 28, 2001. |
Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. |
(b) Reports on Form 8-K.
(8) | Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. |
(9) | Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. |
(10) | Incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated as of December 30, 2003. |
(11) | Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. |
(12) | Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. |
(13) | Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. |
(14) | Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. |
(15) | Incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated as of February 10, 2005. |
There were no reports on Form 8-K filed by the Company during the fourth quarter of 2002.
(c) Exhibits.
The Company hereby files as part of this Form 10-K the exhibits listed in Item 15(a)(3) above. Exhibits which are incorporated herein by reference can be inspected and copied at the public reference facilities maintained by the Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C., and at the Commission’s regional offices at CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511 and 233 Broadway, 13th floor, New York, NY 10279. Copies of such material can also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 29549, at prescribed rates.
(d) Financial Statement Schedule.
The Company hereby files as part of this Form 10-K the consolidated financial statement schedule listed in Item 15(a)(2) above, which is attached hereto.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Fort Lauderdale, Florida on the 24th11th day of March, 2003.2005.
CITRIX SYSTEMS, INC |
By: | /S/ MARK B. TEMPLETON | |
Mark B. Templeton | ||
President and Chief Executive Officer |
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Citrix Systems, Inc., hereby severally constitute and appoint Mark B. Templeton and David D. Urbani,J. Henshall, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments to this report, and generally to do all things in our names and on our behalf in such capacities to enable Citrix Systems, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on the 24th11th day of March, 2003.
Signature | Title(s) | |||
/ Mark B. Templeton | President, Chief Executive Officer and Director (Principal Executive Officer) | |||
/ David | ||||
/ Stephen M. Dow | Chairman of the Board of Directors | |||
/ Thomas F. Bogan | Director | |||
/ Murray J. Demo | Director | |||
/ Gary E. Morin | Director | |||
/S/ GODFREY R. SULLIVAN Godfrey R. Sullivan | Director | |||
/S/ JOHN W. John W. White | Director |
47
CERTIFICATIONS
I, Mark B. Templeton, certify that:
Date: March 24, 2003
48
CERTIFICATIONS
I, David D. Urbani, certify that:
Date: March 24, 2003
49
CITRIX SYSTEMS, INC.
List of Financial Statements and Financial Statement Schedule
The following consolidated financial statements of Citrix Systems, Inc. are included in Item 8:
The following consolidated financial statement schedule of Citrix Systems, Inc. is included in Item 15(a):
F-34 |
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
F-1
REPORT OF INDEPENDENT CERTIFIEDREGISTERED PUBLIC ACCOUNTANTSACCOUNTING FIRM
Board of Directors and Stockholders
Citrix Systems, Inc.
We have audited the accompanying consolidated balance sheets of Citrix Systems, Inc. as of December 31, 20022004 and 2001,2003, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2002.2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditingthe standards generally accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Citrix Systems, Inc. at December 31, 20022004 and 2001,2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002,2004, in conformity with accounting principlesU.S. generally accepted in the United States.accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed
We also have audited, in Note 2 toaccordance with the consolidatedstandards of the Public Company Accounting Oversight Board (United States), the effectiveness of Citrix Systems, Inc.’s internal control over financial statements, effective January 1, 2002,reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Company changed its methodCommittee of accounting for goodwillSponsoring Organizations of the Treadway Commission and certain intangible assets as a result of adopting Statement of Financial Accounting Standard No. 142,Goodwill and Other Intangible Assets.our report dated March 10, 2005 expressed an unqualified opinion thereon.
/s/Ernst & Young LLP
Certified Public Accountants
West Palm Beach, Florida
F-2March 10, 2005
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||||
2002 | 2001 | |||||||||
(In thousands, except | ||||||||||
par value) | ||||||||||
Assets | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 142,700 | $ | 139,693 | ||||||
Short-term investments | 77,213 | 77,078 | ||||||||
Accounts receivable, net of allowances of $16,538 and $12,069 at 2002 and 2001, respectively | 69,471 | 65,032 | ||||||||
Inventories | 1,774 | 3,568 | ||||||||
Prepaid taxes | 2,128 | 6,069 | ||||||||
Other prepaids and current assets | 32,498 | 21,444 | ||||||||
Current portion of deferred tax assets | 49,515 | 33,171 | ||||||||
Total current assets | 375,299 | 346,055 | ||||||||
Long-term investments | 499,491 | 529,894 | ||||||||
Property and equipment, net | 76,534 | 90,110 | ||||||||
Goodwill, net | 152,364 | 152,364 | ||||||||
Other intangible assets, net | 30,849 | 36,613 | ||||||||
Long-term portion of deferred tax assets, net | 5,587 | 25,071 | ||||||||
Other assets, net | 21,407 | 28,123 | ||||||||
$ | 1,161,531 | $ | 1,208,230 | |||||||
Liabilities and Stockholders’ Equity | ||||||||||
Current liabilities: | ||||||||||
Accounts payable and accrued expenses | $ | 92,926 | $ | 111,928 | ||||||
Current portion of deferred revenues | 95,963 | 80,573 | ||||||||
Total current liabilities | 188,889 | 192,501 | ||||||||
Long-term portion of deferred revenues | 8,028 | 5,631 | ||||||||
Convertible subordinated debentures | 333,549 | 346,214 | ||||||||
Commitments and contingencies | ||||||||||
Put warrants | 7,340 | 16,554 | ||||||||
Common stock subject to repurchase | 9,135 | — | ||||||||
Stockholders’ equity: | ||||||||||
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding | — | — | ||||||||
Common stock at $.001 par value: 1,000,000 shares authorized; 197,426 and 196,627 issued at 2002 and 2001, respectively | 197 | 197 | ||||||||
Additional paid-in capital | 595,959 | 507,857 | ||||||||
Retained earnings | 519,797 | 425,877 | ||||||||
Accumulated other comprehensive income (loss) | 3,833 | (84 | ) | |||||||
1,119,786 | 933,847 | |||||||||
Less — common stock in treasury, at cost (29,290 and 11,450 shares in 2002 and 2001, respectively) | (505,196 | ) | (286,517 | ) | ||||||
Total stockholders’ equity | 614,590 | 647,330 | ||||||||
$ | 1,161,531 | $ | 1,208,230 | |||||||
December 31, | ||||||||
2004 | 2003 | |||||||
(In thousands, except par value) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 73,485 | $ | 182,969 | ||||
Short-term investments | 159,656 | 385,431 | ||||||
Accounts receivable, net of allowances of $4,916 and $6,365 in 2004 and 2003, respectively | 108,399 | 87,464 | ||||||
Prepaid expenses and other current assets | 41,159 | 58,167 | ||||||
Current portion of deferred tax assets, net | 43,881 | 51,540 | ||||||
Total current assets | 426,580 | 765,571 | ||||||
Restricted cash equivalents and investments | 149,051 | 146,460 | ||||||
Long-term investments | 183,974 | 183,411 | ||||||
Property and equipment, net | 69,281 | 65,837 | ||||||
Goodwill, net | 361,452 | 152,364 | ||||||
Other intangible assets, net | 87,172 | 21,300 | ||||||
Long-term portion of deferred tax assets, net | — | 3,168 | ||||||
Other assets | 8,574 | 6,828 | ||||||
$ | 1,286,084 | $ | 1,344,939 | |||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 131,287 | $ | 114,456 | ||||
Current portion of deferred revenues | 210,872 | 152,938 | ||||||
Convertible subordinated debentures | — | 351,423 | ||||||
Total current liabilities | 342,159 | 618,817 | ||||||
Long-term portion of deferred revenues | 14,271 | 12,137 | ||||||
Other liabilities | 4,749 | 7,187 | ||||||
Commitments and contingencies (Note 10) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding | — | — | ||||||
Common stock at $.001 par value: 1,000,000 shares authorized; 212,991 and 202,622 shares issued at 2004 and 2003, respectively | 213 | 203 | ||||||
Additional paid-in capital | 872,659 | 700,111 | ||||||
Deferred compensation | (1,063 | ) | — | |||||
Retained earnings | 778,286 | 646,740 | ||||||
Accumulated other comprehensive income | 7,489 | 7,810 | ||||||
1,657,584 | 1,354,864 | |||||||
Less — common stock in treasury, at cost (42,608 and 38,150 shares in 2004 and 2003, respectively) | (732,679 | ) | (648,066 | ) | ||||
Total stockholders’ equity | 924,905 | 706,798 | ||||||
$ | 1,286,084 | $ | 1,344,939 | |||||
See accompanying notes.
F-3
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, | ||||||||||||||
2002 | 2001 | 2000 | ||||||||||||
(In thousands, except per share | ||||||||||||||
information) | ||||||||||||||
Revenues: | ||||||||||||||
Revenues | $ | 513,365 | $ | 551,799 | $ | 430,548 | ||||||||
Other revenues | 14,083 | 39,830 | 39,898 | |||||||||||
Total net revenues | 527,448 | 591,629 | 470,446 | |||||||||||
Cost of revenues: | ||||||||||||||
Cost of revenues (excluding amortization, presented separately below) | 19,030 | 29,848 | 28,483 | |||||||||||
Cost of other revenues | — | — | 571 | |||||||||||
Total cost of revenues | 19,030 | 29,848 | 29,054 | |||||||||||
Gross margin | 508,418 | 561,781 | 441,392 | |||||||||||
Operating expenses: | ||||||||||||||
Research and development | 68,923 | 67,699 | 50,622 | |||||||||||
Sales, marketing and support | 235,393 | 224,108 | 180,384 | |||||||||||
General and administrative | 88,946 | 85,212 | 58,685 | |||||||||||
Amortization of intangible assets | 11,296 | 48,831 | 30,395 | |||||||||||
In-process research and development | — | 2,580 | — | |||||||||||
Write-down of technology | — | — | 9,081 | |||||||||||
Total operating expenses | 404,558 | 428,430 | 329,167 | |||||||||||
Income from operations | 103,860 | 133,351 | 112,225 | |||||||||||
Interest income | 30,943 | 42,006 | 41,313 | |||||||||||
Interest expense | (18,163 | ) | (20,553 | ) | (17,099 | ) | ||||||||
Other expense, net | (3,483 | ) | (2,253 | ) | (1,422 | ) | ||||||||
Income before income taxes | 113,157 | 152,551 | 135,017 | |||||||||||
Income taxes | 19,237 | 47,291 | 40,505 | |||||||||||
Net income | $ | 93,920 | $ | 105,260 | $ | 94,512 | ||||||||
Earnings per common share: | ||||||||||||||
Basic earnings per share | $ | 0.53 | $ | 0.57 | $ | 0.51 | ||||||||
Weighted average shares outstanding | 177,428 | 185,460 | 184,804 | |||||||||||
Earnings per common share — assuming dilution: | ||||||||||||||
Diluted earnings per share | $ | 0.52 | $ | 0.54 | $ | 0.47 | ||||||||
Weighted average shares outstanding | 179,359 | 194,498 | 199,731 | |||||||||||
Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(In thousands, except per share information) | ||||||||||||
Revenues: | ||||||||||||
Software licenses | $ | 369,826 | $ | 374,403 | $ | 363,145 | ||||||
Software license updates | 271,547 | 168,793 | 105,682 | |||||||||
Services | 99,784 | 45,429 | 44,539 | |||||||||
Other | — | — | 14,082 | |||||||||
Total net revenues | 741,157 | 588,625 | 527,448 | |||||||||
Cost of revenues: | ||||||||||||
Cost of software license revenues | 3,824 | 13,555 | 12,444 | |||||||||
Cost of services revenues | 16,472 | 6,481 | 6,586 | |||||||||
Amortization of core and product technology | 6,127 | 11,036 | 10,811 | |||||||||
Total cost of revenues | 26,423 | 31,072 | 29,841 | |||||||||
Gross margin | 714,734 | 557,553 | 497,607 | |||||||||
Operating expenses: | ||||||||||||
Research and development | 86,357 | 64,443 | 68,923 | |||||||||
Sales, marketing and support | 337,566 | 252,749 | 235,393 | |||||||||
General and administrative | 106,516 | 85,672 | 88,946 | |||||||||
Amortization of other intangible assets | 6,204 | 300 | 485 | |||||||||
In-process research and development | 19,100 | — | — | |||||||||
Total operating expenses | 555,743 | 403,164 | 393,747 | |||||||||
Income from operations | 158,991 | 154,389 | 103,860 | |||||||||
Interest income | 14,274 | 21,120 | 30,943 | |||||||||
Interest expense | (4,367 | ) | (18,280 | ) | (18,163 | ) | ||||||
Write-off of deferred debt issuance costs | (7,219 | ) | — | — | ||||||||
Other income (expense), net | 2,754 | 3,458 | (3,483 | ) | ||||||||
Income before income taxes | 164,433 | 160,687 | 113,157 | |||||||||
Income taxes | 32,887 | 33,744 | 19,237 | |||||||||
Net income | $ | 131,546 | $ | 126,943 | $ | 93,920 | ||||||
Earnings per share: | ||||||||||||
Basic | $ | 0.78 | $ | 0.77 | $ | 0.53 | ||||||
Diluted | $ | 0.75 | $ | 0.74 | $ | 0.52 | ||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 168,868 | 165,323 | 177,428 | |||||||||
Diluted | 174,734 | 171,447 | 179,359 | |||||||||
See accompanying notes.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Accumulated | ||||||||||||||||||||||||||||||||||||
Common Stock | Additional | Other | Treasury Stock | Total | Total | |||||||||||||||||||||||||||||||
Paid-In | Retained | Comprehensive | Stockholders’ | Comprehensive | ||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (loss) | Shares | Amount | Equity | Income | ||||||||||||||||||||||||||||
Balance at December 31, 1999 | 181,093 | $ | 181 | $ | 309,321 | $ | 226,105 | $ | (2,537 | ) | — | $ | — | $ | 533,070 | |||||||||||||||||||||
Exercise of stock options | 6,698 | 7 | 69,146 | — | — | — | — | 69,153 | ||||||||||||||||||||||||||||
Common stock issued under employee stock purchase plan | 78 | — | 1,262 | — | — | — | — | 1,262 | ||||||||||||||||||||||||||||
Common stock issued upon debt conversion | 3 | — | 73 | — | — | — | — | 73 | ||||||||||||||||||||||||||||
Tax benefit from employer stock plans | — | — | 63,923 | — | — | — | — | 63,923 | ||||||||||||||||||||||||||||
Proceeds from sale of put warrants | — | — | 4,870 | — | — | — | — | 4,870 | ||||||||||||||||||||||||||||
Put warrant obligations | — | — | (15,732 | ) | — | — | — | — | (15,732 | ) | ||||||||||||||||||||||||||
Repurchase of common stock | — | — | — | — | — | (3,817 | ) | (76,040 | ) | (76,040 | ) | |||||||||||||||||||||||||
Cash paid in advance for share repurchase contract, net of shares received | — | — | (81,810 | ) | — | — | — | — | (81,810 | ) | ||||||||||||||||||||||||||
Unrealized loss on available-for-sale securities, net of taxes | — | — | — | — | (406 | ) | — | — | (406 | ) | $ | (406 | ) | |||||||||||||||||||||||
Net income | — | — | — | 94,512 | — | — | — | 94,512 | 94,512 | |||||||||||||||||||||||||||
Total comprehensive income | $ | 94,106 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2000 | 187,872 | 188 | 351,053 | 320,617 | (2,943 | ) | (3,817 | ) | (76,040 | ) | 592,875 | |||||||||||||||||||||||||
Exercise of stock options | 8,541 | 9 | 113,331 | — | — | — | — | 113,340 | ||||||||||||||||||||||||||||
Common stock issued under employee stock purchase plan | 214 | — | 4,008 | — | — | — | — | 4,008 | ||||||||||||||||||||||||||||
Common stock issued upon debt conversion | — | — | 2 | — | — | — | — | 2 | ||||||||||||||||||||||||||||
Tax benefit from employer stock plans | — | — | 28,011 | — | — | — | — | 28,011 | ||||||||||||||||||||||||||||
Proceeds from sale of put warrants | — | — | 12,019 | — | — | — | — | 12,019 | ||||||||||||||||||||||||||||
Put warrant obligations, net of expired put warrants | — | — | (822 | ) | — | — | — | — | (822 | ) | ||||||||||||||||||||||||||
Repurchase of common stock | — | — | — | — | — | (7,633 | ) | (210,477 | ) | (210,477 | ) | |||||||||||||||||||||||||
Cash paid in advance for share repurchase contract, net of shares received | — | — | 255 | — | — | — | — | 255 | ||||||||||||||||||||||||||||
Unrealized gain on forward contracts and interest rate swap, net of reclassification adjustments and net of tax | — | — | — | — | 84 | — | — | 84 | $ | 84 | ||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net of tax | — | — | — | — | 2,775 | — | — | 2,775 | 2,775 | |||||||||||||||||||||||||||
Net income | — | — | — | 105,260 | — | — | — | 105,260 | 105,260 | |||||||||||||||||||||||||||
Total comprehensive income | $ | 108,119 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2001 | 196,627 | 197 | 507,857 | 425,877 | (84 | ) | (11,450 | ) | (286,517 | ) | 647,330 | |||||||||||||||||||||||||
Exercise of stock options | 551 | 1 | 3,369 | — | — | — | — | 3,370 | ||||||||||||||||||||||||||||
Common stock issued under employee stock purchase plan | 248 | — | 1,301 | — | — | — | — | 1,301 | ||||||||||||||||||||||||||||
Tax benefit from employer stock plans | — | — | 25,735 | — | — | — | — | 25,735 | ||||||||||||||||||||||||||||
Proceeds from sale of put warrants | — | — | 3,310 | — | — | — | — | 3,310 | ||||||||||||||||||||||||||||
Put warrant obligations, net of expired put warrants | — | — | 9,215 | — | — | — | — | 9,215 | ||||||||||||||||||||||||||||
Repurchase of common stock | — | — | — | — | — | (17,840 | ) | (218,679 | ) | (218,679 | ) | |||||||||||||||||||||||||
Common stock subject to repurchase | — | — | (9,135 | ) | — | — | — | — | (9,135 | ) | ||||||||||||||||||||||||||
Cash paid in advance for share repurchase contracts, net of shares received and maturities | — | — | 54,307 | — | — | — | — | 54,307 | ||||||||||||||||||||||||||||
Unrealized gain on forward contracts and interest rate swaps, net of reclassification adjustments and net of tax | — | — | — | — | 3,428 | — | — | 3,428 | $ | 3,428 | ||||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net of tax | — | — | — | — | 489 | — | — | 489 | 489 | |||||||||||||||||||||||||||
Net income | — | — | — | 93,920 | — | — | — | 93,920 | 93,920 | |||||||||||||||||||||||||||
Total comprehensive income | $ | 97,837 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2002 | 197,426 | $ | 197 | * | $ | 595,959 | $ | 519,797 | $ | 3,833 | (29,290 | ) | $ | (505,196 | ) | $ | 614,590 | * | ||||||||||||||||||
Common Stock | Additional | Retained | Accumulated Other Comprehensive Income(Loss) | Deferred | Common Stock in Treasury | Total | Total | |||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance at December 31, 2001 | 196,627 | $ | 197 | $ | 507,857 | $ | 425,877 | $ | (84 | ) | — | (11,450 | ) | $ | (286,517 | ) | $ | 647,330 | ||||||||||||||||||
Exercise of stock options | 551 | 1 | 3,369 | — | — | — | — | — | 3,370 | |||||||||||||||||||||||||||
Common stock issued under employee stock purchase plan | 248 | — | 1,301 | — | — | — | — | — | 1,301 | |||||||||||||||||||||||||||
Tax benefit from employer stock plans | — | — | 25,735 | — | — | — | — | — | 25,735 | |||||||||||||||||||||||||||
Proceeds from sale of put warrants | — | — | 3,310 | — | — | — | — | — | 3,310 | |||||||||||||||||||||||||||
Put warrant obligations, net of expired put warrants | — | — | 9,215 | — | — | — | — | — | 9,215 | |||||||||||||||||||||||||||
Repurchase of common stock | — | — | 85,811 | — | — | — | (17,840 | ) | (218,679 | ) | (132,868 | ) | ||||||||||||||||||||||||
Common stock subject to repurchase | — | — | (9,135 | ) | — | — | — | — | — | (9,135 | ) | |||||||||||||||||||||||||
Cash paid in advance for share repurchase contract | — | — | (31,504 | ) | — | — | — | — | — | (31,504 | ) | |||||||||||||||||||||||||
Unrealized gain on forward contracts and interest rate swap, net of reclassification adjustments and net of tax | — | — | — | — | 3,428 | — | — | — | 3,428 | $ | 3,428 | |||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net of tax | — | — | — | — | 489 | — | — | — | 489 | 489 | ||||||||||||||||||||||||||
Net income | — | — | — | 93,920 | — | — | — | — | 93,920 | 93,920 | ||||||||||||||||||||||||||
Total comprehensive income | $ | 97,837 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2002 | 197,426 | 197 | * | 595,959 | 519,797 | 3,833 | — | (29,290 | ) | (505,196 | ) | 614,590 | * | |||||||||||||||||||||||
Exercise of stock options | 4,723 | 5 | 54,984 | — | — | — | — | — | 54,989 | |||||||||||||||||||||||||||
Common stock issued under employee stock purchase plan | 473 | — | 3,434 | — | — | — | — | — | 3,434 | |||||||||||||||||||||||||||
Tax benefit from employer stock plans | — | — | 10,289 | — | — | — | — | — | 10,289 | |||||||||||||||||||||||||||
Proceeds from sale of put warrants | — | — | 655 | — | — | — | — | — | 655 | |||||||||||||||||||||||||||
Put warrant obligations, net of expired put warrants | — | — | 7,340 | — | — | — | (200 | ) | (2,517 | ) | 4,823 | |||||||||||||||||||||||||
Repurchase of common stock | — | — | 33,195 | — | — | — | (8,659 | ) | (140,354 | ) | (107,159 | ) | ||||||||||||||||||||||||
