UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,Washington, D.C. 20549

 


FORMForm 10-Q

 


(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 20052006

or

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            .

Commission File Number 0-27084

 


CITRIX SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware 75-2275152

(State or other jurisdiction of

incorporation or organization)

 

(IRS 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

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

x  Large accelerated filer    ¨  Accelerated filer    ¨  Non-accelerated filer

Indicate by check mark whether the registrant is an accelerated filera shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  x    No  ¨

    No  x

As of August 2, 20054, 2006 there were 170,383,914183,806,732 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.

 



CITRIX SYSTEMS, INC.

Form 10-Q

For the Quarterly Period Ended June 30, 20052006

CONTENTS

 

     

Page

Number


PART I:

FINANCIAL INFORMATION

  
Item 1.Condensed Consolidated Financial Statements
      Item 1.

Condensed Consolidated Financial Statements

 

Condensed Consolidated Balance Sheets:
June 30, 20052006 (Unaudited) and December 31, 20042005

  3
 

Condensed Consolidated Statements of Income:
Three Months and Six Months ended June 30, 20052006 and 20042005 (Unaudited)

  4
 

Condensed Consolidated Statements of Cash Flows:
Six Months ended June 30, 20052006 and 20042005 (Unaudited)

  5
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

  6
Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  1823
Item 3. 

Quantitative & Qualitative Disclosures about Market Risk

  4137
Item 4. 

Controls and Procedures

  41
PART II:OTHER INFORMATION37
Item 1.PART II: 

Legal ProceedingsOTHER INFORMATION

  42
      Item 1.

Legal Proceedings

38
      Item 1A.

Risk Factors

38
Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

  4248
Item 4. 

Submission of Matters to a Vote of Security Holders

  4248
Item 5. 

Other Information

  4349
Item 6. 

Exhibits

  4349
Signature  4450

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Citrix Systems, Inc.CITRIX SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

Condensed Consolidated Balance Sheets

   

June 30,

2005


  

December 31,

2004


 
   (unaudited)    
   (In thousands, except par value) 

Assets

         

Current assets:

         

Cash and cash equivalents

  $207,673  $73,485 

Short-term investments

   183,278   159,656 

Accounts receivable, net of allowances of $3,091 and $4,916 at June 30, 2005 and December 31, 2004, respectively

   98,861   108,399 

Prepaid expenses and other current assets

   33,881   41,159 

Current portion of deferred tax assets

   41,762   43,881 
   


 


Total current assets

   565,455   426,580 

Restricted cash equivalents and investments

   145,639   149,051 

Long-term investments

   148,265   183,974 

Property and equipment, net

   69,389   69,281 

Goodwill, net

   361,783   361,452 

Other intangible assets, net

   77,370   87,172 

Other assets

   9,882   8,574 

Deferred tax assets, long term

   5,952   —   
   


 


   $1,383,735  $1,286,084 
   


 


Liabilities and Stockholders’ Equity

         

Current liabilities:

         

Accounts payable

  $17,389  $17,554 

Accrued expenses

   110,636   111,535 

Income taxes payable

   22,095   2,198 

Current portion of deferred revenues

   227,690   210,872 
   


 


Total current liabilities

   377,810   342,159 

Long-term portion of deferred revenues

   14,981   14,271 

Other liabilities

   1,677   4,749 

Commitments and contingencies

         

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; 215,848 and 212,991 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively

   216   213 

Additional paid-in capital

   950,498   872,659 

Deferred compensation

   (840)  (1,063)

Retained earnings

   844,732   778,286 

Accumulated other comprehensive income(loss)

   (2,899)  7,489 
   


 


    1,791,707   1,657,584 

Less— common stock in treasury, at cost (45,690 and 42,608 shares at June 30, 2005 and December 31, 2004, respectively)

   (802,440)  (732,679)
   


 


Total stockholders’ equity

   989,267   924,905 
   


 


   $1,383,735  $1,286,084 
   


 


   

June 30,

2006

  

December 31,

2005

 
   (unaudited)    
   (In thousands, except par value) 
Assets   

Current assets:

   

Cash and cash equivalents

  $344,589  $484,035 

Short-term investments

   276,244   18,900 

Accounts receivable, net of allowances of $4,316 and $4,382 at June 30, 2006 and December 31, 2005, respectively

   136,175   142,015 

Inventories, net

   4,817   3,933 

Prepaid expenses and other current assets

   54,275   31,164 

Current portion of deferred tax assets

   46,631   46,410 
         

Total current assets

   862,731   726,457 

Restricted cash equivalents and investments

   63,779   63,728 

Long-term investments

   214,892   51,286 

Property and equipment, net

   81,314   73,727 

Goodwill, net

   598,892   591,994 

Other intangible assets, net

   128,167   137,333 

Long-term portion of deferred tax assets, net

   33,248   29,158 

Other assets

   8,910   7,973 
         
  $1,991,933  $1,681,656 
         
Liabilities and Stockholders’ Equity   

Current liabilities:

   

Accounts payable

  $38,252  $33,495 

Accrued expenses

   122,111   125,029 

Income taxes payable

   —     1,329 

Current portion of deferred revenues

   290,097   266,223 
         

Total current liabilities

   450,460   426,076 

Long-term portion of deferred revenues

   20,628   19,803 

Long-term debt

   —     31,000 

Other liabilities

   1,379   1,297 

Commitments and contingencies

   

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; 236,226 and 226,573 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively

   236   226 

Additional paid-in capital

   1,448,662   1,189,460 

Deferred compensation

   —     (18,873)

Retained earnings

   1,035,755   944,626 

Accumulated other comprehensive income (loss)

   2,312   (4,463)
         
   2,486,965   2,110,976 

Less— common stock in treasury, at cost (51,914 and 49,965 shares at June 30, 2006 and December 31, 2005, respectively)

   (967,499)  (907,496)
         

Total stockholders’ equity

   1,519,466   1,203,480 
         
  $1,991,933  $1,681,656 
         

See accompanying notes.

Citrix Systems, Inc.CITRIX SYSTEMS, INC.

Condensed Consolidated Statements of IncomeCONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

   Three Months Ended June 30,

  Six Months Ended June 30,

 
   2005

  2004

  2005

  2004

 
   (In thousands, except per share information) 

Revenues:

                 

Product licenses

  $91,980  $87,716  $182,042  $175,142 

License updates

   80,455   66,981   157,630   125,878 

Services

   38,794   23,605   73,447   38,592 
   


 


 


 


Total net revenues

   211,229   178,302   413,119   339,612 
   


 


 


 


Cost of revenues:

                 

Cost of product license revenues

   2,277   756   3,645   2,169 

Cost of services revenues

   5,395   4,169   9,910   6,992 

Amortization of core and product technology

   3,693   3,598   7,011   6,632 
   


 


 


 


Total cost of revenues

   11,365   8,523   20,566   15,793 
   


 


 


 


Gross margin

   199,864   169,779   392,553   323,819 
   


 


 


 


Operating expenses:

                 

Research and development

   26,402   22,173   51,467   41,211 

Sales, marketing and support

   92,035   80,804   186,429   154,932 

General and administrative

   30,150   27,837   57,561   52,588 

Amortization of other intangible assets

   2,214   1,873   4,391   2,599 

In-process research and development

   —     —     —     18,700 
   


 


 


 


Total operating expenses

   150,801   132,687   299,848   270,030 
   


 


 


 


Income from operations

   49,063   37,092   92,705   53,789 

Interest income

   5,369   2,567   10,001   8,252 

Interest expense

   (16)  (8)  (24)  (4,352)

Write-off of deferred debt issuance costs

   —     —     —     (7,219)

Other (expense) income, net

   (370)  190   94   1,175 
   


 


 


 


Income before income taxes

   54,046   39,841   102,776   51,645 

Income taxes

   26,160   8,366   36,330   10,845 
   


 


 


 


Net income

  $27,886  $31,475  $66,446  $40,800 
   


 


 


 


Earnings share:

                 

Basic

  $0.16  $0.18  $0.39  $0.24 
   


 


 


 


Diluted

  $0.16  $0.18  $0.38  $0.23 
   


 


 


 


Weighted average shares outstanding:

                 

Basic

   169,698   170,327   169,930   168,392 
   


 


 


 


Diluted

   175,146   176,273   175,541   174,428 
   


 


 


 


   Three Months Ended June 30,  Six Months Ended June 30, 
   2006  2005  2006  2005 

Revenues:

     

Product licenses

  $117,799  $91,980  $231,984  $182,042 

License updates

   99,750   80,455   193,621   157,630 

Online services

   35,128   23,844   66,766   44,209 

Technical services

   22,791   14,950   43,095   29,238 
                 

Total net revenues

   275,468   211,229   535,466   413,119 
                 

Cost of revenues:

     

Cost of license revenues

   8,116   2,277   14,747   3,645 

Cost of services revenues

   11,421   5,395   21,811   9,910 

Amortization of core and product technology

   4,585   3,693   9,586   7,011 
                 

Total cost of revenues

   24,122   11,365   46,144   20,566 
                 

Gross margin

   251,346   199,864   489,322   392,553 
                 

Operating expenses:

     

Research and development

   38,222   26,402   71,882   51,467 

Sales, marketing and support

   117,002   92,035   225,939   186,429 

General and administrative

   40,796   30,150   79,414   57,561 

Amortization of other intangible assets

   4,150   2,214   8,182   4,391 
                 

Total operating expenses

   200,170   150,801   385,417   299,848 
                 

Income from operations

   51,176   49,063   103,905   92,705 

Interest income

   10,302   5,369   17,904   10,001 

Interest expense

   (73)  (16)  (511)  (24)

Other income (expense), net

   111   (370)  (597)  94 
                 

Income before income taxes

   61,516   54,046   120,701   102,776 

Income taxes

   15,066   26,160   29,572   36,330 
                 

Net income

  $46,450  $27,886  $91,129  $66,446 
                 

Earnings per share:

     

Basic

  $0.25  $0.16  $0.50  $0.39 
                 

Diluted

  $0.24  $0.16  $0.48  $0.38 
                 

Weighted average shares outstanding:

     

Basic

   183,023   169,698   180,609   169,930 
                 

Diluted

   191,500   175,146   188,762   175,541 
                 

See accompanying notes.

Citrix Systems, Inc.CITRIX SYSTEMS, INC.

Condensed Consolidated Statements of Cash FlowsCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Six Months Ended

June 30,


 
   2005

  2004

 
   (In thousands) 

OPERATING ACTIVITIES

         

Net income

  $66,446  $40,800 

Adjustments to reconcile net income to net cash provided by operating activities:

         

Amortization of intangible assets

   11,402   9,231 

Depreciation and amortization of property and equipment

   10,228   10,142 

Amortization of deferred stock-based compensation

   197   —   

Write-off of deferred debt issuance costs

   —     7,219 

In-process research and development

   —     18,700 

(Recovery of) provision for doubtful accounts

   (107)  995 

Provision for product returns

   2,614   2,425 

Provision for inventory reserves

   27   312 

Tax benefit related to the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options

   13,868   12,103 

Accretion of original issue discount and amortization of financing cost

   —     4,318 

Other non-cash items

   131   (309)
   


 


Total adjustments to reconcile net income to net cash provided by operating activities

   38,360   65,136 

Changes in operating assets and liabilities, net of the effects of acquisition:

         

Accounts receivable

   7,031   420 

Prepaid expenses and other current assets

   (89)  11,195 

Other assets

   (162)  (394)

Deferred tax assets, net

   (3,471)  (369)

Accounts payable

   (165)  (116)

Accrued expenses

   (3,946)  (11,289)

Income taxes payable

   19,897   (4,899)

Deferred revenues

   17,528   23,704 

Other liabilities

   (2,927)  (1,333)
   


 


Total changes in operating assets and liabilities, net of the effects of acquisition

   33,696   16,919 
   


 


Net cash provided by operating activities

   138,502   122,855 

INVESTING ACTIVITIES

         

Purchases of available-for-sale investments

   (158,741)  (96,285)

Proceeds from sales of available-for-sale investments

   106,128   153,090 

Proceeds from maturities of available-for-sale investments

   65,604   43,090 

Proceeds from maturities of held-to-maturity investments

   —     195,350 

Purchases of property and equipment

   (12,040)  (11,736)

Cash paid for licensing agreements and core technology

   —     (12,942)

Cash paid for acquisition, net of cash acquired

   —     (90,750)
   


 


Net cash provided by investing activities

   951   179,817 

FINANCING ACTIVITIES

         

Proceeds from issuance of common stock

   36,316   19,876 

Cash paid under stock repurchase programs

   (41,581)  (43,174)

Cash paid to repurchase convertible subordinated debentures

   —     (355,659)
   


 


Net cash used in financing activities

   (5,265)  (378,957)
   


 


Change in cash and cash equivalents

   134,188   (76,285)

Cash and cash equivalents at beginning of period

   73,485   182,969 
   


 


Cash and cash equivalents at end of period

  $207,673  $106,684 
   


 


Supplemental non-cash investing activity:

         

Decrease in restricted cash equivalents and investments

  $(3,412) $(3,308)
   


 


   Six Months Ended June 30, 
   2006  2005 
   (In thousands) 

Operating Activities

   

Net income

  $91,129  $66,446 

Adjustments to reconcile net income to net cash provided by operating activities:

   

Amortization of intangible assets

   17,768   11,402 

Depreciation and amortization of property and equipment

   12,657   10,228 

Stock-based compensation expense

   25,631   197 

Provision for (recovery of) doubtful accounts

   1,012   (107)

Provision for product returns

   2,162   2,614 

Provision for inventory reserves

   857   27 

Tax effect of stock-based compensation

   34,632   13,868 

Excess tax benefit from exercise of stock options

   (34,634)  —   

Other non-cash items

   164   131 
         

Total adjustments to reconcile net income to net cash provided by operating activities

   60,249   38,360 

Changes in operating assets and liabilities, net of the effects of acquisition:

   

Accounts receivable

   3,578   7,031 

Inventories

   (1,742)  (6)

Prepaid expenses and other current assets

   (19,598)  (83)

Other assets

   (938)  (162)

Deferred tax assets, net

   (2,432)  (3,471)

Accounts payable

   4,178   (165)

Accrued expenses

   (2,060)  (3,946)

Income taxes payable

   (1,330)  19,897 

Deferred revenues

   24,374   17,528 

Other liabilities

   57   (2,927)
         

Total changes in operating assets and liabilities, net of the effects of acquisition

   4,087   33,696 
         

Net cash provided by operating activities

   155,465   138,502 

Investing Activities

   

Purchases of available-for-sale investments

   (458,215)  (158,741)

Proceeds from sales of available-for-sale investments

   7,321   106,128 

Proceeds from maturities of available-for-sale investments

   28,992   65,604 

Purchases of property and equipment

   (21,417)  (12,040)

Cash paid for acquisition, net of cash acquired

   (13,448)  —   
         

Net cash (used in) provided by investing activities

   (456,767)  951 

Financing Activities

   

Proceeds from issuance of common stock

   196,526   36,316 

Excess tax benefit from exercise of stock options

   34,634   —   

Cash paid under stock repurchase programs

   (38,304)  (41,581)

Payments on term loan

   (31,000)  —   
         

Net cash provided by (used in) financing activities

   161,856   (5,265)
         

Change in cash and cash equivalents

   (139,446)  134,188 

Cash and cash equivalents at beginning of period

   484,035   73,485 
         

Cash and cash equivalents at end of period

  $344,589  $207,673 
         

Supplemental non-cash investing activity:

   

Increase (decrease) in restricted cash equivalents and investments

  $51  $(3,412)
         

See accompanying notes.

Citrix Systems, Inc.CITRIX SYSTEMS, INC.