Common stock subject to repurchase | — | — | 9,135 | — | — | — | — | — | 9,135 | |||||||||||||||||||||||||||
Cash paid in advance for share repurchase contracts | — | — | (14,878 | ) | — | — | — | — | — | (14,878 | ) | |||||||||||||||||||||||||
Unrealized gain on forward contracts and interest rate swaps, net of reclassification adjustments and net of tax | — | — | — | — | 3,672 | — | — | — | 3,672 | $ | 3,672 | |||||||||||||||||||||||||
Unrealized gain on available-for-sale securities, net of tax | — | — | — | — | 305 | — | — | — | 305 | 305 | ||||||||||||||||||||||||||
Net income | — | — | — | 126,943 | — | — | — | — | 126,943 | 126,943 | ||||||||||||||||||||||||||
Total comprehensive income | $ | 130,920 | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2003 | 202,622 | 203 | * | 700,111 | * | 646,740 | 7,810 | — | (38,150 | )* | $ | (648,066 | )* | 706,798 | ||||||||||||||||||||||
Exercise of stock options | 4,492 | 4 | 58,673 | — | — | — | — | — | 58,677 | |||||||||||||||||||||||||||
Common stock issued under employee stock purchase plan | 299 | — | 4,786 | — | — | — | — | — | 4,786 | |||||||||||||||||||||||||||
Common stock issued for acquisition | 5,578 | 6 | 124,416 | — | — | — | 124,422 | |||||||||||||||||||||||||||||
Tax benefit from employer stock plans | — | — | 20,875 | — | — | — | — | — | 20,875 | |||||||||||||||||||||||||||
Deferred compensation | — | 1,088 | (1,063 | ) | 25 | |||||||||||||||||||||||||||||||
Repurchase of common stock | — | — | 15,782 | — | — | — | (4,458 | ) | (84,613 | ) | (68,831 | ) | ||||||||||||||||||||||||
Cash paid in advance for share repurchase contracts | — | — | (53,072 | ) | — | — | — | — | — | (53,072 | ) | |||||||||||||||||||||||||
Unrealized loss on forward contracts and interest rate swaps, net of reclassification adjustments and net of taxes | — | — | — | — | (164 | ) | — | — | — | (164 | ) | $ | (164 | ) | ||||||||||||||||||||||
Unrealized loss on available-for-sale securities, net of tax | — | — | — | — | (156 | ) | — | — | — | (156 | ) | (156 | ) | |||||||||||||||||||||||
Net income | — | — | — | 131,546 | — | — | — | — | 131,546 | 131,546 | ||||||||||||||||||||||||||
Total comprehensive income | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2004 | 212,991 | $ | 213 | $ | 872,659 | $ | 778,286 | $ | 7,489 | * | $ | (1,063 | ) | (42,608 | ) | $ | (732,679 | ) | $ | 924,905 | * | $ | 131,226 | |||||||||||||
* | Amounts do not add due to rounding |
See accompanying notes.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, | ||||||||||||||
2002 | 2001 | 2000 | ||||||||||||
(In thousands) | ||||||||||||||
Operating activities | ||||||||||||||
Net income | $ | 93,920 | $ | 105,260 | $ | 94,512 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Amortization of intangible assets | 11,296 | 48,831 | 30,395 | |||||||||||
Depreciation and amortization of property and equipment | 30,142 | 30,757 | 19,853 | |||||||||||
Realized (gain) loss on the repurchase of convertible subordinated debentures | (1,547 | ) | 360 | — | ||||||||||
Realized gain on the termination of interest rate swap | (3,356 | ) | — | — | ||||||||||
Loss on abandonment of fixed assets | 2,006 | 247 | — | |||||||||||
Realized losses and other-than-temporary decline in fair value of investments | 2,095 | 7,689 | — | |||||||||||
In-process research and development | — | 2,580 | — | |||||||||||
Write-down of technology | — | — | 9,081 | |||||||||||
Provision for doubtful accounts | 3,486 | 2,784 | 377 | |||||||||||
Provision for product returns | 25,282 | 22,533 | 27,883 | |||||||||||
Provision for inventory reserves | 1,407 | 2,292 | 6,932 | |||||||||||
Deferred income taxes | (4,218 | ) | (1,063 | ) | 6,240 | |||||||||
Tax benefit related to the exercise of non-statutory stock options and disqualified dispositions of incentive stock options | 25,735 | 28,011 | 63,923 | |||||||||||
Accretion of original issue discount and amortization of financing cost | 17,711 | 17,853 | 16,911 | |||||||||||
Total adjustments to reconcile net income to net cash provided by operating activities | 110,039 | 162,874 | 181,595 | |||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||||||||
Accounts receivable | (33,205 | ) | (50,665 | ) | (8,625 | ) | ||||||||
Inventories | 387 | (1,238 | ) | (3,762 | ) | |||||||||
Prepaid expenses and other current assets | (1,387 | ) | 12,648 | 4,614 | ||||||||||
Other assets | 5,661 | (12,034 | ) | (2 | ) | |||||||||
Deferred tax assets | 6,480 | 3,534 | (8,440 | ) | ||||||||||
Accounts payable and accrued expenses | (65 | ) | 5,523 | 18,799 | ||||||||||
Deferred revenues | 17,787 | (8,630 | ) | (26,987 | ) | |||||||||
Income taxes payable | (12,514 | ) | 12,571 | (8,467 | ) | |||||||||
Total changes in operating assets and liabilities, net of effects of acquisitions | (16,856 | ) | (38,291 | ) | (32,870 | ) | ||||||||
Net cash provided by operating activities | 187,103 | 229,843 | 243,237 | |||||||||||
Investing activities | ||||||||||||||
Purchases of investments | (364,482 | ) | (553,490 | ) | (569,795 | ) | ||||||||
Proceeds from sales and maturities of investments | 393,454 | 415,633 | 642,986 | |||||||||||
Purchases of property and equipment | (19,104 | ) | (60,557 | ) | (43,532 | ) | ||||||||
Proceeds from termination of interest rate swap | 3,902 | — | — | |||||||||||
Cash paid for acquisitions, net of cash acquired | (10,680 | ) | (183,754 | ) | (30,102 | ) | ||||||||
Cash paid for licensing agreement | (3,000 | ) | — | (1,333 | ) | |||||||||
Net cash provided by (used in) investing activities | 90 | (382,168 | ) | (1,776 | ) | |||||||||
Financing activities | ||||||||||||||
Proceeds from issuance of common stock | 4,671 | 117,350 | 70,488 | |||||||||||
Cash paid to repurchase convertible subordinated debentures | (27,773 | ) | (2,141 | ) | — | |||||||||
Cash paid under stock repurchase programs | (164,372 | ) | (210,222 | ) | (157,850 | ) | ||||||||
Proceeds from sale of put warrants | 3,310 | 12,019 | 4,870 | |||||||||||
Other | (22 | ) | (13 | ) | (60 | ) | ||||||||
Net cash used in financing activities | (184,186 | ) | (83,007 | ) | (82,552 | ) | ||||||||
Change in cash and cash equivalents | 3,007 | (235,332 | ) | 158,909 | ||||||||||
Cash and cash equivalents at beginning of year | 139,693 | 375,025 | 216,116 | |||||||||||
Cash and cash equivalents at end of year | $ | 142,700 | $ | 139,693 | $ | 375,025 | ||||||||
Supplemental Cash Flow Information
The Company paid income taxes of approximately $14,222, $7,991 and $9,277 in 2002, 2001 and 2000, respectively. Additionally, the Company paid interest of approximately $4,155, $1,221 and $23 during the years ended December 31, 2002, 2001 and 2000, respectively.
Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
(In thousands) | ||||||||||||
Operating activities | ||||||||||||
Net income | $ | 131,546 | $ | 126,943 | $ | 93,920 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Amortization of intangible assets | 12,331 | 11,336 | 11,296 | |||||||||
Depreciation and amortization of property and equipment | 21,247 | 23,000 | 30,142 | |||||||||
Write-off of deferred debt issuance costs | 7,219 | — | — | |||||||||
Realized gain on the repurchase of convertible subordinated debentures | — | — | (1,547 | ) | ||||||||
Realized loss (gain) on the termination of interest rate swap | (328 | ) | 736 | (3,356 | ) | |||||||
Realized (gains) losses on investments | — | (1,978 | ) | 2,095 | ||||||||
In-process research and development | 19,100 | — | — | |||||||||
Provision for doubtful accounts | 1,108 | 522 | 3,486 | |||||||||
Provision for product returns | 6,663 | 3,825 | 25,282 | |||||||||
Provision for (recovery of) inventory reserves | 428 | (4 | ) | 1,407 | ||||||||
Deferred income tax provision (benefit) | (2,360 | ) | 1,343 | (4,218 | ) | |||||||
Tax benefit related to the exercise of non-statutory stock options and disqualified dispositions of incentive stock options | 20,875 | 10,289 | 25,735 | |||||||||
Accretion of original issue discount and amortization of financing cost | 4,318 | 18,237 | 17,711 | |||||||||
Other non-cash items | 677 | 273 | 2,006 | |||||||||
Total adjustments to reconcile net income to net cash provided by operating activities | 91,278 | 67,579 | 110,039 | |||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | ||||||||||||
Accounts receivable | (25,312 | ) | (22,340 | ) | (33,205 | ) | ||||||
Prepaid expenses and other current assets | 9,172 | (4,413 | ) | (1,000 | ) | |||||||
Other assets | (456 | ) | 6,119 | 5,661 | ||||||||
Deferred tax assets, net | 12,249 | (731 | ) | 6,480 | ||||||||
Accounts payable and accrued expenses | 1,763 | 20,455 | (18,496 | ) | ||||||||
Deferred revenues | 54,118 | 61,084 | 17,787 | |||||||||
Other liabilities | (9,077 | ) | 735 | 5,917 | ||||||||
Total changes in operating assets and liabilities, net of effects of acquisitions | 42,457 | 60,909 | (16,856 | ) | ||||||||
Net cash provided by operating activities | 265,281 | 255,431 | 187,103 | |||||||||
Investing activities | ||||||||||||
Purchases of available for-sale investments | (192,745 | ) | (381,107 | ) | (423,207 | ) | ||||||
Proceeds from sales of available-for-sale investments | 161,846 | 196,524 | 349,600 | |||||||||
Proceeds from maturities of available-for-sale investments | 56,867 | 109,252 | 88,229 | |||||||||
Proceeds from maturities of held-to-maturity investments | 195,350 | — | — | |||||||||
Purchases of property and equipment | (24,412 | ) | (11,063 | ) | (19,104 | ) | ||||||
(Payment for) proceeds from termination of interest rate swaps | — | (1,572 | ) | 3,902 | ||||||||
Cash paid for acquisitions, net of cash acquired | (140,788 | ) | — | (10,680 | ) | |||||||
Cash paid for licensing agreements and core technology | (16,784 | ) | (1,358 | ) | (3,000 | ) | ||||||
Net cash provided by (used in) investing activities | 39,334 | (89,324 | ) | (14,260 | ) | |||||||
Financing activities | ||||||||||||
Proceeds from issuance of common stock | 63,463 | 58,423 | 4,671 | |||||||||
Cash paid to repurchase convertible subordinated debentures | (355,659 | ) | — | (27,773 | ) | |||||||
Cash paid under stock repurchase programs | (121,903 | ) | (124,554 | ) | (164,372 | ) | ||||||
Proceeds from sale of put warrants | — | 655 | 3,310 | |||||||||
Other | — | (12 | ) | (22 | ) | |||||||
Net cash used in financing activities | (414,099 | ) | (65,488 | ) | (184,186 | ) | ||||||
Change in cash and cash equivalents | (109,484 | ) | 100,619 | (11,343 | ) | |||||||
Cash and cash equivalents at beginning of year | 182,969 | 82,350 | 93,693 | |||||||||
Cash and cash equivalents at end of year | $ | 73,485 | $ | 182,969 | $ | 82,350 | ||||||
(continued)
Supplemental Cash Flow Information (In thousands) Non-cash investing activity—Increase (decrease) in restricted cash equivalents and investments Cash paid for income taxes Cash paid for interest $ 2,591 $ (25,646 ) $ 172,106 $ 2,623 $ 10,331 $ 14,222 $ 559 $ 2,976 $ 4,155
See accompanying notes.notes
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Citrix Systems, Inc. (“Citrix” or the “Company”), is a Delaware corporation founded on April 17, 1989, is a leading supplier of corporate application1989. The Company designs, develops and informationmarkets access infrastructure software, services and services that enable the effective and efficient enterprise-wide deployment and management of applications and information, including those designed for Microsoft® Windows® operating systems, for UNIX® operating systems, such as Sun SolarisTM, HP-UX, or IBM®-AIX® (collectively, “UNIX operating systems”) and for Web-based information systems. The Company’s MetaFrame® products permit organizations to provide secure access to Windows based, Web-based and UNIX applications without regard to location, network connection or type of client hardware platforms.appliances. The Company markets and licenses its products through multiple channels such as value-added resellers, channel distributors, system integrators, and independent software vendors and its websites, managed by the Company’s worldwide sales force.Company’s. The Company also promotes its products through relationships with a wide variety of industry participants, including Microsoft Corporation (“Microsoft”).
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries in the Americas, Europe, the Middle East and Africa (“EMEA”) and Asia-Pacific. All significant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents at December 31, 20022004 and 2003 include marketable securities, which are primarily municipal securities, money market funds, corporate securities, and commercial paper and government securities with initial or remaining contractual maturities when purchased of three months or less. The Company minimizes its credit risk associated with cash and cash equivalents by investing primarily in investment grade, highly liquid instruments and periodically evaluating the credit quality of its primary financial institutions.
Restricted Cash Equivalents and Investments
Restricted cash equivalents and investments at December 31, 2004 and 2003 include approximately $62.8 million in investment securities and cash equivalents were pledged as collateral for specified obligations under the Company’s synthetic lease arrangement. In addition, at December 31, 2004 and 2003 approximately $86.3 million and $83.6 million, respectively, in investment securities were pledged as collateral for certain of the Company’s credit default contracts and interest rate swaps. The Company maintains the ability to manage the composition of the restricted cash equivalents and investments within certain limits and to withdraw and use excess investment earnings from the restricted collateral for operating purposes. For further information, see Notes 10 and 13.
Investments
Short and long-term investments at December 31, 20022004 and 2003 primarily consist of corporate securities, government securities, commercial paper and municipal securities. Investments classified as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in accumulated other comprehensive income (loss).income. Investments classified as held-to-maturity are stated at amortized cost. The Company does not recognize changes in the fair value of certainheld-to-maturity investments in income unless a decline in value is considered other-than-temporary.
From time to time, the Company makes equity investments that are accounted for under the cost method due to the limited extent of the Company’s ownership interest and the lack of the Company’s ability to exert significant influence over the investees. As of December 31, 2002 and 2001, such investments were recorded at the lower of cost or estimated net realizable value. The Company periodically evaluates the carrying value of its investments to determine if there has been any impairment of value that is other-than-temporary. During 2002 and 2001, the Company recorded $2.1 million and $7.7 million, respectively, of losses resulting from sales of available-for-sale securities and other-than-temporary declines in fair value of certain of the Company’s investments. Amounts included in accumulated other comprehensive income (loss) in prior periods are reclassified to earnings using the specific identification method. At December 31, 2002, the Company’s remaining equity investments were approximately $0.2 million.
The Company minimizes its credit risk associated with investments by investing primarily in investment grade, highly liquid securities. The Company maintains investments with various financial institutions and the Company’s policy is designed to limit exposure to any one institutionissuer depending on credit quality. Periodic
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
evaluations of the relative credit standing of those financial institutionsissuers are considered in the Company’s investment strategy.
At December 31, 2002, approximately $63 million in investment securities were pledged as collateral for specified obligations under the Company’s synthetic lease. In addition, at December 31, 2002, approximately $109 million in investment securities were pledged as collateral for the Company’s credit default contracts. The Company maintains the ability to manage the composition of the pledged investments. Accordingly, these securities are not reflected as restricted investments in the accompanying consolidated balance sheets. For furtheruses information see Notes 10 and 13.
The Company relies onprovided by third party valuationsparties to adjust the carrying value of certain of its investments and derivative instruments to fair value at the end of each period. Fair values are based on valuation models that use market quotes and, for certain investments, assumptions as to the creditworthiness of the entities issuing those underlying investments.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Receivable
Substantially all of the Company’s accounts receivable are due from value-added resellers and distributors of computer software. Collateral is not required. Credit losses and expected product returns are provided for in the consolidated financial statements and have historically been within management’s expectations. If the financial condition of a significant distributor or customer were to deteriorate, the Company’s operating results could be adversely affected. One distributor accounted for approximately 7% and 14% of gross accounts receivable at December 31, 2002 and 2001, respectively. No other distributor or customer accounted for more than 10% of gross accounts receivable.
Inventories, consisting primarily of raw materials, are stated at the lower of cost (determined by the first-in, first-out method) or market. When necessary, a provision has been made to reduce obsolete or excess inventories to market.Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally three years for computer equipment, software, office equipment and furniture, the lesser of the lease term or five years for leasehold improvements, seven years for the Company’s enterprise resource planning system and 40 years for buildings. Assets under capital leases are amortized overDepreciation expense was $21.2 million, $23.0 million and $30.1 million for 2004, 2003 and 2002, respectively.
During 2003, the shorterCompany retired $15.4 million in property and equipment that were no longer in use. At the time of theretirement, these assets had no remaining net book value and no asset life or the remaining lease term. Amortization of assets under capital leases is included in depreciation expense. Accumulated amortization of equipment under capital leases approximated $0.4 million at December 31, 2002 and 2001, respectively.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)retirement obligations associated with them. In 2004 retirements were not material.
Property and equipment consist of the following:
December 31, | ||||||||
2002 | 2001 | |||||||
(In thousands) | ||||||||
Buildings | $ | 17,781 | $ | 17,583 | ||||
Computer equipment | 53,109 | 50,561 | ||||||
Software | 40,312 | 38,028 | ||||||
Equipment and furniture | 17,062 | 13,250 | ||||||
Leasehold improvements | 29,277 | 25,930 | ||||||
Land | 9,062 | 9,062 | ||||||
Equipment under capital leases | 411 | 451 | ||||||
167,014 | 154,865 | |||||||
Less accumulated depreciation and amortization | (90,480 | ) | (64,755 | ) | ||||
$ | 76,534 | $ | 90,110 | |||||
December 31, | ||||||||
2004 | 2003 | |||||||
(In thousands) | ||||||||
Buildings | $ | 17,781 | $ | 17,781 | ||||
Computer equipment | 57,628 | 48,452 | ||||||
Software | 47,799 | 40,548 | ||||||
Equipment and furniture | 18,143 | 16,297 | ||||||
Leasehold improvements | 35,759 | 30,922 | ||||||
Land | 9,062 | 9,062 | ||||||
186,172 | 163,062 | |||||||
Less accumulated depreciation and amortization | (116,891 | ) | (97,225 | ) | ||||
$ | 69,281 | $ | 65,837 | |||||
Long-Lived Assets
The Company reviews for impairment of long-lived assets and certain identifiable intangible assets to be held and used whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset.asset compared to its carrying value. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. During 2004 and 2003, the Company did not recognize any impairment charges associated with its long-lived or intangible assets. During 2002, the Company recognized $2.0 million in asset impairment charges primarily due to the consolidation of certain of its offices resulting in the abandonment of certain leasehold improvements. These charges are reflected in operating expenses in the accompanying consolidated statementsstatement of income for the year ended December 31, 2002 and primarily related to the Americas geographic segment. As of December 31, 2002, we have determined that there were no other triggering events requiring additional impairment analysis.
Software Developed or Obtained for Internal Use
The Company accounts for internal use software pursuant to the American Institute of Certified Public Accountants Statement of Position No. (“SOP”) No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Pursuant to the SOP 98-1, the Company capitalizes external direct costs of materials and services used in the project and internal costs such as payroll and benefits of those employees directly associated with the development of the software. The amount of costs capitalized in 20022004 and 20012003 relating to internal use software were $3.4$6.6 million and $16.7$3.8 million, respectively, consisting principally of purchased software and services provided by external vendors. These costs are being
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
amortized over the estimated useful life of the software developed, which is generally three to seven years and are included in property and equipment in the accompanying consolidated balance sheets.
Goodwill
The Company accounts for goodwill in accordance with Statement of Financial Accounting StandardStandards (“SFAS”) No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires certain software development costs to be capitalized upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by manage-
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ment with respect to certain external factors such as anticipated future revenue, estimated economic life, and changes in software and hardware technologies. Software development costs incurred beyond the establishment of technological feasibility have not been significant.
Effective January 1, 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets. As a result of adopting SFAS No. 142, the Company’srequires that goodwill and certain intangible assets are no longernot amortized, but are subject to an annual impairment test. In accordance with SFAS No. 142,At December 31, 2004 and 2003, the Company ceased amortizing goodwill with a net book value at January 1, 2002 ofhad $361.5 million and $152.4 million including $10.1 million of acquired workforce previously classified as purchased intangible assets.goodwill, respectively. There was no impairment of goodwill or other intangible assets as a result of adopting SFAS No. 142 or the annual impairment tests completed during the fourth quarterquarters of 2002.2004 and 2003. Excluding goodwill, the Company has no intangible assets deemed to have indefinite lives. Substantially all of the Company’s goodwill at December 31, 20022004 was associated with the Americas and Citrix Online reportable segments and at December 31, 2003 substantially all of the Company’s goodwill was associated with the Americas reportable segment. See Note 3 for acquisitions and Note 12 for segment information.
Intangible Assets
The following table provides a reconciliation of reported net income for the years ended December 31, 2001 and 2000 to net income adjusted as if SFAS No. 142 had been applied as of the beginning of 2000. Some amounts may not add due to rounding.
Year Ended December 31, | |||||||||
2001 | 2000 | ||||||||
(In thousands, except per | |||||||||
share amounts) | |||||||||
Net income as reported | $ | 105,260 | $ | 94,512 | |||||
Goodwill amortization, net of taxes | 33,659 | 15,661 | |||||||
Adjusted net income | $ | 138,919 | $ | 110,173 | |||||
BASIC EARNINGS PER SHARE: | |||||||||
Earnings per share as reported | $ | 0.57 | $ | 0.51 | |||||
Goodwill amortization, net of taxes | 0.18 | 0.08 | |||||||
Adjusted earnings per share | $ | 0.75 | $ | 0.60 | |||||
DILUTED EARNINGS PER SHARE: | |||||||||
Earnings per share as reported | $ | 0.54 | $ | 0.47 | |||||
Goodwill amortization, net of taxes | 0.17 | 0.08 | |||||||
Adjusted earnings per share | $ | 0.71 | $ | 0.55 | |||||
IntangibleCompany has intangible assets with definite lives that are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally three to fiveseven years, except for patents, which are amortized over 10 years. In accordance with SFAS No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,the Company carriesrecords acquired core and product technology at net realizable value and reviews this technology for impairment on a periodic basis by comparing the estimated net realizable value to the unamortized cost of the technology. There has been no impairment of these assets to date.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible assets consist of the following (in thousands):
December 31, 2002 | December 31, 2001 | |||||||||||||||||
Gross Carrying | Accumulated | Gross Carrying | Accumulated | |||||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||||
Amortized intangible assets: | ||||||||||||||||||
Core and product technologies | $ | 81,686 | $ | 52,056 | $ | 76,686 | $ | 41,245 | ||||||||||
Other | 8,460 | 7,241 | 7,928 | 6,756 | ||||||||||||||
Total | $ | 90,146 | $ | 59,297 | $ | 84,614 | $ | 48,001 | ||||||||||
Estimated future annual amortization expense is as follows (in thousands): | ||||||||||||||||||
Year ending December 31, | ||||||||||||||||||
2003 | $ | 11,685 | ||||||||||||||||
2004 | 8,894 | |||||||||||||||||
2005 | 7,600 | |||||||||||||||||
2006 | 2,074 | |||||||||||||||||
2007 | 124 |
December 31, 2004 | December 31, 2003 | |||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||
Core and product technologies | $ | 125,248 | $ | 67,488 | $ | 82,486 | $ | 63,092 | ||||
Other | 43,432 | 14,020 | 9,447 | 7,541 | ||||||||
Total | $ | 168,680 | $ | 81,508 | $ | 91,933 | $ | 70,633 | ||||
Amortization of core and product technology was $6.1 million, $11.0 million and $10.8 million for 2004, 2003 and 2002, respectively, and is classified as a component of cost of revenues on the accompanying consolidated statements of income. Amortization of other intangible assets was $6.2 million, $0.3 million and $0.5 million for 2004, 2003 and 2002, respectively. Estimated future annual amortization expense is as follows (in thousands):
Year ending December 31, | |||
2005 | $ | 23,254 | |
2006 | 19,205 | ||
2007 | 14,149 | ||
2008 | 11,684 | ||
2009 | 8,098 |
During 2004, the Company reclassified certain acquired intangible assets to goodwill to adjust the purchase price allocation resulting from a 2001 acquisition. The adjustment resulted in a $4.4 million reduction of amortization expense, net of related tax effect of $2.8 million in 2004.
Software Development Costs
SFAS No. 86 requires certain software development costs to be capitalized upon the establishment of technological feasibility. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors such as anticipated future revenue, estimated economic life, and changes in software and hardware technologies. Software development costs incurred beyond the establishment of technological feasibility have not been significant.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company markets and licenses software products primarily through value-added resellers, channel distributors, system integrators and independent software vendors, managed by the Company’s worldwide sales force.vendors. The Company’s software licenses are generally perpetual,perpetual. The Company also separately sells software license updates and are delivered by means of traditional packaged productsservices, which include product training, technical support and electronically, typically under volume-based licensing programs. consulting services, as well as Web-based desktop access services.
The Company’s packaged products are typically purchased by medium and small-sized businesses with fewer locations anda minimal number of locations. In these cases, the software license is delivered with the packaged product.
Volume-based Electronic license arrangements are used with more complex multi-servermultiserver environments typically found in larger business enterprises that deploy the Company’s products on a department or enterprise-wide basis, which could require differences in product features and functionality at various customer locations. The end-customer license agreement with enterprise customers is typically customized based on these factors. Once the Company receives a software license agreement and purchase order, from the channel distributor, the volume-basedenterprise customer licenses are electronically delivered to the customer with “softwaredelivered. “Software activation keys” that enable the feature configuration ordered by the end-customer. Depending onend-user are delivered separate from the size of the enterprise, softwaresoftware. Software may be delivered indirectly by thea channel distributor, via download from the Company’s website or directly to the end-user by the Company pursuant to a purchase order from the channel distributor.Company.
Revenue is recognized when it is earned. The Company’s revenue recognition policies are in compliance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations,Software Revenue RecognitionRecognition.. In addition, for the Company’s Web-based desktop access services revenue is recognized in accordance with Emerging Issues Task Force (“EITF”) No. 00-3,Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred and the Company has no remaining obligations; the fee is fixed or determinable; and collectibility is probable. The Company defines these four criteria as follows:
Collectibility is probable. The Company determines collectibility on a customer-by-customer basis and generally does not require collateral. The Company typically sells software licenses and updates to distributors or resellers for whom there are histories of successful collection. New customers are subject to a credit review process that
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
evaluates the |
For certain software products that are only sold bundled with PCS,Net revenues include the Company allocates revenuefollowing categories: Software Licenses, Software License Updates and Services. Software Licenses primarily represent fees related to the delivered software product using the residual method. Under the residual method, the Company does not sell the software products separatelylicensing of our MetaFrame products. These revenues are reflected net of sales allowances and thus is generally unableprovisions for stock balancing return rights. Software License Updates consists of fees related to determine VSOE of fair value for the product. Therefore, the Company allocates discounts inherent in the arrangement entirely to the software product and the portion of the fee initially allocated to PCS and deferred is generally higher than in arrangements with established VSOE for the software product. Depending on future product releases or changes in customer demand, the Company may offer additional products that are only sold bundled with PCS. If the Company does this, the use of the residual method will become more prevalent, which could impact the timing of revenue recognition since more of the sales proceeds would be allocated to the PCS portion of the arrangement and recognized over the PCS period. The Company also sells PCS separately through the Subscription Advantage renewal program and it determines VSOE by the renewal price charged. The Company bases technical service and PCS revenues from customer maintenance fees(the Company’s terminology for ongoing customer support and product updates and upgrades on the price charged or derived value of the undelivered elements andpost contract support) that are recognized ratably over the term of the contract, which is typically 1212-24 months. Subscription Advantage is a renewable program that provides subscribers with automatic delivery of software upgrades, enhancements and maintenance releases when and if they become available during the term of subscription. Services consist primarily of technical support services and Web-based desktop access services revenue recognized ratably over the contract term, revenue from product training and certification, and consulting services revenue related to 24 months. implementation of the Company’s software products, which is recognized as the services are provided.
The Company includeslicenses most of its software products bundled with an initial subscription for software license updates that provide the end-user with free enhancements and upgrades to the licensed product on a when and if available basis. Customers may also elect to purchase technical service revenues insupport, product training or consulting services. The Company allocates revenue to software license updates and any other undelivered elements of the arrangement based on VSOE of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenue, net revenuesof any discounts inherent in the consolidated statementsarrangement, is allocated to the delivered software product using the residual method and recognized at the outset of income.the arrangement as the software licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.
In the normal course of business, the Company does not permit product returns, but it does provide most of its distributors and value added resellers with stock balancing and price protection rights. Stock balancing rights permit distributors to return products to the Company by the forty-fifth day of the fiscal quarter, subject to ordering an equal dollar amount of products.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Company’s other products prior to the last day of the same fiscal quarter. Price protection rights require that the Company grant retroactive price adjustments for inventories of its products held by distributors or resellers if it lowers prices for such products. The Company establishes provisions for estimated returns for stock balancing and price protection rights, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors, estimated distributor inventory levels by product, the impact of any new product releases and projected economic conditions. Actual product returns for stock balancing and price protection provisions incurred are, however, dependent upon future events, including the amount of stock balancing activity by distributors and the level of distributor inventories at the time of any price adjustments. The Company continually monitors the factors that influence the pricing of its products and distributor inventory levels and makes adjustments to these provisions when it believes actual returns and other allowances could differ from established reserves. The Company’s ability to recognize revenuesrevenue upon shipment to distributors is predicated on its ability to reliably estimate future product returns and rotation.stock balancing returns. If actual return experience or changes in market condition impairs the Company’s ability to estimate returns, and rotation, it would be required to defer the recognition of revenue until the delivery of the product to the end-user customer.end-user. Allowances for estimated product returns amounted to approximately $10.5$2.3 million at December 31, 20022004 and $8.3$3.0 million at December 31, 2001.2003. The Company has not reduced and has no current plans to reduce its prices for inventory currently held by distributors or resellers. Accordingly, there were no reserves required for price protection at December 31, 20022004 or 2001.December 31, 2003. The Company also records estimated reductions to revenue for customer programs and incentive offerings including volume-based incentives. If market conditions were to decline, the Company could take actions to increase its customer incentive offerings, and possiblywhich could result in an incremental reduction to its revenue at the time the incentive is offered.
The Company provides consulting services to certain license customers. The services consist of network configuration and optimization and are typically performed prior to the customers’ purchase and implementation of the Company’s software products. Services are not essential to the functionality of the Company’s software and do not constitute modifications to the Company’s software. Revenue from services, support arrangements and training programs and materials, which totaled $44.5 million, $40.7 million and $30.4 million for the years ended December 31, 2002, 2001 and 2000, respectively, is recognized when the services are provided and the other criteria of revenue recognition have been met. Such items are included in net revenues. The costs for providing consulting services are included in cost of sales. The costs of providing training and services are included in sales, marketing and support expenses.
CITRIX SYSTEMS, INC.
In May 1997, the Company entered into a five year joint license, development and marketing agreement with Microsoft Corporation (“Microsoft”) (as amended, the “Microsoft Development Agreement”), pursuant to which the Company licensed its multi-user Windows NT extensions to Microsoft for inclusion in certain versions of Windows NT server software. Revenue from the Microsoft Development Agreement was recognized ratably over the five-year term of the contract, which expired in May 2002. Revenues recognized pursuant to the Microsoft Development Agreement are included in other revenues in the accompanying consolidated statements of income.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Product Concentration
The Company derives a substantial portion of its revenues from one software product and anticipates that this product and 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 could experience declines in demand for products, whether as a result of general economic conditions, new competitive product releases, price competition, lack of success of its strategic partners, technological change or other factors.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cost of revenues consistconsists primarily of compensation and other personnel-related costs of providing consulting services and amortization of core and product technology, as well as, the costcosts of royalties, product media and duplication, manuals, packaging materials, shipping expense, service capacity costs and shipping expense.royalties. The Company is a party to licensing agreements with various entities, which give the Company the right to use certain software code in its products or in the development of future products in exchange for the payment of a fixed fee or certain amounts based upon the sales of the related product. The licensing agreements generally have terms ranging from one to five years, and generally include renewal options. However, some agreements may be perpetual unless expressly terminated. Royalties and other costs related to these agreements are included in cost of revenues. All development costs incurred in connection with the Microsoft Development Agreement, were expensed as incurred as cost of other revenues. The Company’s cost of revenues excludes amortization of acquired core and product technologies, which is included in amortization of intangible assets in the accompanying consolidated statements of income.
Foreign Currency
The functional currency of each of the Company’s wholly-owned foreign subsidiaries is the U.S. dollar. AssetsMonetary assets and liabilities of the subsidiaries are remeasured into U.S. dollars at year-end exchange rates, and revenues and expenses are remeasured at average rates prevailing during the year. Remeasurement and foreign currency transaction lossesgains (losses) of approximately $1.1$1.7 million, $2.4 million and $0.1$(1.1) million for the years ended December 31, 2002, 2001,2004, 2003, and 2000,2002, respectively, are included in other expense,income (expense), net in the accompanying consolidated statements of income.
Derivatives and Hedging Activities
In accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities,and its related interpretations and amendments, the Company records derivatives as either assets or liabilities on the balance sheet and measures those instruments at fair value. Derivatives not designated as hedging instruments, if any, are adjusted to fair value through earnings as other income (expense) in the current period. For derivatives that are designated as and qualify as effective cash flow hedges, the portion of gain or loss on the derivative instrument effective at offsetting changes in the hedged item is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings as operating income (expense) when the hedged transaction affects earnings. For derivative instruments that are designated as and qualify as effective fair value hedges, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in current earnings as interest income (expense) during the period of the change in fair values. Derivatives not designated as hedging instruments are adjusted to fair value through earnings as other income (expense) in the period the changes in fair value occur. The application of the provisions of SFAS No. 133 could impact the volatility of earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes attributing all derivatives that are designated as cash flow hedges to floating rate assets or liabilities or forecasted transactions and attributing all derivatives that are designated as fair value hedges to fixed rate assets or liabilities. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in cash flows or fair value of the hedged item. Fluctuations in the value of the derivative instruments are generally offset by changes in the hedged item; however, if it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the affected derivative.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company expenses advertising costs as incurred. The Company has cooperative advertising agreements with certain distributors and resellers whereby the Company will reimburse distributors and resellers for qualified advertising of Citrix
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
products. The Company also has advertising agreements with, and purchases advertising from, online media providers to advertise its Web-based desktop access products. Reimbursement is made once the distributor, reseller or resellerprovider provides substantiation of qualified expenditures. The Company estimates the impact of this programthese expenses and recognizes itthem at the time of product salesales as a component of sales, marketing and support expenses in the accompanying consolidated statements of income. The Company recognized advertising expenses of approximately $10.0$35.2 million, $11.1$13.5 million and $10.7$10.0 million, during the years ended December 31, 2004, 2003 and 2002, 2001 and 2000, respectively.
Income Taxes
The Company is required to estimateestimates income taxes based on rates in effect in each of the jurisdictions in which it operates as part of the process of preparing the consolidated financial statements.operates. Deferred income tax assets and liabilities are determined based upon differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The realization of deferred tax assets is based on historical tax positions and expectations about future taxable income. Valuation allowances are recorded related to deferred tax assets if their realization does not meetbased on the “not more likely than not” criteria of SFAS No. 109,Accounting for Income Taxes. Except for amounts previously provided for in the consolidated financial statements, earnings
Use of overseas subsidiaries are considered permanently reinvested.Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates made by management include the provision for doubtful accounts receivables,receivable, provision for estimated returns for stock balancing and price protection rights, as well as other sales returns and stock rotation,allowances, the valuation of the Company’s goodwill, and acquired workforce, net realizable value of core and product technology, the provision for income taxes and the amortization and depreciation periods for intangible and long-lived assets. While the Company believes that such estimates are fair when considered in conjunction with the consolidated financial position and results of operations taken as a whole, the actual amounts of such estimates, when known, will vary from these estimates.
Accounting for Stock-Based Compensation
SFAS No. 123,Accounting for Stock-Based Compensation,as amended by SFAS No. 148,Accounting for Stock Based Compensation- Transition and Disclosure, defines a fair value method of accounting for issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are not required to adopt the fair value method of accounting for employee stock-based transactions. Companies are permitted to account for such transactions under Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees,but are required to disclose in a note to the consolidated financial statements pro forma net income and per share amounts as if a company had applied the fair methods prescribed by SFAS No. 123.
The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans, stock options granted to employees and non-employee directors and has complied with the disclosure requirements of SFAS No. 123. Except for non-employee directors, the Company has not granted any options to non-employees. See Note 6 for more information regarding the Company’s stock option plans.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Dilutive common share equivalents consist of shares issuable upon the exercise of certain stock options (calculated using the treasury stock method) and put warrants (calculated using the reverse treasury stock method). All common share and per share data, except par value per share, have been retroactively adjusted to reflect the two-for-one stock split of the Company’s Common Stock effective February 16, 2000, which is further discussed in Note 7.
Certain reclassifications of the prior years’ financial statements have been made to conform to the current year’s presentation.
3. ACQUISITIONS
In April 2001, the Company completed the acquisition of Sequoia Software Corporation (“Sequoia”) for approximately $182.6 million. A portion of the purchase price was allocated to in-process research and development (“IPR&D”), which the Company concluded had not reached technological feasibility and for which there was no alternative future use after taking into consideration the potential use of technologies in different products, the stage of development and life cycle of each project, resale of the software and internal use. The value of the respective purchased IPR&D was expensed at the time of the transaction and resulted in a pre-tax charge to the Company’s operations of approximately $2.6 million in 2001.
In February 2000, the Company acquired all of the operating assets of the Innovex Group, Inc. (“Innovex”) for approximately $47.8 million. At the date of acquisition, the Company paid approximately $28.7 million in consideration and $0.2 million in transaction costs, respectively. Pursuant to the acquisition agreement, the remaining purchase consideration, plus interest, was contingently payable based on future events. During 2001, these contingencies were met, resulting in approximately $16.2 million of additional purchase price and $2.9 million in compensation to the former owners. Pursuant to the acquisition agreement, payment of $10.5 million of the contingent amounts and associated interest was made in August 2001 and $10.7 million was paid in 2002. There are no remaining contingent obligations.