Notes to Condensed Consolidated Financial StatementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 20052006

 

1. Basis of PresentationBASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period.period partially because of the seasonality of the Company’s business. Historically, the Company’s fourth quarter revenue in any year is typically higher than the first quarter of the subsequent year. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Citrix Systems, Inc. (the “Company”) Form 10-K for the year ended December 31, 2004.2005.

The Company previously reclassified approximately $55.3 million of investments in auction rate securities that were originally classified as cash equivalents to short-term investments as of June 30, 2004 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 95,Statement of Cash Flows. The condensed consolidated balance sheet as of June 30, 2004 and the condensed consolidated statement of cash flows for the six months ended June 30, 2004 were adjusted to reflect the impact of the reclassification. In addition, certain otherCertain reclassifications have been made for consistent presentation.

2. Significant Accounting PoliciesSIGNIFICANT ACCOUNTING POLICIES

Use of 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 condensed consolidated financial statements and accompanying notes. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial positionstatements and results of operations taken as a whole,accompanying notes, the actual amount of such estimates, when known, will vary from these estimates.

Investments

Short-termShort and long-term investments at June 30, 2006 and December 31, 2005 primarily consist of corporate securities, government securities commercial paper and municipal securities and long-term investments primarily consist of corporate securities and government 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.. In accordance with SFASStatement of Financial Accounting Standards (“SFAS”) No. 95,Statement of Cash Flows, the Company classifies available-for-sale securities, including its investments in auction rate securities that are available to meet the Company’s current operational needs, as short-term. Investments classified as held-to-maturity are stated at amortized cost. The Company does not recognize changes in the fair value of held-to-maturityits investments in income unless a decline in value is considered other-than-temporary.

other-than-temporary in accordance with the Financial Accounting Standards Board (the “FASB”) Staff Position 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.

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 issuer other than certain government securities, depending on credit quality. Periodic evaluations of the relative credit standing of those issuers are considered in the Company’s investment strategy. The Company uses information provided by third parties 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.

Inventory

Inventories are consistently stated at the lower of cost or market on a first-in, first-out basis and primarily consist of finished goods. When necessary, a provision has been made to reduce obsolete or excess inventories to market.

Revenue Recognition

The Company markets and licenses products and appliances primarily through multiple channels such as value-added resellers, channel distributors, system integrators, independent software vendors, its websites and otheroriginal equipment manufacturers. The Company’s product licenses are generally perpetual. The Company also separately sells primarily directly to end-users, license updates and services, which may include product training, technical support and consulting services, as well as Web-based desktop accessonline services.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

The Company’s packagedsoftware products are typically purchased by medium and small-sized businesses, with a minimal number of locations. In these cases, the product license is delivered with the packaged product. Electronic license arrangements are usedlocations, and larger business enterprises with more complex multiserver environments typically found in larger business enterprises that deploy

Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005

the Company’s software products on a departmentdepartmental or enterprise-wide basis, which could require differences in product features and functionality at various customer locations.basis. Once the Company receives a product license agreement and purchase order, “software activation keys” that enable the feature configuration ordered by the end-user are delivered. Products may be delivered indirectly by a channel distributor, or otheroriginal equipment manufacturers via download from the Company’s website or directly to the end-user by the Company.

Company via packaged product or download from the Company’s website. The Company’s appliance products are integrated with software that is essential to the functionality of the equipment. The Company provides unspecified software upgrades and enhancements related to the appliances through its maintenance contracts. Accordingly, for these appliances, the Company accounts for revenue in accordance with SOP No. 97-2, “Software Revenue Recognition, (as amended by SOP 98-4 and SOP 98-9)” and all related interpretations, as described in detail below.

Revenue is recognized when it is earned. The Company’s revenue recognition policies are in compliance with Statement of Position (“SOP”)SOP 97-2Software Revenue Recognition (as amended by SOP 98-4 and SOP 98-9) and related amendments and interpretations. In addition, the Company’s Web-based desktop accessonline 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:

 

Persuasive evidence of the arrangement exists. The Company recognizes revenue on packaged productproducts and appliances upon shipment to distributors and resellers. For packaged product and appliance sales, it is the Company’s customary practice to require a purchase order from distributors and resellers who have previously negotiated a master packaged product distribution or resale agreement. For electronic and paper license arrangements, the Company typically requires a purchase order from the distributor, reseller or end-user (depending on the arrangement) and an executed product license agreement from the end-user. For technical support, product training and consulting services, the Company requires a purchase order and an executed agreement. For Web-based desktop accessonline services, the Company requires the customer or the reseller to electronically accept the terms of an online services agreement or execute a contract and generally submit a purchase order.

 

Delivery has occurred and the Company has no remaining obligations. For product license and appliance sales, the Company’s standard delivery method is free-on-board shipping point. Consequently, it considers delivery of packaged productproducts and appliances to have occurred when the products are shipped pursuant to an agreement and purchase order. The Company considers delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end-user has been electronically provided the software activation keys that allow the end-user to take immediate possession of the product. For product training and consulting services, the Company fulfills its obligation when the services are performed. For license updates, technical support and Web-based desktop accessonline services, the Company assumes that its obligation is satisfied ratably over the respective terms of the agreements, which are typically 12 to 24 months.

 

The fee is fixed or determinable. In the normal course of business, the Company does not provide customers the right to a refund of any portion of their license fees or extended payment terms. The Company sells license updates and services, which includes technical support, product training and consulting services, and Web-based desktop accessonline services separately and it determines vendor specific objective evidence (“VSOE”) of fair value by the price charged for each product when sold separately or applicable renewal rates.

 

Collectibility is probable. The Company determines collectibility on a customer-by-customer basis and generally does not require collateral. The Company typically sells product licenses and license updates to distributors or resellers for whom there are histories of successful collection. New customers are subject to a credit review process that evaluates their financial position and ultimately their ability to pay. Customers are also subject to an ongoing credit review process. If the Company determines from the outset of an arrangement that collectibility is not probable, revenue recognition is deferred until customer payment is received and the other parameters of revenue recognition described above have been achieved. Management’s judgment is required in assessing the probability of collection, which is generally based on evaluation of customer specific information, historical experience and economic market conditions.

Net revenues include the following categories: Product Licenses, License Updates, Online Services and Technical Services. Product Licenses primarily represent fees related to the licensing of the Company’s products and appliances.products. These revenues are reflected net of sales allowances and provisions for stock balancing return rights. Product License Updates consist of fees related to the Subscription Advantage program (the Company’s terminology for post contract support) that are recognized ratably over the

Citrix Systems, Inc.CITRIX SYSTEMS, INC.

Notes to Condensed Consolidated Financial StatementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 20052006

 

the Subscription Advantage program that are recognized ratably over the term of the contract, which is typically 12-24 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. Online Services revenues consist primarily of fees related to online service agreements and are recognized ratably over the contract term. Technical Services revenues are comprised of fees from technical support services and Web-based desktop access services revenuewhich are recognized ratably over the contract term revenueas well as revenues from product training and certification, and consulting services revenue related to implementation of the Company’s products, which is recognized as the services are provided.

The Company licenses most its products bundled with an initial subscription for 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 subscriptions for license updates, when not bundled with the initial product release or purchase, technical support, product training or consulting services. The Company allocates revenue to 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 of any discounts inherent in the arrangement, is allocated to the delivered product using the residual method and recognized at the outset of the arrangement as the product 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 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 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 revenue upon shipment to distributors is predicated on its ability to reliably estimate future stock balancing returns. If actual experience or changes in market condition impairs the Company’s ability to estimate returns, it would be required to defer the recognition of revenue until the delivery of the product to the end-user. Allowances for estimated product returns amounted to approximately $1.3$1.9 million and $2.3 million at June 30, 20052006 and December 31, 2004,2005, respectively. The Company has not reduced and has no current plans to reduce its prices for inventory currently held by distributors or resellers.distributors. Accordingly, there were no reserves required for price protection at June 30, 20052006 and December 31, 2004.2005. 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, which could result in an incremental reduction to revenue at the time the incentive is offered.

Accounting for Stock-Based Compensation

The Company’s stock-based compensation program is a broad based, long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interest. Atinterests. As of June 30, 2005,2006, the Company had eighttwo stock-based employee compensation plans including two plans assumedunder which it was granting stock options, shares of non-vested stock and non-vested stock units. The Company is currently granting stock-based awards from the Net6, Inc., “Net6” acquisition and two plans approved by the Company’s stockholders at the Company’s Annual Meeting of Stockholders on May 5, 2005, namely, theits 2005 Equity Incentive Plan ( as amended, the “2005 Plan”) and 2005 Employee Stock Purchase Plan (collectively,(the “2005 ESPP”). Upon the “2005 Plans”).acquisition of Reflectent Software, Inc., the Company assumed the Reflectent Software, Inc. 2003 Stock Plan and the Reflectent Software, Inc. Restricted Stock Unit Plan. The Company’s Board of Directors has provided that no new awards will be granted under the Company’s acquired stock plans. The Company’s superseded and expired stock plans include the Amended and Restated 1995 Stock Option Plan, the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan, theSecond Amended and Restated 1995 Non-Employee Director Stock Option Plan and the Third Amended and Restated 1995 Employee Stock Purchase Plan although awards(the “1995 ESPP”). Awards previously granted under these plans and still outstanding, however, typically expire ten years from the date of grant and will continue to be subject to all the terms and conditions of such plans, as applicable. The number and frequency of stock option grants made under these stock-based compensation plans are based on competitive practices, operating results ofDuring the Company, the number of options available for grant under the Company’s stockholder approved plans, and other factors. All employees are eligible to participate in the Company’s stock-based program.second

Citrix Systems, Inc.CITRIX SYSTEMS, INC.

Notes to Condensed Consolidated Financial StatementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 20052006

 

SFAS No. 123,Accountingquarter of 2006, the Company began awarding non-vested stock units with performance measures to certain key executives as part of its overall compensation program. In addition, during the second quarter of 2006, the Company also began awarding its non-employee directors non-vested stock units with service based vesting.

The 2005 Plan was originally adopted by the Board of Directors in March 2005 and approved by the Company’s stockholders in May 2005. Under the terms of the 2005 Plan, the Company is authorized to grant incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), non-vested stock, non-vested stock units, stock appreciation rights (“SARs”), performance units and to make stock-based awards to full and part-time employees of the Company and its subsidiaries or affiliates, where legally eligible to participate, as well as consultants and non-employee directors of the Company. The 2005 Plan provides for Stock-Basedthe issuance of a maximum of 15,500,000 shares of common stock of which 5,400,000 was authorized by the Company’s Board of Directors in February 2006 and the Company’s stockholders in May 2006. Under the 2005 Plan, ISOs must be granted at exercise prices no less than fair market value on 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 must be no less than 110% of the market value at the date of grant. NSOs and SARs must be granted at no less than market value on the date of grant, or in the case of SARs in tandem with options, at the exercise price of the related option. Non-vested stock awards may be granted for such consideration in cash, other property or services, or a combination thereof, as determined by the Compensation, as amended by SFAS No. 148,Accounting for Stock-Based Compensation—Transition Committee of the Board of Directors of the Company. All stock-based awards are exercisable upon vesting. Typically, under the 2005 Plan, the Company grants five year options that vest over three years at a rate of 33.3% of the shares underlying the option one year from date of grant and Disclosure, definesat a fair value methodrate of accounting2.78% monthly thereafter. As of June 30, 2006, there were 37,151,022 shares of common stock reserved for issuance pursuant to the Company’s stock-based compensation plans and the Company had authorization under its 2005 Plan to grant 10,440,100 additional stock-based awards at June 30, 2006.

As part of the Company’s acquisition of NetScaler, Inc., and Teros, Inc. in 2005, it assumed 25,179 shares of non-vested stock optionsheld by certain employees of the acquired companies. The non-vested stock assumed vests monthly based on service through October 2007 dependent upon the remaining vesting period at the time of the acquisition. As part of an overall retention program, the Company also assumed $2.8 million worth of non-vested stock units and other equity instruments. Undergranted 60,000 shares of non-vested stock to certain employees retained from the fair value method, compensation cost is measured atacquisitions of NetScaler, Inc., and Teros, Inc. Of the non-vested stock granted, 45,000 shares vest 50% on the first anniversary of the grant date and 50% on the second anniversary of the grant date, the remaining 15,000 non-vested shares granted, vest 50% on the first anniversary of the grant date and 50% eighteen months from the grant date. The non-vested stock units vest 33.33% six, twelve and eighteen months from the date of grant; however, if certain performance criteria are met, 33.33% of the non-vested stock units will vest in fourteen months instead of eighteen months. In accordance with the provisions of SFAS No. 123R, the Company will accelerate the expense recognition of these non-vested stock units when and if it is determined that it is probable the performance criteria will be achieved at the earlier date. The number of shares that will be issued on each vesting date is dependent upon the Company’s stock price over the five consecutive trading days prior to the vesting date; provided, however that the number of shares issued pursuant to the non-vested stock units will not exceed 280,000 shares. The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight line basis over the requisite service period for the entire award.

As part of the acquisition of Reflectent Software, Inc., the Company assumed 3,468 non-vested stock units which vest, based on service, 33.33% at each anniversary of the grant date. The Company will issue up to 8,309 shares of its common stock related to these non-vested stock units. The Company also assumed 40,835 options to purchase shares of the Company’s common stock with a five year life that 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 fair value of these options was estimated using the awardsame option valuation model and is recognized overinputs used for options granted under the service2005 Plan.

The 2005 ESPP was originally adopted by the Board in March 2005 and approved by the Company’s stockholders in May 2005. The 2005 ESPP replaced the Company’s 1995 ESPP under which no more shares may be granted. Under the 2005 ESPP, all full-time and certain part-time employees of the Company are eligible to receive options to purchase common stock of the Company twice per year at the end of a six month payment period which is usually(a “Payment Period”). During each Payment Period, eligible employees who so elect may authorize payroll deductions in an amount no less than 1% nor greater than 10% of his or her base pay for each payroll period in the vesting period. PursuantPayment Period. At the end of each Payment Period, the accumulated deductions are used to purchase shares of common stock from the Company up to a maximum of 12,000 shares for any one employee during a Payment Period. Shares are purchased at a price equal to 85% of the fair market value of the Company’s

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

common stock on the last business day of a Payment Period. Employees who, after exercising their rights to purchase shares of common stock under the 2005 ESPP, would own shares of 5% or more of the voting power of the Company’s common stock, are ineligible to participate under the 2005 ESPP. The 2005 ESPP provides for the issuance of a maximum of 10,000,000 shares of common stock. As of June 30, 2006, 150,743 shares had been issued under the 2005 ESPP.

Adoption of SFAS No. 123, companies are not required123R and Transition

Prior to adoptJanuary 1, 2006, the fair value methodCompany accounted for its stock-based compensation plans under the recognition and measurement provisions of accounting for employee stock-based transactions. Companies are permitted to account for such transactions by applying the intrinsic value method of accounting 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 amountsrelated Interpretations, as if a company had applied the fair value method prescribedpermitted by SFAS No. 123.123,Accounting for Stock-Based Compensation. The Company applies APB Opinion No. 25 anddid not recognize compensation cost related interpretations in accounting for its plans andto stock options granted to its 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. 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 market traded options and not as a tool to value stock options granted to employees.