Each acquisition was accounted for under the purchase method of accounting. The consolidated financial statements reflect the operations of the acquired businesses for the periods after their respective dates of acquisition. The purchase consideration was allocated to the acquired assets and liabilities based on fair values as follows:
Innovex | Sequoia | ||||||||
(In thousands) | |||||||||
Net assets acquired | $ | 2,259 | $ | 10,058 | |||||
Purchased identifiable intangibles | 9,908 | 46,775 | |||||||
Purchased in-process research and development | — | 2,580 | |||||||
Goodwill | 32,944 | 123,157 | |||||||
Total purchase consideration | $ | 45,111 | $ | 182,570 | |||||
During the fourth quarter of 2000, the Company did not believe that there were sufficient projected cash flows or alternative future uses to support the net book value of core technology associated with certain acquisitions made prior to 2000. As a result, the Company wrote off $9.1 million of certain core technology as of December 31, 2000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. CASH AND INVESTMENTS
The summary of the Company’s cash and cash equivalents and investments consists of the following:
December 31, | ||||||||||
2002 | 2001 | |||||||||
(In thousands) | ||||||||||
Cash and cash equivalents: | ||||||||||
Cash | $ | 35,377 | $ | 55,209 | ||||||
Municipal securities | 60,953 | 16,855 | ||||||||
Money market funds | 35,573 | 20,515 | ||||||||
Corporate securities | 9,769 | 39,482 | ||||||||
Commercial paper | 1,028 | 3,682 | ||||||||
Government securities | — | 3,950 | ||||||||
Cash and cash equivalents | $ | 142,700 | $ | 139,693 | ||||||
Short-term investments: | ||||||||||
Corporate securities | $ | 44,355 | $ | 68,912 | ||||||
Government securities | 29,781 | 3,990 | ||||||||
Municipal securities | 3,077 | 4,176 | ||||||||
Short-term investments | $ | 77,213 | $ | 77,078 | ||||||
Long-term investments: | ||||||||||
�� | Corporate securities | $ | 351,065 | $ | 503,138 | |||||
Government securities | 124,906 | 22,063 | ||||||||
Municipal securities | 23,294 | 3,132 | ||||||||
Other | 226 | 1,561 | ||||||||
Long-term investments | $ | 499,491 | $ | 529,894 | ||||||
The unrealized gain (loss) associated with each individual category of cash and investments was not significant for either of the periods presented.
In December 2000, the Company invested $158.1 million in a trust managed by an investment advisor. The purpose of the trust is to maintain sufficient liquidity in the event that the Company’s debentures are redeemed in March 2004. The Company’s investment in the trust matures on March 22, 2004, and comprises all of the trust’s assets. The trust’s assets primarily consist of AAA-rated zero-coupon corporate securities. The trust entered into a credit risk swap agreement with the investment advisor, which effectively increased the yield on the trust’s assets and for which value the trust assumed the credit risk of ten investment-grade companies. The effective yield of the trust, including the credit risk swap agreement, is 6.72% and the principal balance will accrete to $195 million in March 2004. The Company records its investment in the trust and the underlying investments and swap as held-to-maturity zero-coupon corporate security in its consolidated financial statements. The Company does not recognize changes in the fair value of the held-to-maturity investment unless a decline in the fair value of the trust is other-than-temporary, in which case the Company would recognize a loss in earnings. The Company’s investment is at risk to the extent that one of the underlying corporate securities has a credit event resulting in non-payment to the counterparty that may include bankruptcy, dissolution, or insolvency of the issuers. There have been no losses associated with the trust’s underlying corporate securities to date. The amortized cost of the Company’s investment in the trust was approximately $180.4 million at December 31, 2002 and $169.0 million at December 31, 2001, which was
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
classified as long-term corporate investments in our consolidated balance sheets. At December 31, 2002, the fair value of the trust’s assets was $180.2 million.
Other than the Trust investments described above, the Company’s short and long-term investments are classified as available-for-sale and are recorded at fair value. Gross realized gains and gross realized losses on sales of securities and other-than-temporary write downs of investments classified as available-for-sale, using the specific identification method, were $0.7 million and $2.8 million, respectively, for the year ended December 31, 2002 and $8.1 million and $7.7 million respectively, for the year ended December 31, 2001. At December 31, 2002, the average original contractual maturity of the Company’s short-term available-for-sale investments was approximately 17 months. The Company’s long-term available-for-sale investments at December 31, 2002 include $297.2 million of investments with original contractual maturities ranging from one to five years, $20.5 million of investments with original contractual maturities ranging from five to 10 years and $1.1 million of investments with contractual maturities of 35 years. The average remaining maturities of the Company’s short and long-term available-for-sale investments at December 31, 2002 was four and 42 months, respectively. The Company also owns $0.2 million in equity investments not due at a single maturity date classified as long-term investments.
During 2002 the Company invested in two instruments with an aggregate amount of $38 million that include structured credit risk features whereby the Company’s investment is at risk to the extent that several of the underlying corporate securities, above specified threshold amounts, have credit events that result in a loss to the counterparty that may include bankruptcy, dissolution or insolvency of the issuers. The risk level of these instruments is equivalent to an “AA” single security. There have been no credit events associated with the underlying corporate securities to date. If, in the future, one of these instruments has credit events, which would accrue to the Company, the Company’s investment will be reduced to fund the loss, not to exceed the principal value of the investment.
The change in net unrealized securities gains (losses) recognized in other comprehensive income includes unrealized gains (losses) that arose from changes in market value of securities that were held during the period and gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales of available-for-sale securities. This reclassification has no effect on total comprehensive income or stockholders’ equity and was immaterial for all periods presented.
In connection with the Company’s efforts to manage the credit quality and maturities of its investment portfolio, during 2001 the Company sold corporate debt securities with an accreted value of $165.5 million that were previously designated as held-to-maturity and purchased higher credit quality corporate debt securities with interest rates that reset quarterly. Additionally, during 2001, the Company terminated a forward bond purchase agreement previously designated as a hedge of forecasted purchases of corporate security investments. The sale of securities and the termination of the forward bond purchase agreement resulted in a realized gain of approximately $8.0 million, which is included in other expense, net in the 2001 consolidated statement of income.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, | ||||||||
2002 | 2001 | |||||||
(In thousands) | ||||||||
Accounts payable | $ | 11,913 | $ | 10,635 | ||||
Accrued compensation and employee benefits | 19,200 | 17,510 | ||||||
Accrued cooperative advertising and marketing programs | 11,872 | 20,368 | ||||||
Accrued taxes | 20,543 | 35,885 | ||||||
Other | 29,398 | 27,530 | ||||||
$ | 92,926 | $ | 111,928 | |||||
6. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS
As of December 31, 2002, the Company has five stock-based compensation plans, which are described below. The Company grants stock options for a fixed number of shares to employees with an exercise price equal to or above the fair value of the shares at the date of grant. As mentioned in Note 2, the Company applies the intrinsic value method under APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock plans and its stock purchase plan. However, the impact on the Company’s financial statements from the use of options is reflected in the calculation of earnings per share in the form of dilution (see Note 14).
The Company has elected to follow APB Opinion No. 25 because the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models, including the Black-Scholes model, that were developed for use with traded options which have no vesting restrictions and are fully transferable, as opposed to employee stock options, which are typically non-transferable and last up to ten years. Currently, management believes there is not one agreed upon option valuation method that is comparable among all reporting companies. Specifically, the Black-Scholes model requires the input of highly subjective assumptions, including assumptions related to the expected stock price volatility over the expected life of the option. Because the Company’s stock-based awards to employees have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing pricing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. Since the Black-Scholes model is based on statistical expectations, the calculation can result in substantial earnings volatility that may not agree, as to timing or amount, with the actual gain or loss accrued or realized by the option holder.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
No stock-based employee compensation cost is reflected in net income except for amounts related to the 51,546 options assumed as part of the Net6 acquisition, which were accounted for in accordance with FASB Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25), and was not material. Substantially all options granted under the Company’s six stock-based compensation plans, including plans assumed from acquired entities, have an exercise price equal to or above market value of the underlying common stock on the date of grant. Had compensation cost for the grants issued at an exercise price equal to or above market value under the Company’s five stock-based compensation plans had been determined based on the fair value at the grant dates for grants under those plans consistent with the fair value method of SFAS No. 123,
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Company’s cash flows would have remained unchanged,unchanged; however, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
2002 | 2001 | 2000 | |||||||||||
(In thousands, except per share | |||||||||||||
information) | |||||||||||||
Net income (loss) | |||||||||||||
As reported | $ | 93,920 | $ | 105,260 | $ | 94,512 | |||||||
Pro forma | $ | (61,852 | ) | $ | (41,188 | ) | $ | (38,036 | ) | ||||
Basic earnings (loss) per share | |||||||||||||
As reported | $ | 0.53 | $ | 0.57 | $ | 0.51 | |||||||
Pro forma | $ | (0.35 | ) | $ | (0.22 | ) | $ | (0.21 | ) | ||||
Diluted earnings (loss) per share | |||||||||||||
As reported | $ | 0.52 | $ | 0.54 | $ | 0.47 | |||||||
Pro forma | $ | (0.35 | ) | $ | (0.22 | ) | $ | (0.21 | ) | ||||
2004 | 2003 | 2002 | ||||||||||
(In thousands, except per share information) | ||||||||||||
Net income (loss): | ||||||||||||
As reported | $ | 131,546 | $ | 126,943 | $ | 93,920 | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (48,043 | ) | (87,645 | ) | (137,645 | ) | ||||||
Pro forma | $ | 83,503 | $ | 39,298 | $ | (43,725 | ) | |||||
Basic earnings (loss) per share: | ||||||||||||
As reported | $ | 0.78 | $ | 0.77 | $ | 0.53 | ||||||
Pro forma | $ | 0.49 | $ | 0.24 | $ | (0.25 | ) | |||||
Diluted earnings (loss) per share: | ||||||||||||
As reported | $ | 0.75 | $ | 0.74 | $ | 0.52 | ||||||
Pro forma | $ | 0.48 | $ | 0.23 | $ | (0.25 | ) | |||||
For purposes of the pro forma calculations, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following assumptions:
2002 Grants | 2001 Grants | 2000 Grants | ||||||||||
Expected volatility factor | 0.69 | 0.60 | 0.80 | |||||||||
Approximate risk free interest rate | 4.0% | 5.0% | 6.0% | |||||||||
Expected lives | 4.60 years | 4.68 years | 4.64 years |
Volatility is a measure of the amount by which a stock price is expected to fluctuate during the expected life of the option. Much of the value of a stock option is derived from its potential for appreciation. This potential is reflected in the volatility of the underlying stock, which can be measured by periodic changes in the historical stock price. The higher the volatility, the higher the fair value of the option.
2004 Grants | 2003 Grants | 2002 Grants | ||||
Expected volatility factors | 0.38 – 0.49 | 0.57 – 0.68 | 0.69 | |||
Approximate risk free interest rate | 3.0% – 3.5% | 2.5% – 3.0% | 4.0% | |||
Expected lives | 3.32 – 4.76 years | 4.70 – 4.75 years | 4.60 years |
The risk-free interest rate represents the current rate associated with zero coupon U.S. Government securities with a remaining term equal to the expected life of the options being valued. The risk-free interest rate is used in determining the stock’s forward value, and only modestly impacts the fair value of the option. The higher the risk-free interest rate, the higher the fair value of the option.
The expected life of the option is a measure of the amount of time it is expected to take for an employee to exercise their option. Estimating expected lives involves consideration of several factors, including the characteristics of employees receiving the option awards, the vesting period of the awards, historical exercise patterns of employees, and the expected volatility of the underlying stock. The longer the expected life, the more time the option holder has available to allow the stock price to increase, and thus the higher the option’s fair value.
The determination of the fair value of all options is based on the assumptions described in the preceding paragraphs, and becauseabove assumptions. Because additional option grants are expected to be made each year and forfeitures will occur when employees leave the Company, the above pro forma disclosures are not representative of pro forma effects on reported net income (loss) for future years. See Note 6 for more information regarding the Company’s stock option plans.
F-20
Reclassifications
Certain reclassifications of the prior years’ financial statements have been made to conform to the current year’s presentation.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. ACQUISITIONS
On February 27, 2004, the Company acquired all of the issued and outstanding capital stock of Expertcity.com, Inc. (“Expertcity”), a market leader in Web-based desktop access, as well as a leader in Web-based training and customer assistance products. The consideration for this transaction was approximately $241.4 million, comprised of approximately $112.6 million in cash, approximately 5.9 million shares of the Company’s common stock valued at approximately $124.4 million and direct transactions costs of approximately $4.4 million. These amounts include additional common stock earned by Expertcity upon the achievement of certain revenue and other financial milestones during 2004 pursuant to the merger agreement, which will be issued during 2005. The fair value of the common stock earned as additional purchase price consideration was recorded as goodwill on the date earned. There is no further contingent consideration related to the transaction. The sources of funds for consideration paid in this transaction consisted of available cash and investments and our authorized common stock.
On December 8, 2004, the Company acquired all of the issued and outstanding capital stock of Net6, Inc. (“Net6”), a leader in secure access gateways. The acquisition extends the Company’s ability to provide easy and secure access to virtually any resource, both data and voice, on-demand. The consideration for this transaction was approximately $49.2 million and was paid in cash. In addition to the purchase price, direct transaction costs associated with the acquisition were approximately $1.7 million.
Under the purchase method of accounting, the purchase price for each of Expertcity and Net6 was allocated to Expertcity’s and Net6’s respective net tangible and intangible assets based on their estimated fair values as of the date of the completion of the respective acquisitions. Independent valuation specialists conducted separate valuations to assist us in determining the fair values of a significant portion of Expertcity’s and Net6’s net assets.
The allocation of the purchase price is summarized below (in thousands):
Expertcity | Net6 | |||||||||
Purchase Price Allocation | Asset Life | Purchase Price Allocation | Asset Life | |||||||
Current assets | $ | 26,085 | $ | 2,107 | ||||||
Property and equipment | 1,998 | Various | 204 | Various | ||||||
In-process research and development | 18,700 | 400 | ||||||||
Intangible assets | 50,800 | 3-7 years | 20,300 | 3-7 years | ||||||
Goodwill | 165,758 | Indefinite | 33,506 | Indefinite | ||||||
Assets acquired | 263,341 | 56,517 | ||||||||
Current liabilities | 13,617 | 2,836 | ||||||||
Deferred tax liability | 8,292 | 2,812 | ||||||||
Total liabilities assumed | 21,909 | 5,648 | ||||||||
Net assets acquired, including direct transaction costs | $ | 241,432 | $ | 50,869 | ||||||
The goodwill recorded in relation to these acquisitions is not deductible for tax purposes. Identifiable intangible assets purchased in the Expertcity and Net6 acquisitions and their weighted average lives are as follows:
Expertcity | Asset Life | Net6 | Asset Life | |||||||
Trade name | $ | 4,500 | 5 years | $ | — | N/A | ||||
Covenants not to compete | 8,000 | 4 years | 300 | 3 years | ||||||
Customer relationships | 13,000 | 3 years | 6,600 | 6 years | ||||||
Core and product technologies | 25,300 | 6.7 years | 13,400 | 7 years | ||||||
Total | $ | 50,800 | $ | 20,300 | ||||||
The fair values used in determining the purchase price allocation for certain intangible assets for Expertcity and Net6 were based on estimated discounted future cash flows, royalty rates and historical data, among other information. Purchased in-process research and development (“IPR&D”) of approximately $19.1 million was expensed immediately upon closing of the respective mergers in accordance with Financial Accounting Standards Board Interpretation No. 4,Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, due to the fact that it pertains to
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
technology that was not currently technologically feasible, meaning it had not reached the working model stage, did not contain all of the major functions planned for the product, was not ready for initial customer testing and had no alternative future use. The fair value assigned to in-process research and development was determined using the income approach, which includes estimating the revenue and expenses associated with a project’s sales cycle and by estimating the amount of after-tax cash flows attributable to the projects. The future cash flows were discounted to present value utilizing an appropriate risk-adjusted rate of return, which ranged from 17% to 25%. The rate of return included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.
The $165.8 million of goodwill related to the Expertcity acquisition was assigned to the Citrix Online division segment and the $33.5 million of goodwill related to the Net6 acquisition was assigned to the Americas segment. See Note 12 for segment information.
The results of operations of Expertcity and Net6 are included in the Company’s results of operations beginning after their respective acquisition dates. Expertcity is the Company’s new segment, the Citrix Online division and Net6 is part of the Company’s Americas reportable segment. The following unaudited pro forma information combines the consolidated results of operations of the Company and Expertcity and Net6 as if the acquisitions had occurred at the beginning of fiscal year 2003 (in thousands, except per share data):
December 31, | ||||||
2004 | 2003 | |||||
Revenues | $ | 750,861 | $ | 625,435 | ||
Income from operations | 143,724 | 132,868 | ||||
Net income | 118,224 | 108,897 | ||||
Per share – basic | 0.68 | 0.64 | ||||
Per share – diluted | 0.66 | 0.62 |
4. CASH AND INVESTMENTS
Cash and cash equivalents and investments consist of the following:
December 31, | ||||||
2004 | 2003 | |||||
(In thousands) | ||||||
Cash and cash equivalents: | ||||||
Cash | $ | 36,019 | $ | 67,419 | ||
Municipal securities | 4,896 | 8,705 | ||||
Money market funds | 34,902 | 50,289 | ||||
Corporate securities | 3,577 | 9,684 | ||||
Government securities | 6,837 | 57,006 | ||||
Total | $ | 86,231 | $ | 193,103 | ||
Reported as: | ||||||
Cash and cash equivalents | $ | 73,485 | $ | 182,969 | ||
Restricted cash equivalents and investments | $ | 12,746 | $ | 10,134 | ||
Short-term investments: | ||||||
Corporate securities | $ | 112,632 | $ | 284,867 | ||
Government securities | 25,828 | 14,666 | ||||
Commercial paper | — | 1,988 | ||||
Municipal securities | 69,485 | 117,690 | ||||
Total | $ | 207,945 | $ | 419,211 | ||
Reported as: | ||||||
Short-term investments | $ | 159,656 | $ | 385,431 | ||
Restricted cash equivalents and investments | $ | 48,289 | $ | 33,780 | ||
Long-term investments: | ||||||
Corporate securities | $ | 167,910 | $ | 169,418 | ||
Government securities(1) | 103,699 | 116,251 | ||||
Other | 381 | 288 | ||||
Total | $ | 271,990 | $ | 285,957 | ||
Reported as: | ||||||
Long-term investments | $ | 183,974 | $ | 183,411 | ||
Restricted cash equivalents and investments | $ | 88,016 | $ | 102,546 | ||
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1) | |
The Company had two AAA-rated zero coupon corporate securities classified as held-to-maturity investments that were carried at the combined accreted value of approximately $192.5 million at December 31, 2003. These securities matured on March 22, 2004 and the Company received $195.4 million, all of which was used to redeem a portion of the Company’s convertible subordinated debentures. At December 31, 2004, the Company held no investments classified as held-to-maturity.
The Company’s amendedother short and restatedlong-term investments are classified as available-for-sale and are recorded at fair value. Gross realized gains and losses on sales of securities during 2004 and 2003 were not material. Gross realized gains and losses were $0.7 million and $2.8 million, respectively, for the year ended December 31, 2002. At December 31, 2004, the average original contractual maturity of the Company’s short-term available-for-sale investments was approximately 13 months. The Company’s long-term available-for-sale investments at December 31, 2004 include $253.6 million of investments, including restricted investments, with original contractual maturities ranging from one to five years and $18.0 million of investments with original contractual maturities ranging from five to 10 years. The average remaining maturities of the Company’s short and long-term available-for-sale investments, including restricted investments, at December 31, 2004 were five and 27 months, respectively. In addition, included in short-term available for sale investments are auction rate securities owned by the Company that generally reset every seven to 28 days. The Company also owns $0.4 million in equity investments not due at a single maturity date classified as long-term investments.
The Company has investments in two instruments with an aggregate amount of $50.0 million that include structured credit risk features related to certain referenced entities. Under the terms of these debt instruments, the Company assumes the default risk, above a certain threshold, of a portfolio of specific referenced issuers in exchange for a fixed yield that is added to the LIBOR-based yield on the underlying debt instrument. In the event of default by the underlying referenced issuers above specified amounts, the Company will pay the counterparty an amount equivalent to its loss, not to exceed the face value of the instrument. The primary risk associated with these investments is the default risk of the underlying issuers. The credit ratings of these instruments are equivalent to the likelihood of an event of default under “AAA” or “AA” rated individual securities. The purpose of these instruments is to provide additional yield on certain of the Company’s available-for-sale investments. These instruments mature in November 2007 and February 2008. To date there have been no credit events for the underlying referenced entities resulting in losses to the Company. The Company separately accounts for changes in the fair value of the structured credit features of the investments and as of December 31, 2004 and 2003, there was no material change in fair value.
The change in net unrealized securities gains (losses) recognized in other comprehensive income includes unrealized gains (losses) that arose from changes in market value of securities that were held during the period and gains (losses) that were previously unrealized, but have been recognized in current period net income due to sales or maturities of available-for-sale securities. This reclassification has no effect on total comprehensive income or stockholders’ equity and was immaterial for all periods presented. The unrealized gain (loss) associated with each individual category of cash and investments was not significant for either of the periods presented.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, | ||||||
2004 | 2003 | |||||
(In thousands) | ||||||
Accounts payable | $ | 17,554 | $ | 14,992 | ||
Accrued compensation and employee benefits | 29,734 | 25,528 | ||||
Accrued cooperative advertising and marketing programs | 14,699 | 9,964 | ||||
Accrued taxes | 37,050 | 37,253 | ||||
Other | 32,250 | 26,719 | ||||
$ | 131,287 | $ | 114,456 | |||
6. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS
Stock Compensation Plans
As of December 31, 2004, the Company has six stock-based compensation plans including plans assumed in acquisitions, which are described below. The Company typically grants stock options for a fixed number of shares to employees with an exercise price equal to or above the market value of the shares at the date of grant. As mentioned in Note 2, the Company applies the intrinsic value method under APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock plans and its stock purchase plan except for 51,546 options assumed as part of the Net6 acquisition that had an exercise price below market value and were accounted for in accordance with FASB Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25). The impact on the Company’s financial statements from the use of options is reflected in the calculation of earnings per share in the form of dilution (see Note 14).
Fixed Stock Option Plans
The Company’s Amended and Restated 1995 Stock Plan (the “1995 Plan”) was originally adopted by the Board on September 28, 1995 and approved by the Company’s stockholders in October 1995. Under the terms of the 1995 Plan, the Company is authorized to grant incentive stock options (“ISOs”) and nonqualifiednon-qualified stock options (“NSOs”), make stock awards and provide the opportunity to purchase stock to employees, directors and officers and consultants of the Company. The 1995 Plan, as amended, provides for the issuance of a maximum of 69,945,623 (as adjusted for stock splits) shares of Common Stock,common stock, plus, effective January 1, 2001 and each year thereafter, a number of shares of Common Stockcommon stock equal to 5% of the total number of shares of Common Stockcommon stock issued and outstanding as of December 31 of the preceding year. Under the 1995 Plan, a maximum of 60,000,000 ISOs may be granted and ISOs must be granted at exercise prices no less than fair market value at the date of grant, except for ISOs granted to employees who own more than 10% of the Company’s combined voting power, for which the exercise prices will be no less than 110% of the market value at the date of grant. NSOs, stock awards or stock purchases may be granted or authorized, as applicable, at prices no less than the minimum legal consideration required. Under the 1995 Plan, as amended, ISOsstock options must be granted at exercise prices no less than market value at the date of grant,grant; provided, however, that if an NSO is expressly granted in lieu of a reasonable amount of salary or cash bonus, the exercise price may be equal to or greater than 85% of the fair market value at the date of such grant. ISOs and NSOs expire five or ten years from the date of grant.grant depending on the applicable option agreement. All options are exercisable upon vesting. TheTen year options typically vest over four years at a rate of 25% of the shares underlying the option one year from the date of grant and at a rate of 2.08% monthly thereafter and five year options typically vest over three years at a rate of 33.3% of the shares underlying the option one year from date of grant and at a rate of 2.78% monthly thereafter.
The Company’s amendedSecond Amended and restatedRestated 2000 Director and Officer Stock Option and Incentive Plan (the “2000 Plan”) was originally adopted by the Board of Directors and approved by the Company’s stockholders on May 18, 2000. Under the terms of the 2000 Plan, the Company is authorized to make stock awards, provide eligible individuals with the opportunity to purchase stock, grant ISOs and grant NSOs to officers and directors of the Company. The 2000 Plan provides for the issuance of up to 4,000,000 shares, plus, effective on January 1, 2001, on January 1 of each year, a number of shares of Common Stockcommon stock equal to one-half of one percent (0.5%) of the total number of shares of Common Stockcommon stock issued and
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
outstanding as of December 31 of the preceding year. Notwithstanding the foregoing, the maximum number of stock options that may be issued pursuant to the 2000 Plan shall be equal to the maximum number of stock options issuable under the 2000 Plan at any time less 500,000 stock options, and no more than 3,000,000 shares of Common Stockcommon stock may be issued pursuant to the exercise of incentive stock options granted under the 2000 Plan. Under the 2000 Plan, ISOsstock options must be granted at exercise prices no less than market value at the date of grant, provided however, that if an NSO is expressly granted in lieu of a reasonable amount of salary or cash bonus, the exercise price may be equal to or greater than 85% of the fair market value at the date of such grant. ISOs and NSOs expire ten or five years from date of grant.grant depending on the applicable option agreement. All options are exercisable upon vesting. TheTen year options typically vest over four years at a rate of 25% of the shares underlying the option one year from the date of grant and at a rate of 2.08% monthly thereafter and five year options typically vest over three years at a rate of 33.3% of the shares underlying the option one year from date of grant and at a rate of 2.78% monthly thereafter.
The amendedSecond Amended and restatedRestated 1995 Non-Employee Director Stock Option Plan (the “Director Option Plan”) was originally adopted by the Board of Directors on September 28, 1995 and approved by the Company’s stockholders in October 1995. The Director Option Plan provides for the grant of options to purchase a maximum of 3,600,000 (as adjusted for stock splits) shares of Common Stockcommon stock of the Company to non-employee directors of the Company.
Under the current terms of
Pursuant to the Director Option Plan, each non-employee director who is not alsoeligible to receive an employeeinitial grant of the Company and who is first elected as a director will receive, upon the date of his or her initial election, an option to purchase 60,000 shares of Common Stock. Such options will vest at a ratecommon stock and an annual grant of 33.33% per year from the datean option to purchase 20,000 shares of the grant for the first year and vest at a rate of 2.78% monthly thereafter. In addition, in the calendar year following a director’s first election to the Board of Directors,common stock on the first business day of the month following the Annual Stockholders’ meeting,Meeting of Stockholders, provided that no annual grant shall be granted to any non-employee director in the same calendar year that such director would receive an additional option to purchase 20,000 sharesperson received his or her initial grant. The initial grant vests 33.3% after the conclusion of Common Stock, which shall vest at a rate of 8.33%the first year and 2.78% per month provided such
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
director continues to serve onover the Boardremaining two years. The annual grant vests in equal monthly increments over a period of Directors at the time of grant.one year. All options granted under the Director Option Plan have an exercise price equal to the fair market value of the Common Stockcommon stock on the date of grant and a term of tenfive years from the date of grant. Options are exercisable to the extent vested only while the optionee is serving as a director of the Company or within 90 days after the optionee ceases to serve as a director of the Company.
The Company’s 1989Amended and Restated 2000 Stock OptionIncentive Plan of Net6, Inc. (the “2000 Net6 Plan”) was originally adopted and approved by the Board of Directors and stockholders of Net6 on January 19, 2001. The 2000 Net6 Plan and the outstanding unvested stock options under the 2000 Net6 Plan (the “1989 Plan”“2000 Assumed Options”) as amended, permittedwere assumed by the Company on December 8, 2004 in connection with the Company’s acquisition of Net6. Under the terms of the 2000 Net6 Plan, Net6 was authorized to grant ISOs and NSOs and to purchase upmake stock awards to 25,256,544employees, directors, officers and consultants of Net6. The 2000 Net6 Plan, as amended and restated, provides for the issuance of a maximum of 167,850 (as adjusted for stock splits) shares of common stock. As of December 8, 2004, however, the Company’s Common Stock. UnderBoard of Directors resolved to cap the 19892000 Net6 Plan options may bewith 7,861 shares of the 2000 Assumed Options outstanding and to make no further option grants or stock awards under the 2000 Net6 Plan. ISOs were granted at exercise prices no less than the fair market value at the date of grant, except for ISOs granted to employees who owned more than 10% of Net6’s combined voting power, for which the exercise prices were no less than 110% of the market value at the date of grant. NSOs were granted at exercise prices no less than 85% of the fair market value at the date of grant. Stock awards were authorized at prices established by the Board of Directors of Net6. ISOs and NSOs expire five or ten years from the original grant date depending on the applicable option agreement. All options are fully exercisable from the date of grant and are subject to a repurchase option in favor of the Company which lapses as to 25.00%upon vesting. The 2000 Assumed Options generally vest over four years with 25% of the shares underlying the option vesting one year from the original grant date of grant and as toat a rate of 2.08% monthly thereafter. If
The Company’s Amended and Restated 2003 Stock Incentive Plan of Net6, Inc. (the “2003 Net6 Plan”) was originally adopted and approved by the purchaserBoard of Directors and stockholders of Net6 on May 15, 2003. The 2003 Net6 Plan and the outstanding unvested stock pursuant tooptions under the 19892003 Net6 Plan is terminated from employment(the “2003 Assumed Options”) were assumed by the Company on December 8, 2004 in connection with the Company,Company’s acquisition of Net6. Under the Company hasterms of the right2003 Net6 Plan, Net6 was authorized to grant ISOs and optionNSOs and to purchase from the employee, at the price paidmake stock awards to employees, directors, officers and consultants of Net6. The 2003 Net6 Plan, as amended and restated, provides for the issuance of a maximum of 102,575 (as adjusted for stock splits) shares byof common stock. As of December 8, 2004, however, the employee,Company’s Board of Directors resolved to cap the number2003 Net6 Plan with 43,685 shares of unvested sharesthe 2003 Assumed Options outstanding and to make no further option grants or stock awards under the 2003 Net6 Plan. ISOs were granted at exercise prices no less than the fair market value at the date of termination. Nogrant, except for ISOs granted to employees who owned more than 10% of Net6’s combined voting power, for which the exercise prices were no less than 110% of the market value at the date of grant. NSOs were granted at
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
exercise prices established by the Board of Directors of Net6, provided that NSOs granted to certain Net6 officers were granted at no less than fair market value at the date of grant. Stock awards were authorized at prices established by the Board of Directors of Net6, provided that stock awards made to certain Net6 officers were made at no less than fair market value at the date of award. ISOs and NSOs expire five or ten years from the original grant date depending on the applicable option agreement. All options are exercisable upon vesting. The 2003 Assumed Options generally vest over four years with 25% of the shares have been repurchased under this Plan. Effective November 1999 no further options may be granted under this Plan.underlying the option vesting one year from the original grant date and at a rate of 2.08% monthly thereafter.
A summary of the status and activity of the Company’s fixed stock option plans is as follows:
Year Ended December 31, | |||||||||||||||||||||||||
2002 | 2001 | 2000 | |||||||||||||||||||||||
Weighted | Weighted | Weighted | |||||||||||||||||||||||
Average | Average | Average | |||||||||||||||||||||||
Exercise | Exercise | Exercise | |||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||||
Outstanding at beginning of year | 39,596,278 | $ | 28.92 | 43,288,840 | $ | 25.67 | 42,358,350 | $ | 18.28 | ||||||||||||||||
Granted at market value | 9,274,497 | 9.98 | 8,351,092 | 30.68 | 12,671,582 | 42.38 | |||||||||||||||||||
Granted above market value | 355,626 | 17.92 | — | — | — | — | |||||||||||||||||||
Exercised | (550,791 | ) | 6.12 | (8,545,575 | ) | 13.27 | (6,692,488 | ) | 10.32 | ||||||||||||||||
Forfeited | (7,455,093 | ) | 30.86 | (3,498,079 | ) | 31.06 | (5,048,604 | ) | 25.65 | ||||||||||||||||
Outstanding at end of year | 41,220,517 | 24.51 | 39,596,278 | 28.92 | 43,288,840 | 25.67 | |||||||||||||||||||
Options exercisable at end of year | 24,101,550 | 27.01 | 18,140,094 | 26.02 | 14,364,325 | 16.49 | |||||||||||||||||||
Weighted-average fair value of options granted during the year at market value | 5.80 | $ | 16.63 | $ | 28.07 | ||||||||||||||||||||
Weighted-average fair value of options granted during the year above market value | 8.57 | — | — |
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Year Ended December 31, | ||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||
Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||
Outstanding at beginning of year | 38,221,590 | $ | 24.56 | 41,220,517 | $ | 24.51 | 39,596,278 | $ | 28.92 | |||||||||
Granted at market value | 5,637,687 | 20.97 | 5,574,808 | 16.19 | 9,274,497 | 9.98 | ||||||||||||
Granted above market value | — | — | 348,500 | 12.00 | 355,626 | 17.92 | ||||||||||||
Granted below market value | 51,546 | 3.86 | — | — | — | — | ||||||||||||
Exercised | (4,491,795 | ) | 13.06 | (4,722,911 | ) | 11.64 | (550,791 | ) | 6.12 | |||||||||
Forfeited | (2,490,866 | ) | 25.14 | (4,199,324 | ) | 28.14 | (7,455,093 | ) | 30.86 | |||||||||
Outstanding at end of year | 36,928,162 | 25.20 | 38,221,590 | 24.56 | 41,220,517 | 24.51 | ||||||||||||
Options exercisable at end of year | 25,525,048 | 28.62 | 25,044,225 | 28.76 | 24,101,550 | 27.01 | ||||||||||||
Weighted-average fair value of options granted during the year at market value | $ | 7.26 | $ | 8.68 | $ | 5.80 | ||||||||||||
Weighted-average fair value of options granted during the year above market value | — | 6.71 | 8.57 | |||||||||||||||
Weighted-average fair value of options granted during the year below market value | 21.55 | — | — |
Information about stock options outstanding as of December 31, 20022004 is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | ||||||||||||||||||||
Options | Average | Weighted | Options | Weighted | ||||||||||||||||
Range of | Outstanding at | Remaining | Average | Exercisable at | Average | |||||||||||||||
Exercise Prices | December 31, 2002 | Contractual Life | Exercise Price | December 31, 2002 | Exercise Price | |||||||||||||||
$ 0.13 to $ 5.60 | 4,814,448 | 8.31 | $ | 4.87 | 914,872 | $ | 1.75 | |||||||||||||
$ 5.84 to $ 13.31 | 4,750,650 | 6.97 | $ | 9.40 | 2,812,680 | $ | 9.68 | |||||||||||||
$13.55 to $ 15.34 | 3,782,130 | 7.51 | $ | 15.09 | 1,746,230 | $ | 14.98 | |||||||||||||
$15.34 to $ 16.94 | 4,629,666 | 7.18 | $ | 15.98 | 2,966,322 | $ | 16.03 | |||||||||||||
$17.39 to $ 21.67 | 3,741,623 | 7.09 | $ | 19.47 | 2,536,552 | $ | 19.67 | |||||||||||||
$22.19 to $ 24.38 | 4,125,217 | 7.13 | $ | 23.26 | 2,953,269 | $ | 23.31 | |||||||||||||
$24.39 to $ 25.55 | 4,414,087 | 6.62 | $ | 25.41 | 3,540,743 | $ | 25.43 | |||||||||||||
$25.69 to $ 35.01 | 3,414,456 | 7.52 | $ | 30.34 | 2,090,999 | $ | 30.11 | |||||||||||||
$35.49 to $ 44.66 | 3,739,886 | 8.22 | $ | 37.44 | 1,827,503 | $ | 39.47 | |||||||||||||
$48.44 to $104.00 | 3,808,354 | 7.13 | $ | 75.19 | 2,712,380 | $ | 75.41 | |||||||||||||
41,220,517 | 7.36 | $ | 24.51 | 24,101,550 | $ | 27.01 | ||||||||||||||
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Options Outstanding at December 31, 2004 | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Options at | Weighted Average Exercise Price | |||||||
$ 2.49 to $ 9.38 | 3,804,701 | 6.13 | $ | 6.38 | 2,148,454 | $ | 6.90 | |||||
$ 10.06 to $ 15.25 | 4,673,325 | 6.97 | $ | 13.25 | 2,518,514 | $ | 13.54 | |||||
$ 15.34 to $ 17.55 | 4,323,986 | 4.92 | $ | 16.39 | 3,084,235 | $ | 16.01 | |||||
$ 17.66 to $ 19.69 | 3,755,861 | 6.39 | $ | 18.68 | 2,199,702 | $ | 18.92 | |||||
$ 19.81 to $ 22.19 | 3,894,204 | 5.04 | $ | 21.29 | 1,300,644 | $ | 21.62 | |||||
$ 22.47 to $ 24.98 | 4,116,042 | 5.23 | $ | 23.73 | 2,448,525 | $ | 23.56 | |||||
$ 25.44 to $ 26.13 | 3,702,820 | 4.75 | $ | 25.51 | 3,631,192 | $ | 25.50 | |||||
$ 27.81 to $ 35.49 | 4,698,025 | 5.95 | $ | 33.17 | 4,236,203 | $ | 32.99 | |||||
$ 36.25 to $ 48.44 | 976,470 | 4.96 | $ | 44.90 | 974,904 | $ | 44.92 | |||||
$ 53.38 to $104.00 | 2,982,728 | 5.14 | $ | 76.64 | 2,982,675 | $ | 76.64 | |||||
36,928,162 | 5.63 | $ | 25.20 | 25,525,048 | $ | 28.62 | ||||||
Stock Purchase Plan
The amendedThird Amended and restatedRestated 1995 Employee Stock Purchase Plan (the “1995 Purchase Plan”) was originally adopted by the Board of Directors on September 28, 1995 and approved by the Company’s stockholders in October 1995. The 1995 Purchase Plan provides for the issuance of a maximum of 9,000,000 shares of Common Stockcommon stock upon the exercise of nontransferablenon-transferable options granted to participating employees. All U.S.-based employees of the Company whose customary employment is 20 hours or more per week and more than five months in any calendar year, and employees of certain international subsidiaries, are eligible to participate in the 1995 Purchase Plan. Employees who would immediately after the grant own 5% or more of the Company’s Common Stock,common stock and directors who are not employees of the Company, may not participate in the 1995 Purchase Plan. To participate in the 1995 Purchase Plan, an employee must authorize the Company to deduct an amount (not less than 1% nor more than 10% of a participant’s total cash compensation, up to a maximum of $25,000) from his or her pay during six-month periods (each a Plan Period)“Plan Period”).
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The maximum number of shares of Common Stock an employee may purchase in any Plan Period is 6,00012,000 shares subject to certain other limitations. The exercise price for the option for each Plan Period is 85% of the lesser of the market price of the Common Stock on the first or last business day of the Plan Period. If an employee is not a participant on the last day of the Plan Period, such employee is not entitled to exercise his or her option, and the amount of his or her accumulated payroll deductions are refunded. An employee’s rights under the 1995 Purchase Plan terminate upon his or her voluntary withdrawal from the 1995 Purchase Plan at any time or upon termination of employment. In January 2002, the 1995 Purchase Plan was amended to change the Plan Periods to avoid automatic purchases of shares of Common Stock from being made during the Company’s regular black-out periods. Under the 1995 Purchase Plan, the Company issued 299,498 shares, 473,002 shares and 248,027 shares 213,907 sharesin 2004, 2003, and 77,781 shares in 2002, 2001, and 2000, respectively.
Benefit Plan
The Company maintains a 401(k) benefit plan (the “Plan”) allowing eligible U.S.-based employees to contribute up to 15%60% of their annual compensation, limited to an annual maximum amount as set periodically by the Internal Revenue Service. The Company, at its discretion, may contribute up to $0.50 onof each dollar of employee contribution, limited to a maximum of 6% of the employee’s annual contribution.compensation. The Company’s matching contributions for 2004, 2003 and 2002 2001were $2.3 million and 2000 were $2.0 million $1.8 millionfor both 2003 and $1.2 million,2002, respectively. The Company’s contributions vest over a four-year period at 25% per year.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. CAPITAL STOCK
Common Stock
The Company has reserved for future issuance 71,221,64179,800,352 shares of Common Stockcommon stock for the exercise of stock options outstanding or available for grant and 10,880,486 shares for the conversion of the zero coupon convertible debentures into Common Stock.grant.
On May 18, 2000, the stockholders approved an increase of authorized Common Stock from 400,000,000 shares, $0.001 par value per share to 1,000,000,000 shares, $0.001 par value per share.Repurchase Programs
The Company’s Board of Directors has authorized $600 million ofan ongoing stock repurchase program with a total repurchase authority undergranted to the Company’s stock repurchase program,Company of $1.0 billion, of which $200 million was authorized in February 2005, the objective of which is to manage actual and anticipated dilution.dilution and improve shareholders’ return. At December 31, 2004, approximately $42.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock.
The Company is authorized to make open market purchases paid out of its common stock using general corporate funds. During the years ended December 31, 2002 and 2001, the Company purchased 9,300,000 and 3,135,500 shares, respectively of outstanding Common Stock on the open market for approximately $75.7 million and $90.7 million (at an average per share price of $8.14 and $28.92), respectively.