No stock-based employee compensation cost is reflected in net income, except for amounts related to the 51,546 shares issuable under options assumed as part of the acquisition of Net6, which were accounted for in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25).Substantially all options granted under the Company’s eight stock-based compensation plans, including two plans assumed from Net 6 havehad an exercise price equal to or above the market value of the underlying common stock on the date of grant. Hadgrant in its condensed consolidated statement of income prior to January 1, 2006. Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R,Share-Based Payment, and related interpretations using the modified-prospective transition method. Under that method, compensation cost recognized in the first quarter of 2006 includes (a) compensation cost for the grants issued at an exercise price equalall stock-based awards granted prior to, or above market value under the Company’s stock-based compensation plans had been determinedbut not yet vested as of January 1, 2006 based on the grant date fair value at the grant dates for grants under those plans consistentestimated in accordance with the fair value methodoriginal provisions of SFAS No. 123 and (b) compensation cost for all stock-based awards granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Results for prior periods have not been restated.

As a result of adopting SFAS No. 123R on January 1, 2006, the Company’s income before income taxes and net income for the three months ended June 30, 2006, are $10.7 million and $9.5 million lower, respectively, and for the six months ended June 30, 2006 $19.4 million and $16.0 million lower, respectively, than if the Company had continued to account for stock-based compensation under APB Opinion No. 25. The Company’s basic and diluted earnings per share for the three months ended June 30, 2006 is $0.06 and $0.05 lower, respectively, and for the six months ended June 30, 2006 is $0.09 lower for both basic and diluted earnings per share, than if the Company had continued to account for stock-based compensation under APB Opinion No. 25.

Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits from deductions resulting from the exercise of stock options as operating cash flows in its statement of cash flows. SFAS No. 123R requires that the portion of benefits resulting from tax deductions in excess of recognized compensation (the “excess tax benefits”) be presented as financing cash flows. The excess tax benefits were approximately $34.6 million for the six months ended June 30, 2006 and would have remained unchanged; however,been presented as an operating cash inflow prior to the adoption SFAS No. 123R. In addition, the Company previously presented deferred compensation as a separate component of stockholders’ equity. Upon adoption, of SFAS No. 123R, the Company reclassified the balance in deferred compensation to additional paid-in capital on its accompanying condensed consolidated balance sheet.

In November 2005, the FASB issued FASB Staff Position FAS123(R)-3,Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards,(the “FSP”). This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123R or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123R using the modified prospective method may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS No. 123R or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. The Company is still evaluating whether it will adopt the alternative method for calculating its additional-paid-in-capital pool described in the FSP.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

Pro Forma Information Under SFAS No. 123 for Periods Prior to January 1, 2006

The following table illustrates the effect on net incomeearnings and earnings per share would have been reducedif the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based awards for the pro forma amounts indicated belowthree and six months ended June 30, 2005 (in thousands, except per share information):

 

   

Three Months Ended

June 30,


  

Six Months Ended

June 30,


 
   2005

  2004

  2005

  2004

 

Net income:

                 

As reported

  $27,886  $31,475  $66,446  $40,800 

Add: Total stock-based employee compensation included in net income as reported, net of related tax effects

   57   —     139   —   

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

   (6,343)  (11,743)  (16,357)  (27,002)
   


 


 


 


Pro forma

  $21,600  $19,732  $50,228  $13,798 
   


 


 


 


Basic earnings per share:

                 

As reported

  $0.16  $0.18  $0.39  $0.24 
   


 


 


 


Pro forma

  $0.13  $0.12  $0.30  $0.08 
   


 


 


 


Diluted earnings per share:

                 

As reported

  $0.16  $0.18  $0.38  $0.23 
   


 


 


 


Pro forma

  $0.12  $0.11  $0.29  $0.08 
   


 


 


 


Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005

   Three Months Ended
June 30, 2005
  Six Months Ended
June 30, 2005
 

Net income:

   

As reported

  $27,886  $66,446 

Add: Total stock-based employee compensation included in net income as reported, net of related tax effects

   57   139 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

   (6,343)  (16,357)
         

Pro forma

  $21,600  $50,228 
         

Basic earnings per share:

   

As reported

  $0.16  $0.39 
         

Pro forma

  $0.13  $0.30 
         

Diluted earnings per share:

   

As reported

  $0.16  $0.38 
         

Pro forma

  $0.12  $0.29 
         

For purposes of the pro forma calculations, the fair value of each option iswas estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no expected dividends, and the following assumptions:

 

  Stock options granted during the

 
  

Three Months ended

June 30,


 

Six Months ended

June 30,


 
  2005

 2004

 2005

 2004

   Three Months ended
June 30, 2005
  Six Months ended
June 30, 2005

Expected volatility factor

  0.35  0.49  0.35  0.42 – 0.49   0.35  0.35

Approximate risk free interest rate

  3.7% 3.5% 3.7%-3.8% 3.0% - 3.5%    3.7%  3.7%-3.8%

Expected lives (in years)

  3.32  4.76  3.32  4.75 – 4.76 

Expected term (in years)

  3.32  3.32

The Company estimated the expected volatility factor based upon implied and historical data. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the Company’s expected term. The expected term of the Company’s stock options was based on the historical exercise patterns considering changes in vesting periods and contractual terms. The weighted average fair value of stock-based awards granted during the three and six months ended June 30, 2005 was $6.71 and $6.78, respectively. The total intrinsic value of stock options exercised during the three and six months ended June 30, 2005 was $16.3 million and $22.9 million, respectively. Forfeitures were recognized as they occurred.

For purposes of the pro forma calculations, the fair value of each stock-based award related to the 1995 ESPP was estimated using the Black-Scholes option-pricing model, assuming no expected dividends, and the following assumptions:

Six Months ended
June 30, 2005

Expected volatility factor

0.33

Approximate risk free interest rate

  2.5%

Expected term

6
months

The Company estimated the expected volatility factor based on historical data. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining term equivalent to the Company’s expected term. The expected term for the 1995 ESPP is the six month Payment Period. There were no shares purchased under the 1995 ESPP during the three months ended June 30, 2005. The weighted average fair value of the shares purchased under the 1995 ESPP during the six months ended June 30, 2005 was $21.96.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

In December 2004, the Financial Accounting Standards Board issuedValuation and Expense Information under SFAS No. 123R Share-Based Payment.

The Company recorded stock-based compensation costs of $25.6 million and recognized a tax benefit related to stock-based compensation of $34.6 million in the six months ended June 30, 2006. As required by SFAS No. 123R, requires companies to expense the valueCompany estimates forfeitures of employee stock optionoptions and similar awards. SFAS No. 123Rrecognizes compensation cost only for those awards expected to vest. Forfeiture rates are determined based on historical experience. Estimated forfeitures are adjusted to actual forfeiture experience as needed.

Total stock-based compensation and related deferred tax asset recognized in the Company’s consolidated statement of income is effective as$14.1 million and $2.5 million, respectively, for the three months ended June 30, 2006 and $25.6 million and $4.0 million, respectively, for the six months ended June 30, 2006. The detail of the beginning of the fiscal year that begins after June 15, 2005 (i.e. January 1, 2006 for the Company). As of the effective date, the Company will be required to expense all awards granted, modified, cancelled or repurchasedtotal stock-based compensation recognized by income statement classification is 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 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 “modified retrospective” 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.follows (in thousands):

 

Income Statement Classifications

      Three Months Ended
June 30, 2006
  Six Months Ended
June 30, 2006

Cost of services revenues

  $387  $747

Research and development

   4,723   8,380

Sales, marketing and support

   5,871   10,646

General and administrative

   3,101   5,858
          

Total

  $14,082  $25,631
          

The Company currently expects to adopt SFAS No. 123R using the modified prospective method. The Company believes that the adoption of SFAS No. 123R’s fair value method will have a material adverse impact on the Company’s results of operations; however, currently, the impactIn connection with the adoption of SFAS No. 123R, will havethe Company estimated the fair value of each stock option on the date of grant using the Black-Scholes option-pricing model, applying the following assumptions and amortizing that value to expense over the option’s vesting period using the ratable approach:

   Three Months ended
June 30, 2006
  Six Months ended
June 30, 2006

Expected volatility factor

  0.34  0.30 - 0.34

Approximate risk free interest rate

    4.9%  4.6% – 4.9%

Expected term (in years)

  3.0  3.0

Expected dividend yield

  0%  0%

For purposes of determining the expected volatility factor, the Company considered implied volatility in two-year market-traded options of the Company’s common stock based on third party volatility quotes in accordance with the provisions of Staff Accounting Bulletin, (“SAB”) No. 107. The Company’s decision to use implied volatility was based upon the availability of actively traded options on the Company’s resultscommon stock and its assessment that implied volatility is more representative of operations cannot be quantified because, among other things, it will dependfuture stock price trends than historical volatility. The approximate risk free interest rate was based on the levelsimplied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the Company’s expected term on its options. The expected term of share-based payments grantedthe Company’s stock options was based on the historical employee exercise patterns considering changes in vesting periods and contractual terms. The Company also analyzed its historical pattern of option exercises based on certain demographic characteristics and determined that there were no meaningful differences in option exercise activity based on the demographic characteristics. The Company does not intend to pay dividends on its common stock in the foreseeable future. Accordingly, the Company used a dividend yield of zero in its option pricing model. The weighted average fair value of stock options granted during the three and six months ended June 30, 2006 was $12.14 and $11.26, respectively.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

A summary of the status and activity of the Company’s fixed option awards is as follows:

Options

  Number of
Options
  Weighted-
Average
Exercise
Price
  Weighted-
Average
Remaining
Contractual
Life
  

Aggregate
Intrinsic
Value

(in thousands)

Outstanding at December 31, 2005

  34,305,837  $25.86  4.79  

Granted

  2,478,064   37.22    

Exercised

  (9,482,313)  20.30    

Forfeited or expired

  (669,638)  29.94    
         

Outstanding at June 30, 2006

  26,631,950   28.80  4.14  $396,549
           

Vested or expected to vest at June 30, 2006

  24,555,371   28.94  4.11  $369,597
           

Exercisable at June 30, 2006

  17,605,750   30.89  3.95  $257,407
           

The total intrinsic value of stock-based awards exercised during the three and six months ended June 30, 2006 was $94.3 million and $156.4 million, respectively.

The following table summarizes the Company’s non-vested stock activity as of June 30, 2006:

   Number of
Shares
  

Weighted-
Average

Fair Value
at Grant Date

Non-vested at December 31, 2005

  85,179  $26.52

Granted

  25,940   35.00

Vested

  (23,589)  23.46

Forfeited or expired

  (4,000)  27.87
     

Non-vested at June 30, 2006

  83,530   29.95
     

During the second quarter of 2006, the Company awarded certain key executives non-vested stock units from the 2005 Plan. The number of non-vested stock units underlying each award is determined one year after the date of the award based on achievement of a specific corporate operating income goal. If the performance goal is less than 90% attained, then no non-vested stock units will be issued pursuant to the authorized award. For performance at and above 90%, the number of non-vested stock units issued will be based on a graduated slope, with the maximum number of non-vested stock units issuable pursuant to the award capped at 125% of the base number of non-vested stock units set forth in the executive’s award agreement. If the performance goal is met, the non-vested stock units will vest 33.33% on each anniversary subsequent to the date of the award. Each non-vested stock unit, upon vesting, will represent the right to receive one share of the Company’s common stock. If the performance goal is not met, no compensation cost will be recognized and any previously recognized compensation cost will be reversed. During the second quarter of 2006, the Company also awarded non-vested stock units to its non-employee directors. These units vest monthly in equal installments based on service and, upon vesting, each stock unit will represent the right to receive one share of the Company’s common stock.

3. Earnings Per ShareCITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

The following table summarizes the Company’s non-vested stock unit activity with performance measures as of June 30, 2006:

   Number of
Shares
  Weighted-
Average
Fair Value
at Grant Date

Non-vested at December 31, 2005

  —    $—  

Granted

  78,974   39.77

Vested

  —     —  

Forfeited or expired

  —     —  
     

Non-vested at June 30, 2006

  78,974   39.77
     

As of June 30, 2006, there was $65.2 million of total unrecognized compensation cost related to the stock options, non-vested stock and restricted stock units. That cost is expected to be recognized over a weighted-average period of 1.92 years.

The Company estimated the fair value of the stock-based compensation related to the 2005 ESPP using the Black-Scholes option pricing model, applying the following assumptions and amortizing that value to expense over the vesting period:

Six Months ended
June 30, 2006

Expected volatility factor

0.27

Approximate risk free interest rate

    4.45%

Expected term

6 months

Expected dividend yield

0%

The Company estimated the expected volatility factor based on implied volatility in market traded options with remaining terms similar to the expected term of the ESPP options. The approximate risk free interest rate was based on the implied yield available on U.S. Treasury zero-coupon issues with remaining term equivalent to the expected term of the 2005 ESPP options. The expected term for the 2005 ESPP options is the six month Payment Period. There were no shares purchased under the 2005 ESPP during the three months ended June 30, 2006. The weighted average fair value of the shares purchased under the 2005 ESPP during the six months ended June 30, 2006 was $31.14.

3. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing income available to shareholdersstockholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock optionsawards (calculated using the treasury stock method) during the period they were outstanding.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share information):

 

   

Three Months Ended

June 30,


  

Six Months Ended

June 30,


   2005

  2004

  2005

  2004

Numerator:

                

Net income

  $27,886  $31,475  $66,446  $40,800
   

  

  

  

Denominator:

                

Denominator for basic earnings per share — weighted-average shares outstanding

   169,698   170,327   169,930   168,392

Effect of dilutive employee stock options

   5,448   5,946   5,611   6,036
   

  

  

  

Denominator for diluted earnings per share — weighted-average shares outstanding

   175,146   176,273   175,541   174,428
   

  

  

  

Basic earnings per share

  $0.16  $0.18  $0.39  $0.24
   

  

  

  

Diluted earnings per share

  $0.16  $0.18  $0.38  $0.23
   

  

  

  

Anti-dilutive weighted-average shares

   29,550   32,689   28,802   31,564
   

  

  

  

   Three Months ended June 30,  Six Months ended June 30,
   2006  2005  2006  2005

Numerator:

        

Net income

  $46,450  $27,886  $91,129  $66,446
                

Denominator:

        

Denominator for basic earnings per share — weighted-average shares outstanding

   183,023   169,698   180,609   169,930

Effect of dilutive employee stock awards

   8,477   5,448   8,153   5,611
                

Denominator for diluted earnings per share — weighted-average shares outstanding

   191,500   175,146   188,762   175,541
                

Basic earnings per share

  $0.25  $0.16  $0.50  $0.39
                

Diluted earnings per share

  $0.24  $0.16  $0.48  $0.38
                

Anti-dilutive weighted-average shares

   17,528   29,550   17,135   28,802
                

Citrix Systems, Inc.4. ACQUISITIONS

Notes to Condensed Consolidated Financial Statements2006 Acquisition

(Unaudited)

June 30, 2005

4. Acquisitions

On June 1, 2005, the Company entered into an Agreement and Plan of Merger to acquire NetScaler, Inc. in a cash and stock merger. See Note 12 for additional information.

On December 8, 2004,May 4, 2006, the Company acquired all of the issued and outstanding capital stock of Net6,Reflectent Software, Inc. (the “2006 Acquisition”), a leader in secure access gateways.provider of solutions to monitor the performance of client-server, web and desktop applications from an end-user perspective. The acquisition extendsstrengthens the Company’s abilityCitrix Access Platform which is an end to provide easy and secureend architecture for providing access on-demand for almost anyone to virtually any resource, in both data and voice format, on-demand. Results of operations of Net6 are included as part of the Company’s Americas geographic segment and revenue from these appliances is included in Product Licenses revenue in the accompanying condensed consolidated statements of income.resource. The total consideration for this transaction was cash of approximately $49.2 million and was paid in cash.$16.7 million. In addition to the purchase price, estimated direct transaction costs associated with the acquisition were approximately $1.7$1.5 million. The sourcessource of funds for consideration paid in this transactionthe 2006 Acquisition consisted of available cash and investments. Reflectent Software, Inc.’s results of operations have been included in the Company’s consolidated results of operations beginning after the date of acquisition and are not significant in relation to the Company’s consolidated financial statements. Accordingly, pro forma financial disclosures have not been presented.