FromAdditionally, from time to time, the Company entershas entered into structured stock repurchase arrangements with large financial institutions using general corporate funds as part of theits share repurchase program in order to lower the Company’s average cost to acquire shares. These arrangements are described below.
Theprograms include terms that require the Company was a party to two agreements, executed during 2001 and 2000, with a largemake up front payments to the counterparty financial institution to purchase approximately 7.3 million sharesand result in the receipt of stock during or at the end of the Company’s Common Stock at various times in private transactions. Pursuant to the termsperiod of the agreements, an aggregateagreement or the receipt of $150 million was paid to this institution, witheither stock or cash at the ultimate numbermaturity of shares repurchased dependentthe agreement, depending on market conditions. In May 2002, the agreements were terminated and, upon termination,Prior to June 2003, the Company received 3.0 million of the remaining shares. The Company received a total of 7,209,286 shares pursuant to these agreements. During 2002, the Company entered into a new agreement, as amended, with this financial institution in a private transaction to purchase up to 3.8 million shares of the Company’s Common Stock at various times through February 2003. Pursuant to the terms of the agreement, $25 million was paid to this institution during the third quarter of 2002. During 2002, the Company received 2,655,469 shares under this agreement with a total value of $18.5 million. The agreement matured in February 2003 and the Company received 390,830 of the remaining shares with a total value of $6.5 million.
During 2002, the Company entered into two private structured stock repurchase transactions with a large financial institution. Under the terms of the first agreement and in exchange for an up front payment of $25 million, the Company was entitled to receive shares of its Common Stock or a predetermined cash amount at the expiration of the agreement dependent upon the closing price of the Company’s Common Stock at maturity. Upon expiration of the agreement in December 2002, the Company received approximately $29.3 million in cash. Under the terms of the second agreement and in exchange for an up front payment of $25 million, the Company is entitled to receive approximately 2.2 million shares of its Common Stock or a predetermined cash amount at expiration of the agreement in March 2003. The form of settlement at maturity of the second transaction will be dependent upon the closing market price of the Company’s Common Stock.
The Company sellssold put warrants that entitleentitled the holder of each warrant to sell to the Company, generally by physical delivery, one share of the Company’s Common Stockits common stock at a specified price. At December 31, 2004 and 2003 there were no put warrants outstanding.
The Company expended an aggregate of $121.0 million, $123.9 million and $161.1 million during 2004, 2003 and 2002, respectively, net of premiums received, under all stock repurchase transactions. During 2002,2004, the Company sold 2,300,000 put warrants attook delivery of a total of 4,458,740 shares of outstanding common stock with an average strikeper share price of $11.10$18.77; and during 2003, the Company took delivery of a total of 8,859,381 shares of outstanding common stock with an average per share price of $15.86. Some of these shares were received premiumpursuant to prepaid programs. Since the inception of the stock repurchase programs, the average cost of shares acquired was $16.55 per share compared to an average close price during open trading windows of $19.83 per share. In addition, a significant portion of the funds used to repurchase stock was funded by proceeds from employee stock option exercises and the related tax benefit. As of December 31, 2004, the Company has remaining prepaid notional amounts of approximately $3.3 million. During 2002,$53.1 million under structured stock repurchase agreements. Due to the Company paid $42.9 millionfact that the total shares to be received for the purchase of 2,050,000open repurchase agreements at December 31, 2004 is not determinable until the contracts mature in 2005, the above price per share amounts exclude the remaining shares uponto be received subject to the exercise of outstanding put warrants, while 600,000 put warrants expired unexercised. As ofagreements.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2002, 950,000 put warrants were outstanding, with exercise prices ranging from $7.18 to $12.58, and expired on various dates between January and March 2003. As of December 31, 2002, the Company has a total potential repurchase obligation of approximately $9.9 million associated with outstanding put warrants, of which $7.3 million is classified as a put warrant obligation in the accompanying consolidated balance sheet. The remaining $2.6 million of outstanding put warrants permit a net-share settlement at the Company’s option and are not recorded as a put warrant obligation in the consolidated balance sheet. The outstanding put warrants classified as a put warrant obligation on the consolidated balance sheet will be reclassified to stockholders’ equity when each warrant is exercised or when it expires. Under the terms of certain put warrant agreements, the Company must maintain certain levels of cash and investment balances. As of December 31, 2002, the Company was in compliance with the required levels.
In December 2002, the Company entered into an agreement with a large financial institution requiring that this institution sell to the Company up to 1,560,000 million shares of the Company’s CommonPreferred Stock at fixed prices if the Company’s common stock trades at designated levels between December 16, 2002 and January 23, 2003. As of December 31, 2002, the Company had a potential remaining repurchase obligation associated with this agreement of approximately $9.1 million, which is classified as common stock subject to repurchase in the accompanying consolidated balance sheet. During January 2003, this agreement expired and no shares were repurchased.
On January 19, 2000, the Company announced a two-for-one stock split in the form of a stock dividend paid on February 16, 2000, to stockholders of record as of January 31, 2000.
The number of options issuable and previously granted and their respective exercise prices under the Company’s stock option plans have been proportionately adjusted to reflect stock splits. The accompanying consolidated financial statements have been retroactively restated to reflect stock splits.
The Company is authorized to issue 5,000,000 shares of preferred stock, $0.01 par value per share. The Company has no present plans to issue such shares.
8. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1999, the Company sold $850 million principal amount at maturity of its zero coupon convertible subordinated debentures (the “Debentures”) due March 22, 2019, in a private placement. The Debentures were priced with a yield to maturity of 5.25% and resulted in net proceeds to the Company of approximately $291.9 million, net of original issue discount and net of debt issuance costs of approximately $9.6 million. Except under limited circumstances, no interest will be paid on the Debentures prior to maturity. The Debentures are convertible at the option of the security holder at any time on or before the maturity date at a conversion rate of 14.0612 shares of the Company’s Common Stock for each $1,000 principal amount at maturity of Debentures, subject to adjustment in certain events. The Company could redeem the Debentures on or after March 22, 2004. Holders could require the Company to repurchase the Debentures, on fixed dates and at set redemption prices (equal to the issue price plus accrued original issue discount), beginning on March 22, 2004. In October 2000, the Board of Directors approved a program authorizing the Company to repurchase up to $25 million of the Debentures in open market purchases. Additionally, in April 2002, the Board of Directors granted additional authority of $100 million to the Company to repurchase Debentures through private transactions, bringing the total repurchase authority to $125 million. The Board of Directors’ authorization to repurchase the Debentures allowsallowed the Company to repurchase Debentures when market conditions arewere favorable. As ofThrough December 31, 2002,2003, 76,000 units of the Company’s Debentures representing $76.0 million in principal amount at maturity, havehad been repurchased under these programs for $29.9 million.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2002, On March 22, 2004, the Company early adoptedredeemed all of the provisions of SFAS No. 145,Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,and accordingly, the Company recordedoutstanding Debentures for an operating gainaggregate redemption price of approximately $1.6 million during 2002 as a result of Debenture repurchases since$355.7 million. The Company used the proceeds from its held-to-maturity investments that matured on March 22, 2004 and cash on hand to fund the redemption. At the date of adoption.redemption, the Company incurred a charge for the write-off of the associated deferred debt issuance costs of approximately $7.2 million.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of these items. The Company’s investments classified as available-for-sale securities, including restricted investments, are carried at fair value on the accompanying consolidated balance sheets based primarily on quoted market prices for such financial instruments. The aggregate fair value of the Company’s available-for-sale investments was $396.3$479.6 million and $437.9$512.4 million at December 31, 20022004 and 2001,2003, respectively. The Company’s held-to-maturity investments had a carrying value of $180.4 million and $169.0$192.5 million at December 31, 2002 and 2001, respectively,2003, and an aggregate fair value of $180.2 million and $170.7$194.5 million at December 31, 2002 and 2001, respectively,2003 based on dealer quotation. The carrying amount of the Company’s Debentures at December 31, 2002 and 2001 were approximately $333.52003 was $351.4 million and $346.2 million, respectively. Thethe fair value of the Debentures, based on the quoted market price as of December 31, 2002 and 2001 were2003 was approximately $334.0 million and $388.0 million, respectively.$355.9 million.
10. COMMITMENTS AND CONTINGENCIES
The Company leases certain office space and equipment under various operating leases. In addition to rent, the leases require the Company to pay for taxes, insurance, maintenance and other operating expenses. Certain of these leases contain stated escalation clauses while others contain renewal options. The Company recognizes rent expense on a straight-line basis over the term of the lease, excluding renewal periods, unless renewal of the lease is reasonably assured.
Rental expense for the years ended December 31, 2002, 20012004, 2003 and 20002002 totaled approximately $24.4$18.0 million, $17.1$16.4 million and $8.7$24.4 million, respectively. Rental expense for 2002 includes lease losses associated with the vacancy of certain of the Company’s leased properties, as discussed below. Sublease income for the yearyears ended December 31, 2004, 2003 and 2002 was approximately $1.6 million, $2.0 million and $1.7 million, and there was no sublease income during 2001.respectively. Lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year and sublease income associated with non-cancelable subleases, including estimated future payments under the Company’s synthetic lease arrangement, are as follows:
CITRIX SYSTEMS, INC.
Operating | Sublease | ||||||||
Leases | Income | ||||||||
(In thousands) | |||||||||
Years ending December 31, | |||||||||
2003 | $ | 18,170 | $ | 2,708 | |||||
2004 | 15,693 | 1,596 | |||||||
2005 | 15,162 | 506 | |||||||
2006 | 14,283 | 363 | |||||||
2007 | 11,604 | 268 | |||||||
Thereafter | 41,190 | 250 | |||||||
$ | 116,102 | $ | 5,691 | ||||||
In April
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Operating Leases | Sublease Income | |||||
(In thousands) | ||||||
Years ending December 31, 2005 | $ | 23,065 | $ | 894 | ||
2006 | 19,857 | 1,203 | ||||
2007 | 14,957 | 1,324 | ||||
2008 | 11,871 | 1,316 | ||||
2009 | 9,557 | 747 | ||||
Thereafter | 38,499 | 317 | ||||
$ | 117,806 | $ | 5,801 | |||
During 2002, the Company entered intobecame a party to a synthetic lease with a substantive lessorarrangement totaling approximately $61.0 million for its corporate headquarters office space in Fort Lauderdale, Florida. The synthetic lease represents a form of off-balance sheet financing under which an unrelated third party lessor funded 100% of the costs of acquiring the property and leases the asset to the Company. The synthetic lease qualifies as an operating lease for accounting purposes and as a financing lease for tax purposes. The Company does not include the property or the related lease debt as an asset or a liability onin its consolidated balance sheet.sheets. Consequently,
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payments are made pursuant to the lease are recorded as operating expenses in the Company’s consolidated statements of income. The Company entered into the synthetic lease in order to lease its headquarters properties under more favorable terms than under its previous lease arrangements.
The initial term of the synthetic lease is seven years. Upon approval by the lessor, the Company can renew the lease twice for additional two-year periods. The lease payments vary based on the London Interbank Offered Rate, or LIBOR plus a margin. At any time during the lease term, the Company has the option to sublease the property and upon thirty-days’ written notice, the Company has the option to purchase the property for an amount representing the original property cost and transaction fees of approximately $61.0 million plus any lease breakage costs and outstanding amounts owed. Upon at least 180 days notice prior to the termination of the initial lease term, the Company has the option to remarket the property for sale to a third party. If the Company chooses not to purchase the property at the end of the lease term, it has guaranteed a residual value to the lessor of approximately $51.9 million and possession of the buildings will be returned to the lessor. On a periodic basis, the Company evaluates the property for indicators of impairment. If thean evaluation were to indicate that fair value of the building were to decline below $51.9 million, the Company would have to make upbe responsible for the difference under its residual value guarantee, which could have a material adverse effect on the Company’s results of operations and financial condition.
The synthetic lease includes certain financial covenants including a requirement for the Company to maintain a pledged balance of approximately $63.0$62.8 million in cash and/or investment securities as collateral. This amount is included in restricted cash equivalents and investments in the accompanying consolidated balance sheets. The Company managesmaintains the ability to manage the composition of the pledgedrestricted investments within certain limits and to withdraw and use excess investment earnings are availablefrom the restricted collateral for operating purposes. Additionally, the Company must maintain a minimum cash and investment balance of $100.0 million, excluding the Company’s Debentures, collateralized investments and equity investments as of the end of each fiscal quarter. As of December 31, 2002,2004, the Company had approximately $113.5$316.7 million in cash and investments in excess of thosethis required levels.level. The synthetic lease includes non-financial covenants, including the maintenance of the propertiesproperty and adequate insurance, prompt delivery of financial statements to the lender of the lessor and prompt payment of taxes associated with the properties.property. As of December 31, 2002,2004, the Company was in compliance with all material provisions of the arrangement.
In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46,Consolidation of Variable Interest Entities, which addresses the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. In December 2003, the FASB issued FIN No. 46 (revised). FIN No. 46 (revised) was effective immediately for certain disclosure requirements and variable interest entities referred to as special-purpose entities for periods ending after December 15, 2003 and for all types of entities for financial statements for periods ending after March 15, 2004. The Company determined that it was not required to consolidate the lessor, the leased facility or the related debt upon the adoption of FIN No. 46 (revised). Accordingly, there was no impact on its financial position, results of operations or cash flows from adoption. However, if the lessor were to change its ownership of the property or significantly change its ownership of other properties that it currently holds, the Company could be required to consolidate the entity, the leased facility and the debt in a future period.
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2002 and 2001, the Company took actions to consolidate certain of its offices, including the exit of certain leased office space and the abandonment of certain leasehold improvements. Lease obligations related to these existing operating leases continue to 20182025 with a total remaining obligation at December 31, 20022004 of approximately $28.5$22.5 million, of which $6.8$3.0 million net of anticipated sublease income, was accrued for as of December 31, 2002,2004, and is reflected in accrued expenses and other liabilities in the accompanying consolidated financial statements.balance sheets. In calculating this accrual, the Company made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. IfThe Company periodically re-evaluates its estimates and if actual circumstances prove to be materially worse than management has estimated, the total charges for these vacant facilities could be significantly higher.
11. INCOME TAXES
The United States and foreign components of income before income taxes are as follows:
2002 | 2001 | 2000 | |||||||||||
(In thousands) | |||||||||||||
United States | $ | 33,865 | $ | 57,096 | $ | 80,465 | |||||||
Foreign | 79,292 | 95,455 | 54,552 | ||||||||||
Total | $ | 113,157 | $ | 152,551 | $ | 135,017 | |||||||
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2004 | 2003 | 2002 | |||||||
(In thousands) | |||||||||
United States | $ | 29,017 | $ | 45,820 | $ | 33,865 | |||
Foreign | 135,416 | 114,867 | 79,292 | ||||||
Total | $ | 164,433 | $ | 160,687 | $ | 113,157 | |||
The components of the provision for income taxes are as follows:
2002 | 2001 | 2000 | ||||||||||||
(In thousands) | ||||||||||||||
Current: | ||||||||||||||
Federal | $ | 13,786 | $ | 38,469 | $ | 29,252 | ||||||||
Foreign | 5,389 | 6,319 | 3,428 | |||||||||||
State | 4,280 | 3,566 | 1,585 | |||||||||||
Total current | 23,455 | 48,354 | 34,265 | |||||||||||
Deferred | (4,218 | ) | (1,063 | ) | 6,240 | |||||||||
Total provision for income taxes | $ | 19,237 | $ | 47,291 | $ | 40,505 | ||||||||
2004 | 2003 | 2002 | |||||||||
(In thousands) | |||||||||||
Current: | |||||||||||
Federal | $ | 23,763 | $ | 20,887 | $ | 13,786 | |||||
Foreign | 8,974 | 5,435 | 5,389 | ||||||||
State | 2,510 | 6,079 | 4,280 | ||||||||
Total current | 35,247 | 32,401 | 23,455 | ||||||||
Deferred | (2,360 | ) | 1,343 | (4,218 | ) | ||||||
Total provision for income taxes | $ | 32,887 | $ | 33,744 | $ | 19,237 | |||||
The significant components of the Company’s deferred tax assets and liabilities consisted of the following:
December 31, | ||||||||||
2002 | 2001 | |||||||||
(In thousands) | ||||||||||
Deferred tax assets: | ||||||||||
Acquired technology | $ | 16,463 | $ | 16,726 | ||||||
Deferred revenue | — | 5,833 | ||||||||
Accounts receivable allowances | 4,901 | 2,901 | ||||||||
Depreciation and amortization | 2,587 | 4,597 | ||||||||
Tax credits | 21,824 | 13,264 | ||||||||
Net operating losses | 8,896 | 17,346 | ||||||||
Other | 9,184 | 6,328 | ||||||||
Total deferred tax assets | 63,855 | 66,995 | ||||||||
Deferred tax liabilities: | ||||||||||
Foreign earnings | (8,753 | ) | (8,753 | ) | ||||||
Total deferred tax liabilities | (8,753 | ) | (8,753 | ) | ||||||
Total net deferred tax assets | $ | 55,102 | $ | 58,242 | ||||||
December 31, | ||||||||
2004 | 2003 | |||||||
(In thousands) | ||||||||
Deferred tax assets: | ||||||||
Acquired technology | $ | — | $ | 16,348 | ||||
Accruals and reserves | 6,422 | 4,826 | ||||||
Depreciation and amortization | 2,663 | 413 | ||||||
Tax credits | 25,547 | 24,612 | ||||||
Net operating losses | 22,684 | 8,999 | ||||||
Other | 4,265 | 10,408 | ||||||
Valuation allowance | (1,332 | ) | (2,145 | ) | ||||
Total deferred tax assets | 60,249 | 63,461 | ||||||
Deferred tax liabilities: | ||||||||
Acquired technology | (10,712 | ) | — | |||||
Foreign earnings | (8,753 | ) | (8,753 | ) | ||||
Total deferred tax liabilities | (19,465 | ) | (8,753 | ) | ||||
Total net deferred tax assets | $ | 40,784 | $ | 54,708 | ||||
SFAS No. 109,Accounting for Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported if it is not more likely than not that some portion or all of the deferred tax assets will be realized. At December 31, 2004, the Company has recorded a valuation allowance of approximately $1.3 million relating to deferred tax assets for foreign tax credit carryovers.
During the years ended December 31, 2002, 2001,2004, 2003, and 2000,2002, the Company recognized tax benefits related to the exercise of employee stock options in the amount of $20.9 million, $10.3 million, and $25.7 million, $28.0 million and $63.9 million, respectively. This benefit wasThese
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
benefits were recorded to additional paid-in capital. At December 31, 2002,2004, the Company had approximately $35.4$35.0 million of additional U.S. net operating loss carryforwards resulting from stock options, a substantial portion of which begins to expire in 2020. The Company will record the benefit of the net operating loss carryforwards generated from the exercise of employee stock options through additional paid-in capital whenin the period that the net operating loss carryforwards are utilized.
During 2001, the Company acquired an entity with approximately $37.9 million of net operating loss carryforwards. Additionally,
At December 31, 2004, the Company had approximately $6.8$70.3 million of remaining net operating loss carryforwards from prior acquisitions. TheseThe utilization of these net operating loss carryforwards are limited in any one year pursuant to Internal Revenue Code Section 382 and begin to expire in 2010. The Company had approximately $22.9 million of remaining net operating losses at December 31, 2002 subject to Internal Revenue Code Section 382 limitations.2020.
At December 31, 2002,2004, the Company had research and development tax credit carryforwards of approximately $9.0$10.8 million that expire beginning in 2018.2008. The Company had foreign tax credit carryforwards
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of approximately $10.7$12.6 million at December 31, 20022004 that expire beginning in 2003. 2009.
Additionally, the Company had alternative minimum tax credit carryforwards of approximately $2.1 million at December 31, 2002. These credits do not expire.2004 that have no expiration date.
The Company does not expect to remit earnings from its foreign subsidiaries. Accordingly, during 2002 and 2001 the Company did not provide for deferred taxes on foreign earnings.