Under the purchase method of accounting, the purchase price for the 2006 Acquisition was allocated to the acquired company’s net tangible and intangible assets based on their estimated fair values as of the date of the completion of the acquisition. The allocation of the total purchase price is summarized below (in thousands):

   

Purchase Price

Allocation

  

Asset

Life

Current assets

  $3,993  

Property and equipment

   111  Various

Other assets

   1,497  

Intangible assets

   6,910  3-5 years

Goodwill

   7,350  Indefinite
      

Assets acquired

   19,861  

Current liabilities assumed

   1,688  
      

Net assets acquired, including direct transaction costs

  $18,173  
      

Current assets and current liabilities acquired in connection with the 2006 Acquisition consisted mainly of short-term investments, accounts receivable, other accrued expenses and deferred revenues. Other assets consisted primarily of deferred tax assets. The $7.4 million of goodwill related to the 2006 Acquisition was assigned to the Company’s Americas segment and is not deductible for tax purposes. See Note 7 for segment information.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

On February 27, 2004,Identifiable intangible assets purchased in the 2006 Acquisition, in thousands, and their weighted average lives are as follows:

      

Weighted

Life

Covenants not to compete

  $110  3.0 years

Trade name

   400  5.0 years

Customer relationships

   1,100  4.0 years

Core and product technologies

   5,300  4.9 years
      

Total

  $6,910  
      

2005 Acquisitions

During 2005, the Company acquired all of the issued and outstanding capital stock of Expertcity.com,two privately held companies, NetScaler, Inc. (“Expertcity”)and Teros, Inc., (the “2005 Acquisitions”) for a market leader in Web-based desktop access, as well as a leader in Web-based training and customer assistance services. Resultstotal of operations are reflected in the Company’s Citrix Online reportable segment and revenue from the Citrix Online division is included in Services revenue in the accompanying condensed consolidated statements of income. The consideration for this transaction was approximately $241.8 million, comprised of approximately $112.6$172.8 million in cash, approximately 5.86.6 million shares of the Company’s common stock valued at approximately $124.8$154.8 million and estimated direct transaction costs of $6.4 million. The Company also assumed approximately $4.4 million. These amounts include additional common stock earned by Expertcity$20.6 million in non-vested stock-based compensation upon the achievement of certain revenue and other financial milestones during 2004 pursuant to the merger agreement, which were issued during March 2005. The fair valueclosing of the common stock earned as additional purchase price considerationNetScaler transaction that was 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 recorded as goodwill ondeferred compensation in the date earned. Thereaccompanying 2005 consolidated balance sheet. The assumed awards had an excess of fair value over intrinsic value of approximately $0.5 million, which is no further contingentreflected in the total consideration related tofor the transaction. The sources2005 Acquisitions are intended to further extend the Company’s position in application delivery solutions. The results of funds for consideration paid in this transaction consistedoperations of available cash and investments and sharesthe acquired companies are included as part of the Company’s authorized common stock.results beginning after their respective dates of acquisition and revenues from the acquired products are included in the Company’s Product License revenue and Technical Services revenue in the accompanying consolidated statements of income. In connection with the 2005 Acquisitions, the Company allocated $234.3 million to goodwill, $40.2 million to core technology and $35.8 million to other intangible assets. The Company assigned all of the goodwill to its Americas segment.

Purchase Accounting for Acquisitions

The fair values used in determining the purchase price allocation for certain intangible assets for Expertcity and Net6the Company’s acquisitions 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 $18.7$7.0 million was expensed in the third quarter of 2005 immediately upon the closing of the ExpertcityNetScaler, Inc. acquisition in the first quarter of 2004 and $0.4 million was expensed immediately upon closing of the Net6 acquisition in the fourth quarter of 2004 in accordance with FASB Interpretation No. 4,Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, because such IPR&D pertaineddue to the fact that it pertains to 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 at the time of the closing of the applicable transaction.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%was 19%. The rate of return included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

5. Goodwill

The Company had $598.9 and $592.0 million of goodwill as of June 30, 2006 and December 31, 2005, respectively. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,

Goodwill. There were no material changes inthe Company reviews its goodwill periodically for impairment. The Company completed its annual goodwill impairment test during the fourth quarter of 2005 and determined that the carrying amount of goodwill forwas not impaired. Substantially all of the six months endedCompany’s goodwill at June 30, 2005. The Company recorded $166.1 million of goodwill related to2006 and December 31, 2005 was associated with the Expertcity acquisition which was assigned to theAmericas and Citrix Online Division reportable segment. In addition, the Company recorded $33.5 million of goodwill related to the Net6 acquisition, which was assigned to the Americas reportable segment. The goodwill recorded in relation to the Expertcity and Net6 acquisitions was not deductible for tax purposes.segments. See Note 4 for additional information regarding the Company’s acquisitions and Note 7 for segment information.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

Intangible Assets.Assets

Intangible assets are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally onethree to seven years, except for patents, which are amortized over the shorter of the remaining life or 10 years. Intangible assets consist of the following (in thousands):

 

   June 30, 2005

  December 31, 2004

   

Gross

Carrying

Amount


  

Accumulated

Amortization


  

Gross

Carrying

Amount


  

Accumulated

Amortization


Core and product technologies

  $125,747  $74,499  $125,248  $67,488

Other

   44,533   18,411   43,432   14,020
   

  

  

  

   $170,280  $92,910  $168,680  $81,508
   

  

  

  

Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005

   June 30, 2006  December 31, 2005
   

Gross Carrying

Amount

  

Accumulated

Amortization

  

Gross Carrying

Amount

  

Accumulated

Amortization

Core and product technologies

  $171,500  $93,841  $165,975  $84,255

Other

   84,331   33,823   81,254   25,641
                

Total

  $255,831  $127,664  $247,229  $109,896
                

Amortization of core and product technology was $4.6 million and $9.6 million for the three months and six months ended June 30, 2006, respectively, and $3.7 million and $7.0 million for the three and six months ended June 30, 2005, respectively, and was $3.6 million and $6.6 million for the three and six months ended June 30, 2004, respectively, and is classified as a component of cost of revenues on the accompanying condensed consolidated statements of income. Amortization of other intangible assets, which consist primarily of customer relationships, tradenames, covenants not to compete, and patents, was $4.2 million and $8.2 million for the three and six months ended June 30, 2006, respectively, and $2.2 million and $4.4 million for the three and six months ended June 30, 2005, respectively, and was $1.9 million and $2.6 million for the three and six months ended June 30, 2004, respectively, and is classified as a component of operating expenses on the accompanying condensed consolidated statements of income. Estimated future amortization expense is as follows (in thousands):

 

Year ending December 31,

    

2005

  $23,311

2006

   19,621

2007

   14,565

2008

   12,099

2009

   8,513

Year ending December 31,

  

2006

  $34,989

2007

   30,342

2008

   27,268

2009

   22,633

2010

   19,260

6. Convertible Subordinated DebenturesLONG-TERM DEBT

Credit Facility

Effective on August 9, 2005, the Company entered into a revolving credit facility (the “Credit Facility”) with a group of financial institutions (the “Lenders”). The Credit Facility provides for a five year revolving line of credit in the aggregate amount of $100.0 million, subject to continued covenant compliance. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $15.0 million may be available for swing line loans. The Credit Facility currently bears interest at the London Interbank Offered Rate (“LIBOR”) plus 0.5% and adjusts in the range of 0.5% to 1.25% above LIBOR based on the level of the Company’s total debt and its adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the agreement. In addition, the Company is required to pay a quarterly facility fee ranging from 0.125% to 0.25% based on the aggregate amount available under the Credit Facility and the level of the Company’s total debt and its adjusted EBITDA. Borrowings under the Credit Facility are guaranteed by the Company and certain of the Company’s United States and foreign subsidiaries, which guarantees are secured by a pledge of shares of certain foreign subsidiaries. During 2005, the Company borrowed and repaid $75 million under the Credit Facility. As of June 30, 2006, there were no amounts outstanding under the Credit Facility.

Term Loan

Effective on August 9, 2005, a subsidiary of the Company entered into a term loan facility (the “Term Loan”) with the Lenders. The Term Loan provided for an eighteen-month single-draw term loan facility in the aggregate amount of $100.0 million. The Term Loan’s interest rate was LIBOR plus 0.5% and adjusted in the range of 0.5% to 1.25% above LIBOR based on the level of the subsidiary’s total debt and its adjusted EBITDA, as described in the agreement. Borrowings under the Term Loan were guaranteed by the Company and certain of its United States and foreign subsidiaries, which guarantees were secured by a pledge of shares of certain foreign subsidiaries. In addition, the Company was required to pay a quarterly facility fee ranging from 0.125% to 0.25% based on the aggregate amount of the Term Loan and the level of the Company’s total debt and its adjusted EBITDA. The Term Loan was paid in full in February 2006. The weighted average interest rate on the Term Loan for the period that it was outstanding in 2006 was 4.59%.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

In March 1999,The Company incurred $0.2 million in interest expense on its borrowings in 2006. The Credit Facility contains customary default provisions, and the Company sold $850 million principal amount at maturitymust comply with various financial and non-financial covenants. The financial covenants consist of its zero coupon convertible subordinated debentures (the “Debentures”) due March 22, 2019, in a private placement. On March 22, 2004,minimum interest coverage ratio and a maximum consolidated leverage ratio. The primary non-financial covenants limit the Company’s ability to pay dividends (other than pursuant to the Dividend Reinvestment Plan executed under the American Jobs Creation Act), conduct certain mergers or acquisitions, make certain investments and loans, incur future indebtedness or liens, alter the Company’s capital structure or sell stock or assets, subject to certain limits. As of June 30, 2006, the Company redeemedwas in compliance with all ofcovenants under the outstanding Debentures for a redemption price of approximately $355.7 million. The Company used the proceeds from its held-to-maturity investments that matured on March 22, 2004 and available cash to fund the aggregate redemption price. At the date of redemption, the Company incurred a charge for the associated deferred debt issuance costs of approximately $7.2 million.

Credit Facility.

7. Segment InformationSEGMENT INFORMATION

The Company operates in a single market consisting of the design, development, marketing, sales and support of access infrastructure productssoftware and services for enterprise applications and Web-based desktop access.online services. The Company’s revenues are derived from sales of its Virtualization Systems products, comprised primarily of Access Suite products, including Presentation Server, its Application Networking products, comprised of Citrix NetScaler products and Citrix Access Gateways products, its Advanced Solutions products, comprised of Citrix Application Gateway products, and related technical services in the Americas, Europe, the Middle East and Africa (“EMEA”)EMEA and Asia-Pacific regions and from Web-based desktop accessonline services sold by its Citrix Online division.Division. These three geographic regions and the Citrix Online divisionDivision 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 and separately evaluates revenues from the Citrix Online division.Division. Segment profit for each segment includes certain sales, marketing, research and development, general and administrative expenses directly attributable to the segment, including research and development costs in the Citrix Online Division 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 Virtualization Systems products, formerly Access SuiteManagement products, Application Networking products, Advanced Solutions products, formerly Application Gateway products, stock-based compensation costs, amortization of core and product technology, andamortization of other intangible assets, interest, corporate expenses and income taxes, as well as, charges for in-process research and development. Corporate expenses are comprised primarily of corporate marketing costs, stock-based compensation 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.

Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005

Net revenues and segment profit, (loss), classified by the Company’s four reportable segments are as follows (in thousands):

 

  

Three Months Ended

June 30,


 

Six Months Ended

June 30,


   Three Months Ended June 30, Six Months Ended June 30, 
  2005

 2004

 2005

 2004

   2006 2005 2006 2005 

Net revenues:

        

Americas (1)

  $92,475  $84,249  $178,640  $159,139   $125,972  $92,475  $235,600  $178,640 

EMEA (2)

   76,164   66,867   153,596   136,378    91,127   76,164   188,733   153,596 

Asia-Pacific

   18,746   16,731   36,674   30,844    23,241   18,746   44,367   36,674 

Citrix Online division

   23,844   10,455   44,209   13,251 

Citrix Online Division

  ��35,128   23,844   66,766   44,209 
  


 


 


 


             

Consolidated

  $211,229  $178,302  $413,119  $339,612   $275,468  $211,229  $535,466  $413,119 
  


 


 


 


             

Segment profit (loss):

   

Segment profit:

     

Americas (1)

  $50,553  $52,659  $98,493  $94,702   $66,200  $50,553  $118,057  $98,493 

EMEA (2)

   44,118   38,656   90,552   80,683    55,999   44,118   121,625   90,552 

Asia-Pacific

   5,308   5,017   9,329   9,134    8,370   5,308   16,126   9,329 

Citrix Online division

   5,322   (2,046)  8,830   (4,654)

Citrix Online Division

   9,640   5,322   17,796   8,830 

Unallocated expenses (3):

        

Amortization of intangible assets

   (5,907)  (5,471)  (11,402)  (9,231)   (8,735)  (5,907)  (17,768)  (11,402)

Research and development

   (23,726)  (20,542)  (46,329)  (38,997)   (35,127)  (23,726)  (65,998)  (46,329)

In-process research and development

   —     —     —     (18,700)

Net interest and other income (expense)

   4,983   2,749   10,071   (2,144)

Net interest and other income

   10,340   4,983   16,796   10,071 

Other corporate expenses

   (26,605)  (31,181)  (56,768)  (59,148)   (45,171)  (26,605)  (85,933)  (56,768)
  


 


 


 


             

Consolidated income before income taxes

  $54,046  $39,841  $102,776  $51,645   $61,516  $54,046  $120,701  $102,776 
  


 


 


 


             

(1)The Americas segment is comprised of the United States, Canada and Latin America.
(2)Defined as Europe, the Middle East and Africa.
(3)Represents expenses presented to management on a consolidated basis only and not allocated to the operating segments.

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

Identifiable assets classified by the Company’s reportable segments are shown below. Long-lived assets consist of property and equipment, net:

   June 30,
2006
  December 31,
2005
   (In thousands)

Identifiable assets:

    

Americas

  $1,530,672  $1,275,831

EMEA

   204,079   152,473

Asia-Pacific

   45,072   41,967

Citrix Online Division

   212,110   211,385
        

Total identifiable assets

  $1,991,933  $1,681,656
        

The increase in identifiable assets in the Americas segment is primarily due to an increase short-term and long-term investments and, to a lesser extent, the goodwill and assets associated with the Company’s 2006 Acquisition. The increase in identifiable assets in the EMEA segment is primarily due to an increase short-term and long-term investments. See Note 3 for additional information regarding the Company’s acquisitions.