A reconciliation of the Company’s effective tax rate to the statutory federal rate is as follows:
Year Ended December 31, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
(In thousands) | ||||||||||||
Federal statutory taxes | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes, net of federal tax benefit | 3.8 | 3.8 | 3.8 | |||||||||
Foreign operations | (17.9 | ) | (20.2 | ) | (14.6 | ) | ||||||
Interest income | — | — | (4.4 | ) | ||||||||
Intangible assets | — | 7.4 | 2.3 | |||||||||
Other permanent differences | 0.5 | 1.8 | 2.3 | |||||||||
Tax credits | (7.6 | ) | (0.8 | ) | 0.5 | |||||||
Other | 3.2 | 4.0 | 5.1 | |||||||||
17.0 | % | 31.0 | % | 30.0 | % | |||||||
Year Ended December 31, | |||||||||
2004 | 2003 | 2002 | |||||||
Federal statutory taxes | 35.0 | % | 35.0 | % | 35.0 | % | |||
State income taxes, net of federal tax benefit | 4.5 | 3.8 | 3.8 | ||||||
Foreign operations | (27.0 | ) | (21.7 | ) | (17.9 | ) | |||
Permanent differences | 5.0 | 1.7 | 0.5 | ||||||
Tax credits | — | (1.7 | ) | (7.6 | ) | ||||
Other | 3.0 | 2.6 | 3.2 | ||||||
Change in valuation allowance | (0.5 | ) | 1.3 | — | |||||
20.0 | % | 21.0 | % | 17.0 | % | ||||
The Company’s tax provision is based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. In the ordinary course of global business, there are transactions for which the ultimate tax outcome is uncertain, thus judgment is required in determining the worldwide provision for income taxes and the associated realizability of deferred tax assets and liabilities. The Company establishes reserves when it becomes probable that a tax return position may be challenged and that the Company may not succeed in completely defending that challenge. The Company adjusts these reserves in light of changing facts and circumstances, such as the settlement of a tax audit. The Company’s annual tax rate includes the impact of reserve provisions and changes to reserves. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Resolution of the tax contingencies would be recognized as an increase or decrease to the Company’s tax rate in the period of resolution.
On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction for 85% of certain foreign earnings that are repatriated, as defined in the AJCA. The Company may elect to apply this provision to qualifying earnings repatriations in 2005. The Company has started an evaluation of the effects of the repatriation provision; however, the Company does not expect to be able to complete this evaluation until after Congress or the Treasury Department provides guidance concerning the key elements of the provision. The Company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the anticipated guidance. Per the provisions of the AJCA, the range of possible amounts that the Company is eligible to repatriate under this provision is between zero and $500 million. The related potential range of income tax is between zero and $52 million.
Other than considering the one-time repatriation provision within the AJCA, the Company does not expect to remit earnings from its foreign subsidiaries. Accordingly, since 2000 the Company has not provided for deferred taxes on foreign earnings.
12. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in a single market consisting of the design, development, marketing, sales and support of access infrastructure software and services for enterprise applications.applications, as well as Web-based desktop access. The Company’s
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
revenues are derived from MetaFrame Access Suite sales and related services in the Americas, Europe, the Middle East and Africa (“EMEA”)EMEA and Asia-Pacific regions.regions and from Web-based desktop access services sold by its Citrix Online division. These three geographic regions and the Citrix Online division constitute the Company’s four reportable segments.
The Company does not engage in intercompany revenue transfers between segments. The Company’s management evaluates performance based primarily on revenues in the geographic locations in which the Company operates.operates and separately evaluates revenues from the Citrix Online division. Segment profit for each segment includes certain sales, marketing, general and administrative expenses directly attributable to the segment and excludes certain expenses that are managed outside the reportable segments. Costs excluded from segment profit primarily consist of research and development costs associated with the MetaFrame Access Suite products, amortization of core and product technology, amortization of other intangible assets, interest, corporate expenses and income taxes, as well as, non-recurring charges for in-process research and development and write-down of technology.development. Corporate expenses are comprised primarily of corporate marketing costs, operations and certain general and administrative expenses, which are separately managed. Accounting policies of the segments are the same as the Company’s consolidated accounting policies.
Previously, the Company formed wholly-owned subsidiaries in various locations within EMEA and Asia-Pacific. These subsidiaries are responsible for sales and distribution
International revenues (sales outside of the Company’s products. Prior to the formationUnited States) accounted for approximately 53.2%, 54.6% and 53.7% of these subsidiaries, sales in these geographic segments were classified as export sales from the Americas segment. For purposes of the presentation of segment information, the sales previously reported as Americas export sales have been reclassified to the geographical segments where the sale was made for each of the periods presented.
In July 2001, the Company implemented a new enterprise resource planning system. The new system was designed to provide a structure that would meet the growing demands of the Company and to provide management improved focus on the results of operations and the Company’s financial resources. The features and functionality of the new system allowed the Company to summarize and classify information included in
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the results of operations differently than that provided by the Company’s legacy information systems. The Company began planningour net revenues for the new information system in 2000,year ended December 31, 2004, 2003, and as a result, detailed transaction information for 2001 and 2000, prior to the implementation of the new system, was retained and converted to the new system. Information for the years ended 2001 and 2000 has been reclassified to reflect these changes.
2002, respectively. Net revenues and segment profit for 2002, 20012004, 2003 and 20002002 classified by the major geographic area in which the Company operates,Company’s reportable segments, are presented below.
2002 | 2001 | 2000 | ||||||||||||
(In thousands) | ||||||||||||||
Net revenues: | ||||||||||||||
Americas | $ | 255,438 | $ | 289,017 | $ | 248,398 | ||||||||
EMEA | 209,520 | 216,766 | 158,645 | |||||||||||
Asia-Pacific | 48,408 | 46,016 | 23,505 | |||||||||||
Other(1) | 14,082 | 39,830 | 39,898 | |||||||||||
Consolidated | $ | 527,448 | $ | 591,629 | $ | 470,446 | ||||||||
Segment profit: | ||||||||||||||
Americas | $ | 122,553 | $ | 163,621 | $ | 149,856 | ||||||||
EMEA | 123,126 | 134,096 | 102,356 | |||||||||||
Asia-Pacific | 18,839 | 22,880 | 2,610 | |||||||||||
Other(1) | 14,082 | 39,830 | 39,898 | |||||||||||
Unallocated expenses(2): | ||||||||||||||
Amortization of intangibles | (11,296 | ) | (48,831 | ) | (30,395 | ) | ||||||||
In-process research and development | — | (2,580 | ) | — | ||||||||||
Research and development | (68,923 | ) | (67,699 | ) | (50,622 | ) | ||||||||
Write-down of technology | — | — | (9,081 | ) | ||||||||||
Net interest and other income | 9,297 | 19,200 | 22,792 | |||||||||||
Other corporate expenses | (94,521 | ) | (107,966 | ) | (92,397 | ) | ||||||||
Consolidated income before income taxes | $ | 113,157 | $ | 152,551 | $ | 135,017 | ||||||||
2004 | 2003 | 2002 | ||||||||||
(In thousands) | ||||||||||||
Net revenues: | ||||||||||||
Americas(1) | $ | 335,436 | $ | 291,470 | $ | 255,438 | ||||||
EMEA(2) | 293,690 | 243,890 | 209,520 | |||||||||
Asia-Pacific | 67,930 | 53,265 | 48,408 | |||||||||
Citrix Online division | 44,101 | — | — | |||||||||
Other(3) | — | — | 14,082 | |||||||||
Consolidated | $ | 741,157 | $ | 588,625 | $ | 527,448 | ||||||
Segment profit (loss): | ||||||||||||
Americas | $ | 199,332 | $ | 158,781 | $ | 122,553 | ||||||
EMEA | 174,277 | 151,557 | 123,126 | |||||||||
Asia-Pacific | 19,587 | 18,364 | 18,839 | |||||||||
Other(3) | — | — | 14,082 | |||||||||
Citrix Online division | (1,124 | ) | — | — | ||||||||
Unallocated expenses(4): | ||||||||||||
Amortization of intangibles | (12,331 | ) | (11,336 | ) | (11,296 | ) | ||||||
In-process research and development | (19,100 | ) | — | — | ||||||||
Research and development | (81,483 | ) | (64,443 | ) | (68,923 | ) | ||||||
Net interest and other income | 5,442 | 6,298 | 9,297 | |||||||||
Other corporate expenses | (120,167 | ) | (98,534 | ) | (94,521 | ) | ||||||
Consolidated income before income taxes | $ | 164,433 | $ | 160,687 | $ | 113,157 | ||||||
(1) | The Americas segment is comprised of the United States, Canada and Latin America. |
Defined as Europe, the Middle East and Africa. |
(3) | Represents royalty fees in connection with the Microsoft Development Agreement, which expired in May 2002. |
Represents expenses presented to management only on a consolidated basis and not allocated to the geographic operating segments. |
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Identifiable assets classified by major geographic area in which the Company operatesCompany’s reportable segments are shown below. Long-lived assets consist of property plant and equipment, net:
CITRIX SYSTEMS, INC.
December 31, | |||||||||
2002 | 2001 | ||||||||
(In thousands) | |||||||||
Identifiable assets: | |||||||||
Americas | $ | 752,841 | $ | 945,299 | |||||
EMEA | 378,831 | 241,943 | |||||||
Asia-Pacific | 29,859 | 20,988 | |||||||
Total identifiable assets | $ | 1,161,531 | $ | 1,208,230 | |||||
Long-lived assets, net: | |||||||||
United States | $ | 38,089 | $ | 50,601 | |||||
United Kingdom | 33,663 | 33,029 | |||||||
Other foreign countries | 4,782 | 6,480 | |||||||
Total long-lived assets, net | $ | 76,534 | $ | 90,110 | |||||
To purchase certain investments during 2002, the Company initiated an inter-segment loan whereby the Americas transferred approximately $134 million to EMEA.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, | ||||||
2004 | 2003 | |||||
(In thousands) | ||||||
Identifiable assets: | ||||||
Americas | $ | 537,199 | $ | 975,054 | ||
EMEA | 483,637 | 328,689 | ||||
Asia-Pacific | 43,240 | 41,196 | ||||
Citrix Online division | 222,008 | — | ||||
Total identifiable assets | $ | 1,286,084 | $ | 1,344,939 | ||
Long-lived assets, net: | ||||||
United States | $ | 31,376 | $ | 29,917 | ||
United Kingdom | 30,165 | 31,821 | ||||
Other foreign countries | 7,740 | 4,099 | ||||
Total long-lived assets, net | $ | 69,281 | $ | 65,837 | ||
The decrease in the Americas identifiable assets and increase in EMEA’s identifiable assets is primarily due to a decrease in cash, cash equivalents and investments related to the resultredemption of this agreement. This loan was repaid during early 2003.the Company’s convertible subordinated debentures and to expenditures related to the Net6 and Expertcity acquisitions.
Export revenue represents shipments of finished goods and services from the United States to international customers. As of July 1, 2000, the Company was shipping finished goods to Europeancustomers, primarily in Latin America and Asia-Pacific customers from its warehouse location in Europe.Canada. Shipments from the United States to international customers for 2004, 2003 and 2002 were as follows:
Years Ended December 31, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
(In thousands) | ||||||||||||
Asia-Pacific | $ | — | $ | — | $ | 11,249 | ||||||
Other(1) | 25,297 | 21,392 | 7,274 | |||||||||
$ | 25,297 | $ | 21,392 | $ | 18,523 | |||||||
The Company had net revenue attributed to individual distributors in excess of 10% of total net sales as follows. There were no individual end-customers that represented greater than 10% of net sales for any of the years presented.
Year Ended December 31, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Distributor A | 13 | % | 13 | % | 13 | % | ||||||
Distributor B | 10 | % | 10 | % | 12 | % | ||||||
Distributor C | 8 | % | 9 | % | 10 | % |
F-31
Year Ended December 31, | |||||||||
2004 | 2003 | 2002 | |||||||
Distributor A | 11 | % | 13 | % | 13 | % | |||
Distributor B | 8 | % | 9 | % | 10 | % |
13. | DERIVATIVE FINANCIAL INSTRUMENTS |
For the Year Ended December 31, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Unrealized gains on derivative instruments | $ | 6,258 | $ | 11,200 | $ | 9,091 | ||||||
Reclassification of realized gains | (6,422 | ) | (7,528 | ) | (5,663 | ) | ||||||
Net change in other comprehensive income due to derivative instruments | $ | (164 | ) | $ | 3,672 | $ | 3,428 | |||||
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company also tracks revenue according to the following three categories: License Revenue, Technical Services Revenue and Royalty Revenue, but does not track expenses or identifiable assets by category. As a result, these revenue categories do not constitute segments in accordance with SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information. Additional information regarding revenue by categories is as follows:
Year Ended December 31, | |||||||||||||
2002 | 2001 | 2000 | |||||||||||
(In thousands) | |||||||||||||
Revenues: | |||||||||||||
License Revenue | $ | 468,827 | $ | 511,147 | $ | 400,156 | |||||||
Technical Services Revenue | 44,539 | 40,652 | 30,392 | ||||||||||
Royalty Revenue | 14,082 | 39,830 | 39,898 | ||||||||||
Net Revenues | $ | 527,448 | $ | 591,629 | $ | 470,446 | |||||||
13. DERIVATIVE FINANCIAL INSTRUMENTS
Cash Flow Hedges.At December 31, 2004 and 2003, the Company had in place foreign currency forward sale contracts with a notional amount of $39.0 million and $37.2 million, respectively, and foreign currency forward purchase contracts with a notional amount of $165.0 million and $160.9 million, respectively. The fair value of these contracts at December 31, 2004 and 2003 were assets of $11.5 million and $12.8 million, respectively and liabilities of $3.5 million and $4.9 million, respectively. A substantial portion of the Company’s anticipated overseas expense and capital purchasing activities arewill be transacted in local currencies. To protect against reductionsfluctuations in valueoperating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a hedging program. The Companyprogram that uses forward foreign exchange forward contracts to reduce a portion of its exposure to these potential changes. The terms of suchthese instruments, and the hedginghedged transactions to which they relate, generally do not exceed 12 months. Principal currenciesCurrencies hedged are Euros, British pounds sterling, Euros, Swiss francs, Australian dollars, and Japanese yen and Australian dollars. The Company could choose not to hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic costyen. There was no material ineffectiveness of hedging particular exposures, and availability of appropriate hedging instruments. At December 31, 2002 and 2001, the Company had in placeCompany’s foreign currency forward sale contracts with a notional amount of $48.9 million and $13.1 million, respectively, and foreign currency forward purchase contracts with a notional amount of $128.4 million and $60.9 million, respectively. The aggregate net fair value of these contracts at December 31, 2002 and 2001 were recorded as assets of $3.6 million and $0.2 million, respectively.for 2004, 2003 or 2002.
In order to manage its exposure to interest rate risk, in November 2001, the Company entered into an interest rate swap agreementinstrument with a notional amount of $174.6 million that was to expire in March 2004. The swap converted the floating rate return on certain of the Company’s available for sale investment securities to a fixed interest rate. In October 2002, the Company terminated this interest rate swap agreement.instrument. Upon termination, the Company received a cash payment of $9.2 million as settlement under the swap agreement, and there was approximately $2.4 million in accumulated other comprehensive income, net of taxes.instrument. The swap was previously accounted for as an effective cash flow hedge, and in accordance with the provisions of SFAS No. 133, the remaining $2.4 million, net of taxes,amount in accumulated other comprehensive income of approximately $2.4 million was to be recognized in interest income ratably along with the interest cash flows from the investments through the original termination dateremaining holding period of the swapunderlying investments in March 2004. As a result of the sale of certain investments underlying this swap agreement in December 2002, the forecasted interest cash flows from the investments were no longer probable and interest income of approximately $3.4 million related to the terminated swap was recognized.2002.
In connection with the efforts to manage the credit quality and maturities of its available-for-sale investment portfolio, during 2001 the Company terminated a forward bond purchase agreement previously designated as a hedge of forecasted purchases of corporate security investments. As a result, the Company recorded a realized gain of $1.4 million, which is included in other expense, net on the 2001 consolidated statements of income. At the time of the sale, the Company realized approximately $0.5 million of amounts previously classified in accumulated other comprehensive loss.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Hedges.The Company uses derivativesinterest rate swap instruments to hedge against the changechanges in fair value of certain of its available-for-sale securities due to changes in interest rates. DuringAt December 2002,31, 2004, the Company entered into 12 interest rate swap agreements withinstruments have an aggregate notional amount of $208.0$182.4 million related to 12 specific available-for-sale securities. The swaps qualify for the short-cut method of accountingsecurities and expire on various dates through November 2007. TheSeptember 2008. Each of the instruments swap the fixed rate interest on the underlying investments tofor a variable rate based on LIBORthe London Interbank Offered Rate (“LIBOR”) plus a specified margin. During 2003, the Company sold $104.0 million of the underlying fixed rate available-for-sale securities and discontinued hedge accounting for the related $104.0 million of the interest rate swaps. Changes in the fair value of the derivativesswap instruments are recorded in earnings along with related designated changes in the value of the underlying investments. The fair value of the instruments at December 31, 2004 were liabilities of approximately $4.4 million and assets of $1.1 million. At December 31, 2003, the fair value of the instruments were liabilities of approximately $4.2 million. Changes in the fair value of these derivatives are recorded in earnings. There was no material ineffectiveness of the Company’s interest rate swaps for the years ended December 31, 2004, 2003 or 2002.
Derivatives not Designated as Hedges.The Company utilizes credit default contractsderivatives and other instruments for investment purposes that either do not qualify or are not designated for hedge accounting treatment under SFAS No. 133.133,Accounting for Derivative Instruments and Hedging Activities, and its related interpretations. Accordingly, changes in the fair value of these contracts, if any, are recorded in other expense, net, if any.income (expense), net. Under the terms of thesethe credit contracts, the Company assumes the default risk, above a certain threshold, of a portfolio of specified high credit quality referenced issuers in exchange for a fixed yield that is recorded in interest income. In the event of default by underlying referenced issuers above specified amounts, the Company will pay the counterparty an amount equivalent to its loss, not to exceed the notional value of the contract. The primary risk associated with these transactions is the default risk of the underlying issuers. The risk levels of these instruments are equivalent to “AAA” and “Super AAA”“AAA,” or better single securities. The purpose of the credit default contracts is to increase the effectiveprovide additional yield on certain of the Company’s underlying available-for-sale investments.
During December 2002, the
The Company entered into twois a party to three credit default contracts withthat have an aggregate notional amount of $100.0$75.0 million thatand expire during December 2007.on various dates through March 2008. The Company was also a party to a credit default contract that has pledged $104an aggregate notional amount of $195.4 million and expired on March 22, 2004. At December 31, 2004, the Company has restricted approximately $86.3 million of investment securities as collateral for these contracts.contracts and interest rate swaps, which is included in restricted cash equivalents and investments in the accompanying consolidated balance sheet. The Company maintains the ability to manage the composition of the pledged investments. Accordingly, these securities are not reflected as restricted investments inwithin certain limits and to withdraw and use excess investment earnings from the accompanying consolidated balance sheets.restricted collateral for operating purposes. The fixed yield earned on these contracts was not material at December 31, 2002,during 2004 and 2003 is included in interest income in the accompanying consolidated statements of income. ForTo date there have been no credit events for the year endedunderlying referenced entities resulting in losses to the Company. As of December 31, 2002, there was no change in2004, the fair value of these credit default contracts and there were no credit events related to the underlying reference issuers.
The ineffectiveness of hedges on existing derivative instruments for the year ended December 31, 2002, was not material. As of December 31, 2002, the Company recorded $6.3 million of derivative assets and $6.2 million of derivative liabilities, representing the fair values of the Company’s outstanding derivative instruments in other current assets and accrued expenses in the accompanying consolidated balance sheets.
The change in net unrealized derivative gains (losses) recognized in other comprehensive income includes unrealized gains (losses) that arose from changes in market value of derivatives that were held during the period, and gains (losses) that were previously unrealized, but have been recognized in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or stockholders’ equity.