8. Derivative Financial InstrumentsDERIVATIVE FINANCIAL INSTRUMENTS

As of June 30, 20052006 and December 31, 2004,2005, the Company had $6.8$6.6 million and $12.6$3.2 million of derivative assets, respectively, and $7.8$3.3 million and $7.9$8.3 million of derivative liabilities, respectively, representing the fair values of the Company’s outstanding derivative instruments, which are recorded in other current assets, other assets, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. The change in the derivative component in accumulated other comprehensive income (loss) includes unrealized gains or losses that arose from changes in market value of derivatives that were held during the period, and gains or 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 (loss) or stockholders’ equity. The following table presents these components of accumulated other comprehensive income (loss), net of tax for the Company’s derivative instruments (in thousands):

 

   

Three Months Ended

June 30,


  

Six Months Ended

June 30,


 
   2005

  2004

  2005

  2004

 

Unrealized losses on derivative instruments

  $(4,251) $(2,171) $(7,696) $(1,548)

Reclassification of realized gains

   (1,339)  (2,038)  (2,701)  (5,042)
   


 


 


 


Net change in accumulated other comprehensive income due to derivative instruments

  $(5,590) $(4,209) $(10,397) $(6,590)
   


 


 


 


   

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2006  2005  2006  2005 

Unrealized gains (losses) on derivative instruments

  $4,157  $(4,251) $4,128  $(7,696)

Reclassification of realized gains (losses)

   1,307   (1,339)  3,194   (2,701)
                 

Net change in accumulated other comprehensive income due to derivative instruments

  $5,464  $(5,590) $7,322  $(10,397)
                 

Cash Flow Hedges. As ofAt June 30, 20052006 and December 31, 2004,2005, the Company had in place foreign currency forward sale contracts with a notional amount of $83.7$55.3 million and $39.0$81.7 million, respectively, and foreign currency forward purchase contracts with a notional amount of $153.2$210.2 million and $165.0$191.5 million, respectively. The fair value of these contracts at June 30, 20052006 and December 31, 20042005 were assets of $4.0$6.6 million and $11.5$3.2 million, respectively, and liabilities of $7.8$3.3 million and $3.5$8.3 million, respectively. A substantial portion of the Company’s anticipated overseas expenses are and will continue to be transacted in

Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005

local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses forward foreign exchange forward contracts to reduce a portion ofhedge its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed 12 months. Currencies hedged are Euros, British pounds sterling, Australian dollars, Swiss francs, Australian dollars, Japanese yen, Hong Kong dollars, Canadian dollars, Danish krone and Hong Kong dollars.Swedish krona. There was no material ineffectiveness of the Company’s foreign currency forward contracts for the three and six months ended June 30, 20052006 or 2004.

2005.

Fair Value Hedges. TheFrom time to time, the Company uses interest rate swap instruments to hedge against the changes in fair value of certain of its available-for-sale securities due to changes in interest rates. At June 30, 2005, the instruments had an aggregate notional amount of $182.4 million related to specific available-for-sale securities and expire on various dates through September 2008. Each of theThe instruments swap the fixed rate interest on the underlying investments for a variable rate based on the London Interbank Offered Rate, or LIBOR plus a specified margin. Changes in the fair value of the interest rate swap instruments are recorded in earnings along with related designated changes in the value of the underlying

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

investments. The fairDuring 2005, the Company sold underlying fixed rate available-for-sale investments with a notional value of the$193.9 million. The Company holds no remaining interest rate swap instruments atas of June 30, 2005 and December 31, 2004 were assets of $2.8 million and $1.1 million, respectively, and at December 31, 2004 liabilities of approximately $4.4 million.2006. There was no material ineffectiveness of the Company’s interest rate swaps for the period that they were held during the three months and six months ended June 30, 2005 or 2004.

2005.

Derivatives Notnot Designated as HedgesHedges.. The From time to time, the Company utilizes certain derivative instruments that either do not qualify or are not designated for hedge accounting treatment under SFAS No. 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) income net.

The Company is a party to three credit default contracts that have an aggregate notional amount of $75.0 million that expire on various dates through March 2008. Under the terms of these contracts, the Company assumes the default risk, above a certain threshold, of a portfolio of specified referenced issuers(expense), net, and such changes were not material 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 valueany of the contract. The primary risk associated with these contracts is the default risk of the underlying issuers. The risk levels of these instruments are equivalent to “AAA,”, or better, single securities. The purpose of the credit default contracts is to provide additional yield on certain of the Company’s underlying available-for-sale investments. At June 30, 2005, the Company had restricted approximately $82.0 million of investment securities as collateral for these credit default contracts and the interest rate swap agreements discussed above, which is included in restricted cash equivalents and investments in the accompanying condensed consolidated balance sheets. The Company maintains the ability to manage the composition of the restricted investments within certain limits and to withdraw and use excess investment earnings from the restricted collateral for operating purposes. The fixed yield earned on these credit default contracts was not material for the three months ended June 30, 2005 and 2004, and is included in interest income in the accompanying condensed consolidated statements of income. To date there have been no credit events for the underlying referenced entities resulting in losses to the Company. As of June 30, 2005, the fair value of these credit default contracts was not material.

periods presented.

9. Comprehensive IncomeCOMPREHENSIVE INCOME

The components of comprehensive income, net of tax, are as follows (in thousands):

 

   

Three Months Ended

June 30,


  

Six Months Ended

June 30,


 
   2005

  2004

  2005

  2004

 

Net income

  $27,886  $31,475  $66,446  $40,800 

Other comprehensive income:

                 

Change in unrealized gain (loss) on available-for-sale securities

   (104)  (514)  9   (596)

Net change due to derivative instruments

   (5,590)  (4,209)  (10,397)  (6,590)
   


 


 


 


Comprehensive income

  $22,192  $26,752  $56,058  $33,614 
   


 


 


 


Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005

   

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
   2006  2005  2006  2005 

Net income

  $46,450  $27,886  $91,129  $66,446 

Other comprehensive income:

     

Change in unrealized (loss) gain on available-for-sale securities

   (515)  (104)  (547)  9 

Net change due to derivative instruments

   5,464   (5,590)  7,322   (10,397)
                 

Comprehensive income

  $51,399  $22,192  $97,904  $56,058 
                 

The components of accumulated other comprehensive income (loss) income,, net of tax, are as follows (in thousands):

 

   

June 30,

2005


  

December 31,

2004


Unrealized gain on available-for-sale securities

  $479  $470

Unrealized (loss)gain on derivative instruments

   (3,378)  7,019
   


 

Accumulated other comprehensive (loss) income

  $(2,899) $7,489
   


 

   

June 30,

2006

  

December 31,

2005

 

Unrealized (loss) gain on available-for-sale securities

  $(545) $2 

Unrealized gain (loss) on derivative instruments

   2,857   (4,465)
         

Accumulated other comprehensive income (loss)

  $2,312  $(4,463)
         

10. Income TaxesINCOME TAXES

On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA providesprovided for an 85% dividends received deduction on dividend distributions of foreign earnings to a U.S. taxpayer, if certain conditions are met. During the second quarter of fiscal 2005, the Company completed its evaluation of the effects of the repatriation provision of the AJCA. On July 29, 2005,AJCA, and the Company’s Chief Executive Officer and Board of Directors approved its Domestic Reinvestment Plan (“DRP”)dividend reinvestment plan under the AJCA. The implementationDuring the second quarter of the DRP will result in the repatriation of approximately $503 million of certain foreign earnings, of which $500 million qualifies for the 85% dividends received deduction. Accordingly,2005, the Company has recorded an estimateda tax provision of approximately $24.9 million forrelated to the planned repatriationrepatriation. Additionally, during the second quarter of certain foreign earnings. Additionally,2005, the Company recorded the reversal of approximately $8.8 million for income taxes on certain foreign earnings for which a deferred tax liability had been previously recorded. As a result, a net income tax expenseIn September of approximately $16.1 million was recognized in the second quarter of fiscal 2005. Other than the one-time repatriation provision under the DRP,2005, the Company does not expect to remitrepatriated approximately $503 million of certain foreign earnings, from its foreign subsidiaries.

of which $500 million qualified for the 85% dividends received deduction.

The Company maintains certain operational and administrative processes in overseas subsidiaries and its foreign earnings are taxed at lower foreign tax rates. Other than the one-time repatriation provision under the AJCA described above, the Company does not expect to remit earnings from its foreign subsidiaries. The Company’s effective tax rate was approximately 48%24% and 21%48% for the three months ended June 30, 20052006 and the three months ended June 30, 2004, respectively.2005, respectively, and 24% and 35% for the six months ended June 30, 2006 and the six months ended June 30, 2005, respectively,. The increasedecrease in the Company’s effective tax rate for the three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005 is primarily due primarily to the additional tax expense recorded in accordance with2005 due to the Company’s plans to repatriaterepatriation of foreign earnings under the AJCA.AJCA partially offset by an increase in the effective tax rate due to the adoption of SFAS No. 123R in 2006.

In July 2006, the FASB issued FASB Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a comprehensive model for recognizing, measuring,

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

 

presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of application of FIN No. 48 these will be accounted for as an adjustment to retained earnings. The Company is currently assessing the impact of FIN No. 48 on its consolidated financial position and results of operations.

11. Stock Repurchase ProgramsSTOCK REPURCHASE PROGRAMS

The Company’s Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to the Company of $1$1.2 billion, of which $200 million was authorized in February 2005.2006. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At June 30, 2005,2006, approximately $200.4$229.3 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 of its common stock using general corporate funds. Additionally, the Company entershas entered into structured stock repurchase arrangements with large financial institutions using general corporate funds as part of its stock repurchase program in order to lower the average cost to acquire shares. These programs include terms that require the Company to make up frontup-front payments to the counter-partycounterparty financial institution and result in the receipt of stock during and/or at the end of the period of the agreement or depending on market conditions, the receipt of either stock or cash at the maturity of the agreement.agreement, depending on market conditions.

TheDuring the three months ended June 30, 2006, the Company expendedreceived a net amount of approximately $1.6$1.8 million related to the maturity of certain of its structured stock repurchase agreements and $43.2 million, net of premiums received indid not make any open market purchases during the quarter. During the three months ended June 30, 2005, and 2004, respectivelythe Company expended approximately $1.6 million, net of premiums received, under its stock repurchase transactions. The Company expended $38.3 million and $41.6 million and $43.2 million, net of premiums received, during the six months ended June 30, 20052006 and 2004,2005, respectively, under all of its stock repurchase transactions. During the three months ended June 30, 2006, the Company took delivery of a total of 552,727 shares of outstanding common stock with an average price of $35.00 and during the six months ended June 30, 2006, the Company took delivery of a total of 1,949,077 shares of outstanding common stock with an average per share price of $29.46. During the three months ended June 30, 2005, the Company took delivery of a total of 527,758 shares of outstanding common stock with an average per share price of $20.12 and during the six months ended June 30, 2005, the Company took delivery of a total of 3,082,110 shares of outstanding common stock with an average per share price of $22.29. During the three months ended June 30, 2004, the Company took delivery of a total of 349,844 shares of outstanding common stock with an average per share price of $19.84 and during six months ended June 30, 2004, the Company took delivery of a total of 1,059,813 shares of outstanding common stock with an average per share price of $20.59. Some of these shares were received pursuant to prepaid programs. Since the inception of the stock repurchase program, the average cost of shares acquired was $16.93$17.85 per share compared to an average close price during open trading windows of $20.00$21.76 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 benefits. As of June 30, 2005,2006, the Company has remaining prepaid notional amounts of approximately $26.0$35.4 million under structured stock

Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005

repurchase agreements.agreements, which expire on various dates through February 2007. Due to the fact that the total shares to be received for the open repurchase agreements at June 30, 20052006 is not determinable until the contracts mature, the above price per share amounts exclude the remaining shares to be received subject to the agreements.

12. Commitments and ContingenciesCOMMITMENTS AND CONTINGENCIES

Synthetic LeaseOff-Balance Sheet Arrangement

During 2002, the Company became a party to a synthetic lease arrangement 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 on its condensed consolidated balance sheets. Consequently, payments made pursuant to the lease are recorded as operating expenses in the Company’s condensed 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. At any time during the lease term, the Company has the option to sublease the property and upon thirty-days’30 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

CITRIX SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2006

amounts owed. Upon at least 180 daysdays’ 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 an evaluation were to indicate that fair value of the building were to decline below $51.9 million, the Company would be 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 $62.8 million in cash and/or investment securities as collateral. This amount is included in restricted cash equivalents and investments in the accompanying condensed consolidated balance sheets. The Company maintains the ability to manage the composition of the restricted investments within certain limits and to withdraw and use excess investment earnings from 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 collateralized investments, and equity investments and outstanding debt, as of the end of each fiscal quarter. As of June 30, 2005,2006, the Company had approximately $438.6$734.8 million in cash and investments in excess of those required levels. The synthetic lease includes non-financial covenants including the maintenance of the properties and adequate insurance, prompt delivery of financial statements to the lender of the lessee and prompt payment of taxes associated with the properties. As of June 30, 2005,2006, the Company was in compliance with all material provisions of the arrangement.

Office Leases

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 2025 with a total remaining obligation at June 30, 20052006 of approximately $20.8$19.2 million, of which $2.4$1.8 million was accrued for as of June 30, 2005,2006, and is reflected in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. In calculating this accrual, the Company made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. The 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.

Acquisition

On June 1, 2005, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire NetScaler, Inc., (“NetScaler”), a privately held Delaware corporation headquartered in San Jose, California. NetScaler is a

Citrix Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

June 30, 2005

leader in high performance application networking. Pursuant to the Merger Agreement, the Company will acquire all of the issued and outstanding voting securities of NetScaler. The total consideration for this transaction is approximately $300.0 million of which approximately 45% is payable in cash and approximately 55% is payable in shares of the Company’s common stock. In accordance with the terms of the Merger Agreement, the Company will issue to the shareholders of Netscaler approximately 6.55 million shares of its common stock, subject to adjustment, on the date of the consummation of the aforementioned transaction. In addition, the Company will also assume approximately $23.0 million in unvested stock options upon the closing of the transaction. The transaction has been unanimously approved by the Company’s Board of Directors and NetScaler’s board of directors. The Company anticipates completing the transaction in the third quarter of 2005. The consummation of this transaction is subject to customary closing conditions, including approval by the stockholders of NetScaler and other customary conditions. The transaction has received clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Legal Matters

In 2006, the Company has been sued in the United States District Court for the Northern District of Ohio and in the United States District Court for the Southern District of Florida, in each case for alleged infringement of U.S. patents by Citrix Online Division’s GoToMyPC service. The complaints name Citrix Systems, Inc. and Citrix Online LLC, a wholly-owned subsidiary of the Company, as defendants and seek unspecified damages and other relief. In response, the Company filed answers denying that GoToMyPC infringes these patents and alleging, among other things, that the asserted claims of these patents are invalid. The Company believes that it has meritorious defenses to the allegations made in the complaints and intends to vigorously defend these lawsuits; however, it is unable to currently determine the ultimate outcome of these matters or the potential exposure to loss, if any.

TheIn addition, the Company is a defendant in various 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 any ultimate outcome would not materially affect the Company’s financial position, results of operations or cash flows.

13. Recent Accounting PronouncementsSUBSEQUENT EVENT

In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (“FAS 109-2”), “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The AJCA introduces a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. Starting in the first quarter of fiscal 2005,On August 4, 2006, the Company has adopted the accounting and disclosure requirements as outlined in FAS 109-2. See Note 10 for further information regarding the Company’s repatriation of its foreign earnings pursuantsigned a definitive agreement to the AJCA.

14. Subsequent Events

During August 2005, the Company and Citrix Systems International GMBH, a wholly-owned subsidiary of the Company (the “Subsidiary Borrower”), entered into a senior revolving credit agreement with a group of financial institutions (the “Lenders”) led by JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent, and J.P. Morgan Securities Inc. (“JPMSI”), as lead arranger and bookrunner (the “Credit Agreement”). The Credit Agreement provides initially for a five year revolving line of credit in the aggregate amount of $100,000,000, subject to continued covenant compliance. A portion of the revolving line of credit (i) in the aggregate amount of $25,000,000 may be available for issuances of letters of credit and (ii) in the aggregate amount of $15,000,000 may be available for swing line loans. All borrowings under the senior revolving credit facility are generally secured by pledges of shares of certain of the Company’s foreign subsidiaries and are guaranteed by certain of the Company’s United States subsidiaries and the borrowings of the Subsidiary Borrower are also guaranteed by certain of the Company’s foreign subsidiaries. As of the date of this quarterly report, there were no funds borrowed or outstanding under the revolving loans. The Company intends to use the proceeds from the Credit Agreement to fund a portion of the cash portion of the purchase price of the acquisition ofacquire all of the issued and outstanding sharescapital stock of NetScaler. See Note 12Orbital Data Corporation (“Orbital Data”) a provider of solutions that optimize the delivery of applications over wide area networks. The acquisition broadens Citrix’s application delivery capabilities to the branch office and positions Citrix as a strategic partner to provide proven technology needed for additional information.high performance, secure and cost efficient application delivery. The consideration payable to the shareholders of Orbital Data in this transaction is cash of approximately $50.0 million. In addition, the Company estimates that it will incur approximately $1.7 million in acquisition related cost and it will assume approximately 0.3 million unvested stock-based instruments, each of which upon vesting will be exercisable for the right to receive one share of the Company’s common stock.

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

During August 2005, the Subsidiary Borrower entered into a term loan facility (the “Term Loan Agreement”) with a group ofOur operating results and financial institutions led by JPMorgan, as administrative agent, and JPMSI, as lead arranger and bookrunner. The Term Loan Agreement provides for an eighteen-month single-draw term loan facilitycondition have varied in the aggregate amountpast and could in the future vary significantly depending on a number of $100,000,000. Borrowingsfactors. From time to time, information provided by us or statements made by our employees contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Form 10-Q, and in the documents incorporated by reference into this Form 10-Q, that are not historical facts, including, but not limited to statements concerning new products, product development and offerings, Application Networking, Subscription Advantage, Presentation Server, Citrix NetScaler, Virtualization Systems, Access Suite, Access Essentials and Access Gateway products, product and price competition, Citrix Online Division, competition and strategy, market acceptance of operating systems on which our products rely, customer diversification, product price and inventory, deferred revenues, economic and market conditions, potential government regulation, seasonal factors, international operations and expansion, revenue recognition, profits, growth of revenues, composition of revenues, cost of revenues, operating expenses, sales, marketing and support expenses, general and administrative expenses, research and development expenses, compensation costs, our ability to attract and retain qualified personnel, valuations of investments and derivative instruments, technology relationships, reinvestment or repatriation of foreign earnings, gross margins, impairment charges, anticipated operating and capital expenditure requirements, cash inflows, maintenance of accounts receivable, off balance sheet arrangements, contractual obligations, our Credit Facility, in-process research and development, advertising campaigns, tax rates, valuation and composition of stock-based awards, SFAS No. 123R, leasing and subleasing activities, acquisitions, management and financial systems and controls, stock repurchases, investment transactions, liquidity, litigation matters, intellectual property matters, distribution channels, stock price, payment of dividends, Advisor Rewards Program, third party licenses and potential debt or equity financings constitute forward-looking statements and are made under the term loan facility are guaranteed by the Company and certain of its United States and foreign subsidiaries, which guarantees are secured by pledges of shares of certain foreign subsidiaries. Assafe harbor provisions of the dateSection 27 of the filingSecurities Act of 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 factors described in Part II Item 1A, “Risk Factors,” in this quarterly report, approximately $100.0 million is outstanding underForm 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-Q, in the Term Loan Agreement. The Company intendsdocuments incorporated by reference into this Form 10-Q or presented elsewhere by our management from time to use the proceeds from the Term Loan Agreement to partially fund the repatriationtime. Such factors, among others, could have a material adverse effect upon our business, results of certain of its foreign earnings in connection with the AJCA. See Note 10 for additional information.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSoperations and financial condition.

Overview

We design, develop and market technology solutions that enable on-demand access infrastructure software, servicesto information and appliances.applications. We market and license our products through multiple channels such as value-added resellers, channel distributors, system integrators, independent software vendors, our websites and otheroriginal equipment manufacturers. We also promote our products through relationships with a wide variety of industry participants, including Microsoft Corporation or Microsoft.

Acquisitions

NetScaler2006 Acquisition

On June 1, 2005, we entered into an Agreement and Plan of Merger to acquire NetScaler, Inc. in a cash and stock merger. See Note 12 of our condensed consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Commitments” for additional information.

Net6

On December 8, 2004,May 4, 2006, we acquired all of the issued and outstanding capital stock of Net6,Reflectent Software, Inc., or Net6,the 2006 Acquisition, a leader in providing secure access gateways.provider of solutions to monitor the performance of client-server, web and desktop applications from an end-user perspective. The acquisition extendsstrengthens our ability to provide easy and secureCitrix Access Platform which is an end-to-end architecture for providing access on-demand for almost anyone to virtually any resource, both data and voice, on-demand. Results of operations of Net6 are included as part of our Americas geographic segment and revenue from these appliances is included in our Product Licenses revenue in our condensed consolidated statements of income.resource. The consideration for this transaction was cash of approximately $49.2 million paid in cash.$16.7 million. In addition to the purchase price, there wereestimated direct transaction costs associated with the acquisition ofwere approximately $1.7$1.5 million. The sourcessource of funds for consideration paid in this transactionthe 2006 Acquisition consisted of available cash and investments.

Under the purchase method of accounting, the purchase price for the 2006 Acquisition was allocated to the acquired company’s net tangible and intangible assets based on their estimated fair values as of the date of the completion of the acquisition. The allocation of the total purchase price is summarized below (in thousands):

 

   

Purchase Price

Allocation

  

Asset

Life

Current assets

  $3,993  

Property and equipment

   111  Various

Other assets

   1,497  

Intangible assets

   6,910  3-5 years

Goodwill

   7,350  Indefinite
      

Assets acquired

   19,861  

Current liabilities assumed

   1,688  
      

Net assets acquired, including direct transaction costs

  $18,173  
      

Current assets and current liabilities acquired in connection with the 2006 Acquisition consisted mainly of short-term investments, accounts receivable, other accrued expenses and deferred revenues. Other assets consisted primarily of deferred tax assets. The $7.4 million of goodwill related to the 2006 Acquisition was assigned to our Americas segment and is not deductible for tax purposes. See Note 7 to our condensed consolidated financial statements for more information regarding our segments.

Identifiable intangible assets purchased in the 2006 Acquisition, in thousands, and their weighted average lives are as follows:

      

Weighted

Life

Covenants not to compete

  $110  3.0 years

Trade name

   400  5.0 years

Customer relationships

   1,100  4.0 years

Core and product technologies

   5,300  4.9 years
      

Total

  $6,910  
      

Expertcity2005 Acquisitions

On February 27, 2004,During 2005, we acquired all of the issued and outstanding capital stock of Expertcity.com,two privately held companies, NetScaler, Inc. or Expertcity,and Teros, Inc., collectively, the 2005 Acquisitions, for a market leader in Web-based desktop access as well as a leader in Web-based training and customer assistance services. Resultstotal of operations are reflected in our Citrix Online reportable segment and revenue from our Citrix Online division is included in our Services revenue in our condensed consolidated statements of income. The consideration for this transaction was approximately $241.8 million, comprised of approximately $112.6$172.8 million in cash, approximately 5.86.6 million shares of our common stock valued at approximately $124.8$154.8 million and estimated direct transaction costs of $6.4 million. We also assumed approximately $4.4 million. These amounts include additional common stock earned by Expertcity$20.6 million in non-vested stock-based compensation upon the achievement of certain revenue and other financial milestones during 2004 pursuant to the merger agreement, which were issued in March 2005. The fair value of the common stock earned as additional purchase price consideration was recorded as goodwill on the date earned. The sources of funds for consideration paid in this transaction consisted of available cash and investments and our authorized common stock. There is no additional contingent consideration related to the transaction.

Purchased in-process research and development of approximately $18.7 million was expensed immediately upon closing of the Expertcity acquisition in the first quarter of 2004 and $0.4 millionNetScaler transaction that was expensed immediately upon closing of the Net6 acquisition in the fourth quarter of 2004. For more information regarding the in-process research and development acquired from Expertcity and Net6 see note 4 to our condensed consolidated financial statements.

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-specific information, historical collection experience and economic market conditions. If market conditions decline, or if the financial condition of our distributors or customers deteriorates, we may be unable to determine that collectibility is probable, and we could be required to defer the recognition of revenue until we receive customer payments.

We sell our Access Suite products bundled with an initial subscription for 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 support, product training or consulting services. We allocate revenue to license updates and any other undelivered elements of the arrangement based on vendor specific objective evidence, or VSOE, of fair value of each element

and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria have been met. The balance of the revenue, net of any discounts inherent in the arrangement, is allocated to the delivered product using the residual method and recognized at the outset of the arrangement as the licenses 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 in determining the VSOE of fair value for each element, considering the price charged for each product or applicable renewal rates for 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. In accordance with the provisions of our warranties, we also provide end-users of our appliances the right to replacement appliances, as applicable. 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 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, dependent upon future events, including the amount of stock balancing activity by our distributors and the level of distributor inventories at the time of any price adjustments. We continually monitor the factors that influence the pricing of our products and distributor inventory levels and make adjustments to these provisions when we believe actual returns and other allowances could differ from established reserves. Our ability to recognize revenue upon shipment to our distributors is predicated on our ability to reliably estimate future stock balancing returns. If actual experience or changes in market condition impairs our ability to estimate returns, we would be required to defer the recognition of revenue until the delivery of the product to the end-user. Allowances for estimated product returns amounted to approximately $1.3 million at June 30, 2005 and $2.3 million at December 31, 2004. The decrease in allowances for estimated product returns is a reflection of the decrease in stock rotation experience primarily due to a reduction in packaged product inventory held by our distributors resulting from an increase in enterprise customer license arrangements, which are typically delivered electronically. We have not reduced and have no current plans to reduce our prices for inventory currently held by distributors or resellers. Accordingly, there were no reserves required for price protection at June 30, 2005 and December 31, 2004. We also record reductions to revenue for customer programs and incentive offerings including volume-based incentives, at the time the sale is recorded. If market conditions were to decline, we could take actions to increase our customer incentive offerings, which could result in an incremental reduction to our revenue at the time the incentive is offered.

Stock-Based Compensation Disclosures

Our stock-based compensation program is a broad based, long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interest. 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-based compensation program.

Statement of Financial Accounting Standards, or 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, or 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 methods prescribed by SFAS No. 123.

As of June 30, 2005, we had eight stock-based compensation plans, including two plans assumed in our acquisition of Net6. and two plans approved by our stockholders at our Annual Meeting of Stockholders on May 5, 2005, namely, our 2005 Equity Incentive Plan and 2005 Employee Stock Purchase Plan. Our Board of Directors has provided that no new awards will be granted under our Amended and Restated 1995 Stock Option Plan, the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan, the Amended and Restated 1995 Non-Employee Director Stock Option Plan and the Third Amended and Restated 1995 Employee Stock Purchase Plan, although awards granted under these plans and still outstanding will continue to be subject to all terms and conditions of such plans, as applicable. We typically grant stock options for a fixed number of shares to employees and non-employee directors with an exercise price equal to or above the

fair value of the shares at the date of grant. As discussed above and in note 2 to our condensed consolidated financial statements, we apply the intrinsic value method under APB Opinion No. 25 and related interpretations in accounting for our plans except for 51,546 shares issuable under options assumed as part of the Net6 acquisition, which were accounted for in accordance with Financial Accounting Standards Board, or FASB Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25)and was recorded as deferred compensation in the accompanying 2005 condensed consolidated balance sheet. No stock-based compensation cost has been reflected in net income except for the amounts related to the 51,546 optionsThe assumed as part of the Net6 acquisition, whichawards had an exercise price below marketexcess of fair value on the dateover intrinsic value of grant. The impact of our fixed stock plans and our stock purchase plan on our condensed consolidated financial statements from the use of optionsapproximately $0.5 million, which is reflected in the calculation of earnings per share in the form of dilution.

In December 2004, the FASB 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 is effective as of the beginning of the fiscal year that begins after June 15, 2005 (i.e. January 1, 2006total consideration for the Company). As of the effective date, we will be requiredtransaction. The 2005 Acquisitions are intended 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” methodfurther extend our position 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 “modified retrospective” 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 our net operating cash flows and increase net financing cash flows in periods after adoption.

We currently expect to adopt SFAS No. 123R using the modified prospective method. We believe that the adoption of SFAS No. 123R’s fair value method will have a material adverse impact on our results of operations; however, currently, the impact the adoption of SFAS No. 123R will have on ourapplication delivery solutions. The results of operations cannot be quantified because,of the acquired companies are included as part of our results beginning after their respective dates of acquisition and revenues from the acquired products are included in our Product License revenue and Technical Services revenue in the accompanying condensed consolidated statements of income. In connection with the 2005 Acquisitions, we allocated $234.3 million to goodwill, $40.2 million to core technology and $35.8 million to other intangible assets. We assigned all of the goodwill to our Americas segment.

Purchase Accounting for Acquisitions

The fair values used in determining the purchase price allocation for certain intangible assets for our acquisitions were based on estimated discounted future cash flows, royalty rates and historical data, among other things,information. Purchased in-process research and development, or IPR&D, of $7.0 million was expensed upon the closing of the NetScaler, Inc. acquisition in accordance with FASB Interpretation No. 4,Applicability of FASB Statement No. 2 to Business Combinations

Accounted for by the Purchase Method, due to the fact that IPR&D pertains to technology that was not currently technologically feasible, meaning it will depend onhad not reached the levelsworking model stage, did not contain all of share-based payments grantedthe 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 was 19%. The rate of return factored in the future.

The following table (in thousands, except option price) provides information asuncertainty surrounding the successful development of June 30, 2005 about the securities authorized for issuance to our employees and non-employee directors under our fixed stock compensation plans, consisting of our Amended and Restated 1995 Stock Plan, the Second Amended and Restated 1995 Employee Stock Purchase Plan, the 1995 Non-Employee Director Option Plan and the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan, the Amended and Restated 2000 Stock Incentive Plan of Net6 Inc. and the Amended and Restated 2003 Stock Incentive Plan of Net6, Inc., the 2005 Equity Incentive Plan and the 2005 Employee Stock Purchase Plan:

Plan


  

(A)

Number of securities to

be issued upon exercise of

outstanding options,

warrants and rights


  

(B)

Weighted-average

exercise price of

outstanding options,

warrants and rights


  

(C)

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

  35,429  $25.48  9,987

Equity compensation plans not approved by security holders*

  22   2.81  —  
   
      

Total

  35,451  $25.47  9,987
   
      

*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.

The following table provides information about stock options granted for the six months ended June 30, 2005 and for the year ended December 31, 2004 for employees, non-employee directors and for certain executive officers. The stock option data for listed officers relates to our Named Executive Officers. The “Named Executive Officers” for the six months ended June 30, 2005 and for the year ended December 31, 2004 consist of our chief executive officer and our four other most highly compensated executive officers who earned a total salary and bonus in excess of $100,000 in 2004, as reported in our Proxy Statement dated April 1, 2005 and who are current employees:

   

Six Months Ended

June 30, 2005


  

Year Ended

December 31, 2004


 

Net grants to all employees, non-employee directors and executive officers as a percent of outstanding shares (1) (2)

  0.52% 1.73%
   

 

Grants to Named Executive Officers as a percent of outstanding shares (2)

  0.12% 0.17%
   

 

Grants to Named Executive Officers as a percent of total options granted

  9.66% 4.83%
   

 

Cumulative options held by Named Executive Officers as a percent of total options outstanding (3)

  10.58% 9.66%
   

 


(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, 2003 through June 30, 2005 (in thousands, except weighted-average exercise price). Some amounts may not add due to rounding.