The following table presents these components of other comprehensive income, net of tax:
2002 | 2001 | ||||||||
Unrealized gains (losses) | $ | 3,512 | $ | 84 | |||||
Reclassification for realized gains (losses) | (84 | ) | — | ||||||
Increase (decrease) in net unrealized derivative gains recognized in other comprehensive gain (loss) | $ | 3,428 | $ | 84 | |||||
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Year Ended December 31, | |||||||||||||
2002 | 2001 | 2000 | |||||||||||
(In thousands, except per share | |||||||||||||
information) | |||||||||||||
Numerator: | |||||||||||||
Net income | $ | 93,920 | $ | 105,260 | $ | 94,512 | |||||||
Denominator: | |||||||||||||
Denominator for basic earnings per share — weighted average shares | 177,428 | 185,460 | 184,804 | ||||||||||
Effect of dilutive securities: | |||||||||||||
Put warrants | 3 | — | 41 | ||||||||||
Employee stock options | 1,928 | 9,038 | 14,886 | ||||||||||
Denominator for diluted earnings per share — adjusted weighted-average shares | 179,359 | 194,498 | 199,731 | ||||||||||
Basic earnings per share | $ | 0.53 | $ | 0.57 | $ | 0.51 | |||||||
Diluted earnings per share | $ | 0.52 | $ | 0.54 | $ | 0.47 | |||||||
Antidilutive weighted shares | 50,919 | 45,454 | 41,943 | ||||||||||
Year Ended December 31, | |||||||||
2004 | 2003 | 2002 | |||||||
(In thousands, except per share information) | |||||||||
Numerator: | |||||||||
Net income | $ | 131,546 | $ | 126,943 | $ | 93,920 | |||
Denominator: | |||||||||
Denominator for basic earnings per share — weighted average shares | 168,868 | 165,323 | 177,428 | ||||||
Effect of dilutive securities: | |||||||||
Put warrants | — | — | 3 | ||||||
Employee stock options | 5,644 | 6,124 | 1,928 | ||||||
Contingent consideration related to acquisition | 222 | — | — | ||||||
Denominator for diluted earnings per share — adjusted weighted-average shares | 174,734 | 171,447 | 179,359 | ||||||
Basic earnings per share | $ | 0.78 | $ | 0.77 | $ | 0.53 | |||
Diluted earnings per share | $ | 0.75 | $ | 0.74 | $ | 0.52 | |||
Antidilutive weighted average shares | 28,878 | 41,216 | 50,919 | ||||||
The above antidilutive weighted average shares to purchase shares of Common Stockcommon stock includes certain shares under the Company’s stock option program,programs, certain put warrants under the Company’s stock repurchase program and Common Stockcommon stock potentially issuable on the conversion of the Debentures and were not included in computing diluted earnings per share because their effects were antidilutive for the respective periods.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued SFAS No. 143,123R,Accounting for Asset Retirement Obligations,Share-Based Payment. establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143123R requires companies to expense the value of employee stock option and similar awards. SFAS No. 123R is effective in fiscal yearsas of the beginning of the first interim or annual reporting period that begins after June 15, 2002,2005. As of the effective date, the Company will be required to expense all awards granted, modified, cancelled or repurchased as well as the portion of prior awards for which the requisite service has not been rendered, based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No.123. SFAS No.123R permits public companies to adopt its requirements using one of two methods: A “modified prospective” method in which compensation cost is recognized beginning with earlythe effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. A “prospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123R for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The adoption permitted. The Company expects thatof SFAS No. 123R’s fair value method will have an impact on the Company’s results of operations. Currently, the impact the adoption of SFAS No. 143123R will not have a material impact on its consolidated financial position,the Company’s results of operations or cash flows upon adoption. The Company plans to adopt SFAS No. 143 effective January 1, 2003.
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” SFAS No. 145,cannot be estimated because among other things requires gains and lossesit will depend on extinguishmentthe levels of debt to be classified as part of continuing operations rather than treated as extraordinary, as previously required in accordance with SFAS 4. SFAS No. 145 also modifies accounting for subleases where the original lessee remains the secondary obligor and requires certain modifications to capital leases to be treated as a sale-leaseback transaction. The Company early adopted the provisions of SFAS No. 145, during 2002 and recorded $1.6 million in gains from the repurchase of the Debentures as part of continuing operationsshare-based payments granted in the accompanying consolidated statements of income.
In July 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies the guidance previously provided under Emerging Issues Task Force Issue
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Among other things, SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to when there is commitment to a restructuring plan as set forth under the nullified guidance. The Company will adopt SFAS No. 146 on January 1, 2003 and expects no material impact from adoption on its financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The Company expects no material impact on its financial position, results of operations or cash flows from adoption.
In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. FIN No. 45 also clarifies requirements for the recognition of guarantees at the onset of an arrangement. The initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN No. 45 are effective for interim or annual financial statements after December 15, 2002. The Company implemented the disclosure requirements of FIN No. 45 at December 31, 2002. The Company had no material impact on its financial position, results of operations or cash flows as a result of this implementation.
In January 2003, the FASB issued FIN No. 46,Consolidation of Variable Interest Entities,which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN No. 46 is effective immediately for certain disclosure requirements and for variable interest entities created after January 1, 2003, and in the first fiscal year or interim period beginning after June 15, 2003 for all other variable interest entities.future. The Company is currently in the process of determining the effects if any, on its financial position, results of operations and cash flows that will result from the adoption of FINSFAS No. 46.123R.
CITRIX SYSTEMS, INC. |
In February 2002, a stockholder filed a complaint (the “Complaint”) in the Court of Chancery of the State of Delaware against the Company and certain of its current and former officers and directors. The Complaint purported to state a direct claim on behalf of a putative class of stockholders and a derivative claim nominally on behalf of the Company for breach of fiduciary duty based on the Company’s alleged failure to disclose all material information concerning the Company’s business and operations in connection with a proposal to be voted on at the Company’s annual meeting of stockholders in May 2000. The Complaint asserted claims similar to those alleged by such stockholder in a suit that was filed in September 2000, and subsequently voluntarily dismissed without prejudice in July 2001. The Complaint sought compensatory damages, rescission of the Company’s 2000 Director and Officer Stock Option and Incentive Plan, and other related relief. The parties have since agreed to a non-monetary settlement of the action not involving the validity of the 2000 Director and Officer Stock Option and Incentive Plan. The settlement is subject to approval by the court. A hearing on the approval of the settlement has not yet been scheduled.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In addition, the
16. LEGAL MATTERS
The Company is a defendant in various litigation matters of litigation generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that anythe ultimate liability wouldoutcome will not materially affect the Company’s business, financial position, resultresults of operations or cash flows.
F-35
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First | Second | Third | Fourth | ||||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Total Year | |||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||||
2002 | |||||||||||||||||||||
Net revenues | $ | 142,310 | $ | 117,456 | $ | 118,898 | $ | 148,784 | $ | 527,448 | |||||||||||
Gross margin | 137,558 | 112,698 | 114,523 | 143,639 | 508,418 | ||||||||||||||||
Income from operations | 30,942 | 10,276 | 17,368 | 45,274 | 103,860 | ||||||||||||||||
Net income | 26,689 | 10,849 | 16,815 | 39,567 | 93,920 | ||||||||||||||||
Basic earnings per common share | 0.14 | 0.06 | 0.10 | 0.23 | 0.53 | ||||||||||||||||
Diluted earnings per common share | 0.14 | 0.06 | 0.10 | 0.23 | 0.52 | (a) | |||||||||||||||
2001 | |||||||||||||||||||||
Net revenues | $ | 132,812 | $ | 147,274 | $ | 153,495 | $ | 158,048 | $ | 591,629 | |||||||||||
Gross margin | 125,500 | 140,051 | 145,922 | 150,308 | 561,781 | ||||||||||||||||
Income from operations | 35,596 | 31,192 | 32,384 | 34,179 | 133,351 | ||||||||||||||||
Net income | 28,935 | 22,894 | 27,790 | 25,641 | 105,260 | ||||||||||||||||
Basic earnings per common share | 0.16 | 0.12 | 0.15 | 0.14 | 0.57 | ||||||||||||||||
Diluted earnings per common share | 0.15 | 0.12 | 0.14 | 0.13 | 0.54 |
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | ||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
2004 | ||||||||||||||||
Net revenues | $ | 161,310 | $ | 178,302 | $ | 187,578 | $ | 213,967 | $ | 741,157 | ||||||
Gross margin | 154,040 | 169,779 | 178,803 | 212,112 | 714,734 | |||||||||||
Income from operations | 16,697 | 37,092 | 46,323 | 58,879 | (a) | 158,991 | ||||||||||
Net income | 9,325 | 31,475 | 38,448 | 52,298 | (a) | 131,546 | ||||||||||
Basic earnings per common share | 0.06 | 0.18 | 0.23 | 0.31 | (a) | 0.78 | ||||||||||
Diluted earnings per common share | 0.05 | 0.18 | 0.22 | 0.30 | (a) | 0.75 | ||||||||||
2003 | ||||||||||||||||
Net revenues | $ | 143,491 | $ | 143,049 | $ | 144,341 | $ | 157,744 | $ | 588,625 | ||||||
Gross margin | 135,886 | 135,376 | 136,190 | 150,101 | 557,553 | |||||||||||
Income from operations | 37,928 | 35,498 | 38,716 | 42,247 | 154,389 | |||||||||||
Net income | 30,329 | 29,344 | 30,995 | 36,275 | 126,943 | |||||||||||
Basic earnings per common share | 0.18 | 0.18 | 0.19 | 0.22 | 0.77 | |||||||||||
Diluted earnings per common share | 0.18 | 0.17 | 0.18 | 0.21 | 0.74 |
(a) |
F-36
CITRIX SYSTEMS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Charged to | Charged | Balance | |||||||||||||||||||
Beginning | Costs and | to Other | at End | ||||||||||||||||||
of Period | Expenses | Accounts | Deductions | of Period | |||||||||||||||||
(In thousands) | |||||||||||||||||||||
2002 | |||||||||||||||||||||
Deducted from asset accounts: | |||||||||||||||||||||
Allowance for doubtful accounts | $ | 3,726 | $ | 3,486 | $ | — | $ | 1,162 | (2) | $ | 6,050 | ||||||||||
Allowance for returns | 8,343 | — | 25,282 | (1) | 23,137 | 10,488 | |||||||||||||||
Allowance for inventory obsolescence | 1,570 | 1,407 | — | 2,473 | 504 | ||||||||||||||||
2001 | |||||||||||||||||||||
Deducted from asset accounts: | |||||||||||||||||||||
Allowance for doubtful accounts | $ | 1,431 | $ | 2,784 | $ | 2,483 | (3) | $ | 2,972 | (2) | $ | 3,726 | |||||||||
Allowance for returns | 9,170 | — | 22,533 | (1) | 23,360 | 8,343 | |||||||||||||||
Allowance for inventory obsolescence | 722 | 2,292 | — | 1,444 | 1,570 | ||||||||||||||||
2000 | |||||||||||||||||||||
Deducted from asset accounts: | |||||||||||||||||||||
Allowance for doubtful accounts | $ | 1,545 | $ | 377 | $ | — | $ | 491 | (2) | $ | 1,431 | ||||||||||
Allowance for returns | 6,696 | — | 27,883 | (1) | 25,409 | 9,170 | |||||||||||||||
Allowance for inventory obsolescence | 912 | 6,932 | — | 7,122 | 722 |
Beginning of Period | Charged (Credited) to Costs Expenses | Charged to Other Accounts | Deductions | Balance at End of | ||||||||||||||
(In thousands) | ||||||||||||||||||
2004 | ||||||||||||||||||
Deducted from asset accounts: | ||||||||||||||||||
Allowance for doubtful accounts | $ | 3,364 | $ | 1,108 | $ | 879 | (3) | $ | 2,708 | (2) | $ | 2,643 | ||||||
Allowance for returns | 3,001 | — | 6,663 | (1) | 7,391 | (4) | 2,273 | |||||||||||
Allowance for inventory obsolescence | 129 | 428 | 9 | 433 | 133 | |||||||||||||
Valuation allowance for deferred tax assets | 2,145 | — | — | 813 | 1,332 | |||||||||||||
2003 | ||||||||||||||||||
Deducted from asset accounts: | ||||||||||||||||||
Allowance for doubtful accounts | $ | 6,050 | $ | 522 | $ | — | $ | 3,208 | (2) | $ | 3,364 | |||||||
Allowance for returns | 10,488 | — | 3,825 | (1) | 11,312 | (4) | 3,001 | |||||||||||
Allowance for inventory obsolescence | 504 | (4 | ) | — | 371 | 129 | ||||||||||||
Valuation allowance for deferred tax assets | — | 2,145 | — | — | 2,145 | |||||||||||||
2002 | ||||||||||||||||||
Deducted from asset accounts: | ||||||||||||||||||
Allowance for doubtful accounts | $ | 3,726 | $ | 3,486 | $ | — | $ | 1,162 | (2) | $ | 6,050 | |||||||
Allowance for returns | 8,343 | — | 25,282 | (1) | 23,137 | (4) | 10,488 | |||||||||||
Allowance for inventory obsolescence | 1,570 | 1,407 | — | 2,473 | 504 |
(1) | Netted against revenues. |
(2) | Uncollectible accounts written off, net of recoveries. |
(3) | Addition from the |
(4) | Credits issued for stock balancing rights. |
F-37
EXHIBIT INDEX
Exhibit | ||||
No. | Description | |||
2 | .3(1) | Asset Purchase Agreement dated February 15, 2000 by and among the Company, Innovex Group, Inc. and certain stockholders of Innovex | ||
2 | .4(9) | Agreement and Plan of Merger, dated as of March 20, 2001, by and among Citrix Systems, Inc., Soundgarden Acquisition Corp. and Sequoia Software Corporation | ||
3 | .1(2) | Amended and Restated Certificate of Incorporation of the Company | ||
3 | .2(2) | Amended and Restated By-laws of the Company | ||
3 | .3(3) | Certificate of Amendment of Amended and Restated Certificate of Incorporation | ||
4 | .1(2) | Specimen certificate representing the Common Stock | ||
4 | .2(4) | Indenture by and between the Company and State Street Bank and Trust Company as Trustee dated as of March 22, 1999, including the form of Debenture. | ||
4 | .3(4) | Form of Debenture (included in Exhibit 4.2). | ||
4 | .3(4) | Registration Rights Agreement by and between the Company and Credit Suisse First Boston Corporation dated as of March 22, 1999. | ||
10 | .1(2)* | 1989 Stock Option Plan | ||
10 | .2(10)* | Third Amended and Restated 1995 Stock Plan | ||
10 | .3(10)* | Second Amended and Restated 1995 Non-Employee Director Stock Option Plan | ||
10 | .4* | Third Amended and Restated 1995 Employee Stock Purchase Plan | ||
10 | .5(5)* | Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan | ||
10 | .6(2) | Microsoft Corporation Source Code Agreement between the Company and Microsoft Corporation (“Microsoft”) dated November 15, 1989 | ||
10 | .7(2) | Amendment No. 1 to the Source Code Agreement between the Company and Microsoft dated October 1, 1992 | ||
10 | .8(2) | License Agreement for Microsoft OS/2 Version Releases 1.x, 2.x between the Company and Microsoft dated August 15, 1990 | ||
10 | .9(2) | Amendment No. 1 to the License Agreement between the Company and Microsoft dated August 15, 1990, Contract No. 5198-0228 dated May 6, 1991 | ||
10 | .10(2) | Amendment No. 2 to License Agreement between the Company and Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x, dated October 1, 1992 | ||
10 | .11(2) | Amendment No. 3 to the License Agreement between the Company and Microsoft dated August 15, 1990, Contract No. 5198-0228 dated January 1, 1994 | ||
10 | .12(2) | Amendment No. 4 to the License Agreement between the Company and Microsoft dated August 15, 1990, dated January 31, 1995 | ||
10 | .13(2) | Strategic Alliance Agreement between the Company and Microsoft dated December 12, 1991 | ||
10 | .14(2) | Form of Indemnification Agreement | ||
10 | .15(6) | License, Development and Marketing Agreement dated July 9, 1996 between the Company and Microsoft Corporation | ||
10 | .16(7) | License, Development and Marketing Agreement dated May 9, 1997 between the Company and Microsoft Corporation | ||
10 | .17(8) | Amendment No. 1 to License, Development and Marketing Agreement dated May 9, 1997 between The Company and Microsoft Corporation | ||
10 | .18(10) | Employment Agreement dated as of August 1, 2001 by and between the Company and Roger W. Roberts | ||
10 | .19(10) | Amendment to Employment Agreement with Roger W. Roberts as of January 17, 2002 | ||
10 | .20(11) | Microsoft Master Source Code Agreement by and between the Company and Microsoft, dated May 15, 2002 |
Exhibit | ||||
No. | Description | |||
10 | .21(11) | License Form by and between the Company and Microsoft Corporation, dated May 15, 2002 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) | ||
10 | .22(11) | Participation Agreement dated as of April 23, 2002, by and among Citrix Systems, Inc., Citrix Capital Corp., Selco Service Corporation and Key Corporate Capital, Inc. (the “Participation Agreement”) (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) | ||
10 | .23(11) | Amendment No. 1 to Participation Agreement dated as of June 17, 2002 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) | ||
10 | .24(11) | Master Lease dated as of April 23, 2002 by and between Citrix Systems, Inc. and Selco Service Corporation (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) | ||
10 | .25 | Amendment to Employment Agreement with Roger W. Roberts as of July 31, 2002 | ||
21 | .1 | List of Subsidiaries | ||
23 | .1 | Consent of Ernst & Young LLP | ||
24 | .1 | Power of Attorney (Included in signature page) | ||
99 | .1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
99 | .2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit No. | | No. Description |
2.1(6) | ||
2.2(10) | Agreement and Plan of Merger dated as of December 18, 2003 by and among Citrix Systems, Inc., EAC Acquisition Corporation, Expertcity.com, Inc., Edward G. Sim and Andreas von Blottnitz | |
2.3 | Agreement and Plan of Merger dated as of November 21, 2004 by and among Citrix Systems, Inc., Hal Acquisition Corporation, Net6, Inc., and Tim Guleri | |
3.1(1) | Amended and Restated Certificate of Incorporation of the | |
3.2(12) | Amended and Restated By-laws of the Company | |
3.3(2) | Certificate of Amendment of Amended and Restated Certificate of Incorporation | |
4.1(1) | Specimen certificate representing the Common Stock | |
10.1(11)* | Fourth Amended and Restated 1995 Stock Plan | |
10.2(14)* | Second Amended and Restated 1995 Non-Employee Director Stock Option Plan | |
10.3(8)* | Third Amended and Restated 1995 Employee Stock Purchase Plan | |
10.4(9)* | Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan | |
10.5(13)* | 2000 Director and Officer Stock Option and Incentive Plan, Non-Qualified Stock Option Agreement | |
10.6(13)* | 2000 Director and Officer Stock Option and Incentive Plan, Incentive Stock Option Agreement | |
10.7* | Amended and Restated 2000 Stock Incentive Plan of Net6 Inc. (a subsidiary of Citrix Systems, Inc.) | |
10.8* | Amended and Restated 2003 Stock Incentive Plan of Net6 Inc. (a subsidiary of Citrix Systems, Inc.) | |
10.9(4) | License, Development and Marketing Agreement dated May 9, 1997 between the Company and Microsoft Corporation | |
10.10(5) | Amendment No. 1 to License, Development and Marketing Agreement dated May 9, 1997 between the Company and Microsoft Corporation | |
10.11 | Microsoft Master Source Code Agreement by and between the Company and Microsoft dated December 16, 2004 | |
10.12 | License Form by and between the Company and Microsoft Corporation dated December 16, 2004 (with certain information omitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission) | |
10.13(7) | Participation Agreement dated as of April 23, 2002, by and among Citrix Systems, Inc., Citrix Capital Corp., Selco Service Corporation and Key Corporate Capital, Inc. (the “Participation Agreement”) (with certain information omitted pursuant to a grant of confidential treatment and filed separately with the Securities and Exchange Commission) | |
10.14(7) | Amendment No. 1 to Participation Agreement dated as of June 17, 2002 (with certain information omitted pursuant to a grant of confidential treatment and filed separately with the Securities and Exchange Commission) |
10.15(7) | Master Lease dated as of April 23, 2002 by and between Citrix Systems, Inc. and Selco Service Corporation (with certain information omitted pursuant to a grant of confidential treatment and filed separately with the Securities and Exchange Commission) | |
10.16(15)* | 2005 Executive Bonus Plan | |
21.1 | List of Subsidiaries | |
23.1 | Consent of Ernst & Young LLP | |
24.1 | Power of Attorney (Included in signature page) | |
31.1 | Rule 13a-14(a) / 15d-14(a) Certifications | |
31.2 | Rule 13a-14(a) / 15d-14(a) Certifications | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* Indicates a management contract or any compensatory plan, contract or arrangement.
(1) | Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 33-98542), as amended. |
Incorporated herein by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. |
Incorporated herein by reference to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. |
Incorporated herein by reference to Exhibit 10 of the Company’s Current Report on Form 8-K dated as of May 9, 1997. |
Incorporated herein by reference to Exhibit 10 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. |
Incorporated by reference herein to Exhibit 2 of the Company’s Schedule 13D Report dated as of March 28, 2001. |
Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. |
(8) | Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. |
(9) | Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. |
(10) | Incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K dated as of December 30, 2003. |
(11) | Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. |
(12) | Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004. |
(13) | Incorporated by reference herein to exhibits of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004. |
(14) | Incorporated by reference herein to exhibits of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. |
(15) | Incorporated herein by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K dated as of February 10, 2005. |