      Options Outstanding

   

Shares Available

for Grant


  

Number of

Shares


  

Weighted Average

Exercise Price


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
   

 

   

Granted at market value

  (2,122) 2,122   22.86

Exercised

  —    (2,369)  13.86

Forfeited/cancelled

  1,230  (1,230)  35.15

New plans (1)

  10,100  N/A   N/A

Plan retirement (2)

  (51,465) N/A   N/A

Additional shares reserved

  9,371  N/A   N/A
   

 

   

Balance at June 30, 2005

  9,987  35,451   25.47
   

 

   

(1)Represents shares available for grant due under our 2005 Equity Incentive Plan and the 2005 Employee Stock Purchase Plan.
(2)Represents shares no longer available for grant due the resolution of our Board of Directors that upon stockholder approval of the 2005 Equity Incentive Plan and the 2005 Employee Stock Purchase Plan, no new awards will be granted under our Amended and Restated 1995 Stock Option Plan, the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan, the Amended and Restated 1995 Non-Employee Director Stock Option Plan and the Third Amended and Restated 1995 Employee Stock Purchase Plan.

A summary of our in-the-money and out-of-the-money option information as of June 30, 2005 is as follows (in thousands, except weighted average exercise price):

   Exercisable

  Unexercisable

  Total

   Shares

  

Weighted Average

Exercise Price


  Shares

  

Weighted Average

Exercise Price


  Shares

  

Weighted Average

Exercise Price


In-the-money

  10,255  $14.73  5,850  $14.73  16,105  $14.73

Out-of-the-money (1)

  15,345   37.22  4,001   23.60  19,346   34.41
   
      
      
    

Total options outstanding

  25,600   28.21  9,851   18.33  35,451   25.47
   
      
      
    

(1)Out-of-the-money options are those options with an exercise price equal to or above the closing price of $21.66 per share for our common stock at June 30, 2005.

The following table provides information with regard to our stock option grants during the six months ended June 30, 2004 to the Named Executive Officers:

   Individual Grants(1)

   
   

Number of

Securities

Underlying

Options Grant (#)


  

Exercise Price

($/share)


  Expiration Date

Mark Templeton

  100,000  $22.50  April 28, 2010

John Burris

  37,500  $22.50  April 28, 2010

David Henshall

  30,000  $22.50  April 28, 2010

David Friedman

  20,000  $22.50  April 28, 2010

Stefan Sjostrom

  17,500  $22.50  April 28, 2010

(1)IPR&D.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 and outstanding options held by our current Named Executive Officers as of and for the quarter ended June 30, 2005:

   

Shares

Acquired on

Exercise (#)


  

Value

Realized ($)(1)


  

Number of Securities

Underlying Unexercised (#)

Options at June 30, 2005


  

Values of Unexercised

In-the-Money Options at

June 30, 2005 ($)


      Exercisable

  Unexercisable

  Exercisable

  Unexercisable(2)

Mark Templeton

  —     —    2,066,982  235,518  $6,153,056  $805,194

John Burris

  —     —    469,773  147,853  $668,739  $514,787

David Friedman

  —     —    93,699  116,301  $1,205,564  $1,019,561

Stefan Sjostrom

  18,959  $216,995  246,856  82,737  $133,876  $416,796

David Henshall

  —     —    115,140  174,860  $790,838  $741,087

(1)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 and 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 June 30, 2005 ($21.66 per share), multiplied by the number of shares underlying the option.

For further information regarding our stock-based compensation plans, see note 2 to our condensed consolidated financial statements.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of financial condition and results of operations are based upon our condensed 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 other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the year ended December 31, 2004,2005, for further information regarding our critical accounting policies and estimates.

The notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2004,2005, the unaudited interimnotes to our condensed consolidated financial statements and the related notes to the unaudited interim condensed

consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the factors and events described elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” includingand in “CertainPart II, Item 1A “Risk Factors, Which May Affect Future Results,” contain additional information related to our accounting policies and should be read in conjunction with the following discussion and analysis relating to the individual financial statement captions and our overall financial performance, operations and financial position.

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-specific information, historical collection experience and economic market conditions. If market conditions decline, or if the financial condition of our distributors or customers deteriorates, we may be unable to determine that collectibility is probable, and we could be required to defer the recognition of revenue until we receive customer payments.

We license most of our products bundled with an initial subscription for 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 subscriptions for license updates, when not bundled with the initial product release or purchase, technical support, product training or consulting services. We allocate revenue to license updates and any other undelivered elements of the arrangement based on vendor specific objective evidence, or VSOE, of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria have been met. The balance of the revenue, net of any discounts inherent in the arrangement, is allocated to the delivered product using the residual method and recognized at the outset of the arrangement as the licenses 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 in determining the VSOE of fair value for each element, considering the price charged for each product or applicable renewal rates for license updates.

In the normal course of business, we do not permit product returns, but we do provide most of our distributors with stock balancing and price protection rights. In accordance with the provisions of our warranties, we also provide end-users of our products the right to replacement products, as applicable. 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 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 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, dependent upon future events, including the amount of stock balancing activity by our distributors and the level of distributor inventories at the time of any price adjustments. We continually monitor the factors that influence the pricing of our products and distributor inventory levels and make adjustments to these provisions when we believe actual returns and other allowances could differ from established reserves. Our ability to recognize revenue upon shipment to our distributors is predicated on our ability to reliably estimate future stock balancing returns. If actual experience or changes in market condition impairs our ability to estimate returns, we would be required to defer the recognition of revenue until the delivery of the product to the end-user. Allowances for estimated product returns amounted to approximately $1.9 million at June 30, 2006 and $2.3 million at December 31, 2005. We have not reduced and have no current plans to reduce our prices for inventory currently held by distributors. Accordingly, there were no reserves required for price protection at June 30, 2006 and December 31, 2005. We also record reductions to revenue for customer programs and incentive offerings including volume-based incentives, at the time the sale is recorded. If market conditions were to decline, we could take actions to increase our customer incentive offerings, which could result in an incremental reduction to our revenue at the time the incentive is offered.

Stock-Based Compensation

We adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123R,Share-Based Payment on January 1, 2006, the effective date for such adoption. Prior to January 1, 2006, we accounted for our stock-based compensation plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. We did not recognize compensation cost related to stock options granted to our employees and non-employee directors that had an exercise price equal to or above the market value of the underlying common stock on the date of grant in our condensed consolidated statement of income prior to January 1, 2006. We elected to adopt SFAS No. 123R using the modified-prospective method, under which compensation cost, based on the requirements of SFAS No. 123R, is recognized beginning with the effective date for all stock-based awards granted to employees after the effective date and prior to the effective date that remain unvested as of the effective date. In addition, under the modified-prospective method prior periods are not revised for comparative purposes. Under the fair value recognition provisions of SFAS No. 123R, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate and any expected dividends.

For purposes of determining the expected volatility factor, we considered the implied volatility in two-year market-traded options on our common stock based on third party volatility quotes in accordance with the provisions of Staff Accounting Bulletin, or SAB, No. 107. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. The expected term of our options is based on historical employee exercise patterns considering changes in vesting periods and contractual terms. We also analyzed our historical pattern of option exercises based on certain demographic characteristics and we determined that there were no meaningful differences in option exercise activity based on the demographic characteristic. The approximate risk free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with remaining terms equivalent to the expected term on our options. We do not intend to pay dividends on our common stock in the foreseeable future and, accordingly, we used a dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards, including those with graded vesting schedules, are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. Beginning in the second quarter of 2006, we began issuing non-vested stock units with performance goals to certain key executives. The number of non-vested stock units underlying each award is determined based on a range of attainment within defined performance goals. We are required to estimate the attainment that will be achieved related to the defined performance goals and number of non-vested stock units that will ultimately be awarded in order to recognize compensation expense over the vesting period. If our initial estimates of performance goal attainment changes, the related expense may fluctuate from quarter to quarter based on those estimates and if the performance goals are not met, no compensation cost will be recognized and any previously recognized compensation

cost will be reversed. As of June 30, 2006, there was $65.2 million of total unrecognized compensation cost related to options, non-vested stock and non-vested stock units. That cost is expected to be recognized over a weighted-average period of 1.92 years.

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model, the stock-based compensation expense we recognize in future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and earnings per share. This may result in a lack of consistency in future periods and materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. These characteristics are not present in our option grants and employee stock purchase plan shares. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire with little or no intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, the value realized from these instruments may be significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. The guidance in SFAS No. 123R and SAB No. 107 is relatively new from an application perspective and the application of these principles may be subject to further interpretation and refinement over time. See Note 2 to our condensed consolidated financial statements for further information regarding our adoption of SFAS No. 123R.

In November 2005, the Financial Accounting Standards Board, or the FASB, issued FASB Staff Position, FAS123(R)-3,Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards, or FSP. This FSP requires an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123R or the alternative transition method as described in the FSP. An entity that adopts SFAS No. 123R using the modified prospective method may make a one-time election to adopt the transition method described in this FSP. An entity may take up to one year from the later of its initial adoption of SFAS No. 123R or the effective date of this FSP to evaluate its available transition alternatives and make its one-time election. This FSP became effective in November 2005. We are still evaluating whether we will adopt the alternative method for calculating our additional-paid-in-capital pool described in the FSP.

Results of Operations

Our operations consist of the design, development, marketing and support of access infrastructure software, appliancesproducts and services that enable effectiveon-demand access to information and efficient enterprise-wide deploymentapplications for our customers, which include individual consumers and managementprofessionals, small businesses and enterprises. The results of applicationsoperations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period partially because of the seasonality of our business. Historically, our fourth quarter revenue for any year is typically higher than the first quarter of the subsequent year.

Our cost of services revenues and information. operating expenses increased for the three and six months ended June 30, 2006 due to the stock-based compensation expense related to our adoption of SFAS No. 123R. We expect that our overall cost of services revenues and operating expenses will continue to increase for the remainder of 2006 due to the adoption of SFAS No. 123R. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” and Note 2 to our condensed consolidated financial statements for more information related to our adoption of SFAS No. 123R.

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 practice, foreign currency denominated expenses will be higher in the current year if the dollar was weak in the prior year. If the dollar is strong in the current year, most of the benefits will be reflected in our operating costs. 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. In the first six months of 2005 our operating expenses were generally lower due to a stronger dollar compared to the first six months of 2006 during which our operating expenses were higher due to the dollar being generally weaker.

The following table sets forth our condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands).

 

      

Three Months

Ended June 30,

2005 vs. June 30,

2004


  

Six Months

Ended June 30,

2005 vs. June 30,

2004


 
  

Three Months Ended

June 30,


 

Six Months Ended

June 30,


 
  

2005


  

2004


  

2005


  

2004


   Three Months Ended June 30, Six Months Ended June 30, 

Three Months Ended

June 30, 2006

vs. June 30, 2005

  

Six Months Ended

June 30, 2006

vs. June 30, 2005

 
   2006 2005 2006 2005 

Revenues:

         

Product licenses

  $91,980  $87,716  $182,042  $175,142  4.9%3.9% $117,799  $91,980  $231,984  $182,042  28.1% 27.4%

License updates

   80,455   66,981   157,630   125,878  20.1 25.2   99,750   80,455   193,621   157,630  24.0  22.8 

Services

   38,794   23,605   73,447   38,592  64.3  90.3 

Online Services

  35,128   23,844   66,766   44,209  47.3  51.0 

Technical Services

  22,791   14,950   43,095   29,238  52.4  47.4 
  


 


 


 


               

Total net revenues

   211,229   178,302   413,119   339,612  18.5  21.6   275,468   211,229   535,466   413,119  30.4  29.6 
  


 


 


 


               

Cost of revenues:

         

Cost of product license revenues

   2,277   756   3,645   2,169  201.2  68.0 

Cost of license revenues

  8,116   2,277   14,747   3,645  256.4  304.6 

Cost of services revenues

   5,395   4,169   9,910   6,992  29.4  41.7   11,421   5,395   21,811   9,910  111.7  120.1 

Amortization of core and product technology

   3,693   3,598   7,011   6,632  2.6  5.7   4,585   3,693   9,586   7,011  24.2  36.7 
  


 


 


 


               

Total cost of revenues

   11,365   8,523   20,566   15,793  33.3  30.2   24,122   11,365   46,144   20,566  112.2  124.4 
  


 


 


 


               

Gross margin

   199,864   169,779   392,553   323,819  17.7  21.2   251,346   199,864   489,322   392,553  25.8  24.7 
  


 


 


 


               

Operating expenses:

         

Research and development

   26,402   22,173   51,467   41,211  19.1  24.9   38,222   26,402   71,882   51,467  44.8  39.7 

Sales, marketing and support

   92,035   80,804   186,429   154,932  13.9  20.3   117,002   92,035   225,939   186,429  27.1  21.2 

General and administrative

   30,150   27,837   57,561   52,588  8.3  9.5   40,796   30,150   79,414   57,561  35.3  38.0 

Amortization of other intangible assets

   2,214   1,873   4,391   2,599  18.2  68.9   4,150   2,214   8,182   4,391  87.4  86.3 

In-process research and development

   —     —     —     18,700   *  *
  


 


 


 


               

Total operating expenses

   150,801   132,687   299,848   270,030  13.7  11.0   200,170   150,801   385,417   299,848  32.7  28.5 
  


 


 


 


               

Income from operations

   49,063   37,092   92,705   53,789  32.3  72.3   51,176   49,063   103,905   92,705  4.3  12.1 

Interest income

   5,369   2,567   10,001   8,252  109.2  21.2   10,302   5,369   17,904   10,001  91.9  79.0 

Interest expense

   (16)  (8)  (24)  (4,352) 100.0  (99.4)  (73)  (16)  (511)  (24) *  * 

Write-off of deferred debt issuance costs

   —     —     —     (7,219)  *  *

Other income, net

   (370)  190   94   1,175  (294.7) (92.0)

Other income (expense), net

  111   (370)  (597)  94  130.0  * 
  


 


 


 


               

Income before income taxes

   54,046   39,841   102,776   51,645  35.7  99.0   61,516   54,046   120,701   102,776  13.8  17.4 

Income taxes

   26,160   8,366   36,330   10,845  212.7  235.0   15,066   26,160   29,572   36,330  (42.4) (18.6)
  


 


 


 


               

Net income

  $27,886  $31,475  $66,446  $40,800  (11.4)% 62.9% $46,450  $27,866  $91,129  $66,446  66.7% 37.1%
  


 


 


 


               

*Not meaningful.

Revenues

        Net Revenues. Net revenues include the following categories: Product Licenses, License Updates, Online Services and Technical Services. Product Licenses primarily representrepresents fees related to the licensing of our Virtualization Systems products, which primarily consists of our Access Suite products, including Presentation Server, our Application Networking products, which are comprised of our Citrix NetScaler products and our Citrix Access Gateway products. These amountsrevenues are reflected net of sales allowances and provisions for stock balancing return rights. Product License revenues are partially offset by incentives that we offer to our channel distributors and value-added resellers to stimulate demand for our products. Our Presentation Server product accounted for approximately 71.3% of our Product License revenue for the three months ended June 30, 2006 and 73.3% for the six months ended June 30, 2006 and 86.8% of our Product License revenue for the three months ended June 30, 2005 and 89.4% for the six months ended June 30, 2005 and 95.3%2005. The decrease in our Presentation Server product as a percentage of our Product License revenue forwhen comparing the three months ended June 30, 2004 and 95.8% for the six months ended June 30, 2004. The decrease in Presentation Server product revenue as a percent of our Product License revenue for the three and six months ended June 30, 2005 compared2006 to the three months and six months ended June 30, 20042005 is due to an increase in sales of our Access Suite.Application Networking products as well as increased sales of our other Virtualization Systems products. During the remainder of 2006, we expect our Presentation Server product to continue to decrease as a percentage of our Product License revenue due to expected increases in sales of our Application Networking products and other Virtualization Systems products. License Updates consist of fees

related to our Subscription Advantage program that are recognized ratably over the term of the contract, which is typically 12 to 24 months. Subscription Advantage (our terminology for post contract support) 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.

Net revenues increased $32.9 million for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 and increased $73.5 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004. Product License revenue increased $4.3 million for the three months ended June 30, 2005 compared to the three

months ended June 30, 2004 and increased $6.9 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 due to increased sales of our Access Suite and our Access Gateway products. License Updates revenue increased $13.5 million for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 and increased $31.8 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 due primarily to continued renewals of ourWe anticipate that Subscription Advantage program. Services revenue increased $15.2 million for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 primarily due to continued revenue growth in our Citrix Online division. Services revenue increased $34.9 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 primarily due to the impact of our Expertcity acquisition in February 2004. We offer incentive programs to our channel distributors and value-added resellers to stimulate demand for our products. Revenues associated with these programs are partially offset by these incentives to our channel distributors and value-added resellers. We currently expect Product License revenue and Services revenue, which includes revenues from our Citrix Online division, to increase for the remainder of 2005 as compared to last year. In addition, we expect Subscription Advantagewill continue to be of strategic importance to our business in 2005throughout 2006 because it fosters long-term customer relationships and gives us improved visibility and predictability due to the recurring nature of this revenue stream. Online Services revenues consist primarily of fees related to online service agreements and are recognized ratably over the contract term. Technical Services revenues are comprised of fees from technical support services, which are recognized ratably over the contract term, as well as revenues from product training and certification, and consulting services related to implementation of our products, which are recognized as the services are provided.

 

   

Three Months Ended

June 30,

  

Six Months Ended

June 30,

  

Three Months

Ended June 30,

2006 vs. June 30,

2005

  

Six Months

Ended June 30,

2006 vs. June 30,

2005

   2006  2005  2006  2005    
   (In thousands)

Product licenses

  $117,799  $91,980  $231,984  $182,042  $25,819  $49,942

License updates

   99,750   80,455   193,621   157,630   19,295   35,991

Online Services

   35,128   23,844   66,766   44,209   11,284   22,557

Technical Services

   22,791   14,950   43,095   29,238   7,841   13,857
                        

Total net revenues

  $275,468  $211,229  $535,466  $413,119  $64,239  $122,347
                        

Net revenues increased $64.2 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 and increased $122.3 for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. Product License revenue increased $25.8 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 and increased $49.9 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to the addition of our Application Networking products and increased sales of our Virtualization Systems products, primarily due to increases in Presentation Server and, to a lesser extent, our newer products. License Updates revenue increased $19.3 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 and increased $36.0 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 due primarily to a larger base of subscribers and increasing renewals related to our Subscription Advantage program. Online Services revenue increased $11.3 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 and increased $22.6 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to increased customer adoption of all of our Citrix Online Division’s products. Technical Services revenue increased $7.8 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 and increased $13.9 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to services added related to our Application Networking products and an increase in sales of our education and consulting services related to implementation of our Virtualization Systems products. During 2006, we expect Product License revenue to increase due to expected growth from sales of our Application Networking products and our Virtualization Systems products. We also anticipate that License Updates revenue will increase for the remainder of 2006 as we continue to grow our installed customer base. Online Services revenues are also expected to increase for the remainder of 2006.

Deferred revenues increased approximately $17.5$24.7 million as compared to December 31, 2004.2005. This increase was due primarily to increased renewals of our Subscription Advantage program and to a lesser extent an increase in sales fromof our Citrix Online division.Division’s products. We currently expect deferred revenue to continue to increase for the remainder of 2005.2006.

We do not believe that backlog, as of any particular date, is a reliable indicator of future performance. While it is generally our practice to promptly ship our products upon receipt of properly finalized purchase orders, we sometimes have product license orders that have not shipped or have otherwise not met all the required criteria for revenue recognition. Although the amount of such product license orders may vary, the amount, if any, of such product license orders at the end of a particular period has not been material to total revenue at the end of the same period.

International and Segment Revenues.

International revenues (sales outside of the United States) accounted for approximately 50%46% of net revenues for the three months ended June 30, 20052006 and 51%50% the three months ended June 30, 20042005 and approximately 48% of net revenues for the six months ended June 30, 2006 and 51% of net revenues for the six months ended June 30, 2005 and 53% the six months ended June 30, 2004.2005. For detailed information on international revenues, please refer to noteNote 7 to our condensed consolidated financial statements appearing in this report.statements.

Segment Revenues

An analysis of our reportable segment net revenue is presented below (in thousands):

 

              Increase for the

         Increase for the 
  Three Months Ended June 30,

  Six Months Ended June 30,

  

Three Months Ended

June 30, 2005 vs.

June 30, 2004


  

Six Months Ended

June 30, 2005 vs.

June 30, 2004


   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended

June 30, 2006

vs. June 30, 2005

  

Six Months Ended

June 30, 2006

vs. June 30, 2005

 
  2005

  2004

  2005

  2004

     2006  2005  2006  2005   

Americas (1)

  $92,475  $84,249  $178,640  $159,139  9.8% 12.3%  $125,972  $92,475  $235,600  $178,640  36.2% 31.9 %

EMEA (2)

   76,164   66,867   153,596   136,378  13.9  12.6    91,127   76,164   188,733   153,596  19.6  22.9 

Asia-Pacific

   18,746   16,731   36,674   30,844  12.0  18.9    23,241   18,746   44,367   36,674  24.0  21.0 

Citrix Online division

   23,844   10,455   44,209   13,251  128.1  233.6    35,128   23,844   66,766   44,209  47.3  51.0 
  

  

  

  

                  

Net revenues

  $211,229  $178,302  $413,119  $339,612  18.5% 21.6%  $275,468  $211,229  $535,466  $413,119  30.4% 29.6%
  

  

  

  

                  

(1)

(1)    Our Americas segment is comprised of the United States, Canada and Latin America.

(2)

Defined as Europe, Middle East and Africa.

 

With respect to our segment revenues, the increase in net revenues for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 and for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 and for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 was due primarily to the factors previously discussed across the Americas, EMEA, Asia-Pacific segments and our Citrix Online Division. For additional information on our segment revenues, please refer to Note 7 of our condensed consolidated financial statements.

 

Cost of Revenues

 

   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended

June 30, 2006

vs. June 30, 2005

  

Six Months Ended

June 30, 2006

vs. June 30, 2005

   2006  2005  2006  2005    
   (In thousands)

Cost of license revenues

  $8,116  $2,277  $14,747  $3,645          $5,839          $11,102

Cost of services revenues

   11,421   5,395   21,811   9,910   6,026   11,901

Amortization of core and product technology

   4,585   3,693   9,586   7,011   892   2,575
                        

Total cost of revenues

  $  24,122  $  11,365  $  46,144  $  20,566  $12,757  $25,578
                        

With respect to our segment revenues, the increase in net revenues for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 and for the six months ended June 30, 2005 compared to the six months ended June 30, 2004, was due primarily to the factors previously discussed across the Americas, EMEA and Asia-Pacific segments. On February 27, 2004, we acquired Expertcity and after the date of acquisition revenues are reflected in our Citrix Online division. Revenues from our Citrix Online division increased $13.4 million for the three months ended June 30, 2005 compared to the three months ended June 30, 2004 primarily due to growth resulting from continued acceptance of new and existing products and our investment in our Citrix Online division. Revenues from our Citrix Online division increased $31.0 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 due primarily to the full year impact in 2005 of our Expertcity acquisition and continued growth resulting from continued acceptance of new and existing products and our investment in the Citrix Online division. For additional information, please refer to note 4, Acquisitions, and note 7, Segment Information, to our condensed consolidated financial statements.

Cost of Revenues. Cost of revenues consisted primarily of compensation cost and other personnel-related costs of providing services, costs of hardware, the amortization of product and core technology, as well as costs of product media and duplication, manuals, packaging materials, shipping expense, service capacity costs and royalties. Cost of product license revenues increased $1.5$5.8 million for both the three months ended June 30, 20052006 compared to the three months ended June 30, 20042005 and $11.1 million for the six months ended June 30, 20052006 compared to the six months ended June 30, 20042005 primarily due to an increase in sales of our Access Gatewayof Application Networking products, which contain a hardware componentcomponents that hashave a higher cost than our other software license products. Cost of services revenues increased $1.2$6.0 million for the three months ended June 30, 20052006 compared to the three months ended June 30, 2004 primarily due to an increase in sales related to our Citrix Online division resulting from sales

growth due to our continued investment in the business. Cost of services revenues increased $2.92005 and $11.9 million for the six months ended June 30, 20052006 compared to the six months ended June 30, 20042005 primarily due to an increase in costincreased sales of revenues resulting from the full year impactconsulting and technical support services related to our Virtualization Systems products and Application Networking products, increased sales of our Expertcity acquisition.Citrix Online Division’s products and, to a lesser extent, compensation costs related to our adoption of SFAS No. 123R. Amortization of core and product technology increased $0.9 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005 and $2.6 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to increased amortization expense related to core and product technology acquired in our 2005 Acquisitions and to a lesser extent our 2006 Acquisition. For more information regarding the acquisitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisitions” and noteNote 4 to our condensed consolidated financial statements.

We anticipate that for the remainder of 2006, cost of license revenues will continue to increase as compared to current levels as we expect sales of our Application Networking products to increase. In addition, during 2006, we expect our cost of services revenues to increase due to increased sales of our Citrix Online Division’s products and an increase in technical support costs as we increase our customer base, have more frequent product releases and more complex products. Our reported total cost of services revenues is also expected to increase for the remainder of 2006 due to increased compensation expense related to our adoption of SFAS No. 123R.

Gross Margin.Margin

Gross margin as a percent of revenue was 91.2% for the three months ended June 30, 2006 and 94.6% for the three months ended June 30, 2005 and 95.2%91.4% for the threesix months ended June 30, 20042006 and 95.0% for the six months ended June 30, 2005 and 95.3% for the six months ended June 30, 2004. We currently anticipate that2005. The decrease in the remainder of 2005, gross margin as a percentage of net revenues will decline slightlyrevenue for the three and six months ended June 30, 2006 compared to current levels as sales of our Access Gateway products increasethe three and six months ended June 30, 2005 was primarily due to the hardware component of these products that traditionally have a higher cost than our perpetual software license product. In addition, gross margin could also fluctuate from time to time based on a number of factors attributable to theincreases in cost of revenues as describeddiscussed above.

We expect our gross margin to decrease when compared to 2005 levels during the remainder of 2006 due to the factors previously discussed.

Research and Development Expenses.Expenses

   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended

June 30, 2006

vs. June 30,

  

Six Months Ended

June 30, 2006

vs. June 30,

   2006  2005  2006  2005  2005  2005
   (In thousands)

Research and development

  $38,222  $26,402  $71,882  $51,467  $11,820  $20,415

Research and development expenses consisted primarily of personnel-related costs. We expensed substantially all development costs included in theour research and development of software products appliances and enhancements to existing products as incurred except for certain core technologies with an alternative future use. Research and development expenses increased approximately $4.2$11.8 million for the three months ended June 30, 20052006 compared to the three months ended June 30, 2004 primarily due to increased headcount2005 and related personnel costs and an increase in costs for external consultants and developers. Research and development expenses increased approximately $10.3$20.4 million for the six months ended June 30, 20052006 compared to the six months ended June 30, 2004,2005 primarily due to stock-based compensation expense recognized related to our adoption of SFAS No. 123R and increased staffing and related personnel costs and due to the full year impact of our Expertcity acquisition. Excluding the effects of any pending acquisitions, we currently2005 Acquisitions and our continued investment in our business. We expect research and development expenses to increase moderately for the remainder of 2006 when compared to 2005 as we continuelevels due to makethe recognition of stock-based compensation costs related to our adoption of SFAS No. 123R, the full year impact of our acquisitions and our continued investments in our business including the hiring of personnel. See “Management’s Discussion and hire personnelAnalysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” and Note 2 to achieve our product development goals.

condensed consolidated financial statements for more information related to our adoption of SFAS No. 123R.

Sales, Marketing and Support Expenses.Expenses

   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended

June 30, 2006

vs. June 30,

  

Six Months Ended
June 30, 2006

vs. June 30,

   2006  2005  2006  2005  2005  2005
   (In thousands)

Sales, marketing and support

  $117,002  $92,035  $225,939  $186,429  $24,967  $39,510

Sales, marketing and support expenses consisted primarily of personnel-related costs, including sales commissions, and the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. Sales, marketing and support expenses increased approximately $11.2$25.0 million for the three months ended June 30, 20052006 compared to the three months ended June 30, 2004 primarily due to an increase in headcount and the associated increase in salaries, commissions and other variable compensation and employee related expenses. These increases were partially offset by a decrease in marketing program costs due to our 2004 launch of our worldwide brand awareness and advertising campaigns. Sales, marketing and support expenses increased approximately $31.5 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 primarily due to an increase in headcount and the associated increase in salaries, commissions and other variable compensation and employee related expenses, andstock-based compensation expense recognized related to the full year impactour adoption of our Expertcity acquisition. TheseSFAS No. 123R, increases were partially offset by a decrease in marketing program costs related to our worldwide advertising campaigns, as well as, an increase in staffing and related personnel costs due to our 2004 launch2005 Acquisitions. Sales, marketing and support expenses increased approximately $39.5 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to an increase in headcount and the associated increase in salaries, commissions and other variable compensation and employee related expenses, stock-based compensation expense recognized related to our adoption of SFAS No. 123R, an increase in staffing and related personnel costs due to our 2005 Acquisitions, as well as, increases in marketing program costs related to our worldwide brand awareness and advertising campaigns. Excluding the effects of any pending acquisitions, we currentlyWe expect sales, marketing and support expenses to increase moderately for the remainder of 2006 when compared to 2005 levels due to the full year impact of our acquisitions, increased compensation costs as we continue to make investments in our business and hire personnel, as well as additional stock-based compensation costs related to achieve our strategic goals.adoption of SFAS No. 123R. See

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates” and Note 2 to our condensed consolidated financial statements for more information related to our adoption of SFAS No. 123R.

General and Administrative Expenses.Expenses

   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended

June 30, 2006

vs. June 30,

  

Six Months Ended
June 30, 2006

vs. June 30,

   2006  2005  2006  2005  2005  2005
   (In thousands)

General and administrative

  $40,796  $30,150  $79,414  $57,561  $10,646  $21,853

General and administrative expenses consisted primarily of personnel-related related costs, costs related to outside consultants assisting with regulatory compliance and information systems, as well as auditing and legal fees. General and administrative expenses increased approximately $2.3$10.6 million for the three months ended June 30, 20052006 compared to the three months ended June 30, 2004,2005, primarily due to an increase in headcount and the associated salaries and employee related expenses.expenses, stock-based compensation expense recognized related to our adoption of SFAS No. 123R and an increase in staffing and related personnel costs due to our 2005 Acquisitions. General and administrative expenses increased approximately $5.0$21.9 million for the six months ended June 30, 20052006 compared to the six months ended June 30, 2004,2005 primarily due to an increase stock-based compensation expense recognized related to our adoption of SFAS No. 123R, an increase in headcount and the associated salaries and employee related expenses, an increase in staffing and related personnel costs due to our 2005 Acquisitions and, to a lesser extent, an increase in consulting costs primarily related to our information systems. We expect general and administrative expenses to increase for the remainder of 2006 when compared to 2005 levels primarily due to additional compensation costs related to the adoption of SFAS No. 123R and due to the full year impact of our Expertcity acquisition. These increases were partially offset by decrease in our provision for doubtful accounts.

Amortization of Other Intangible Assets. Amortization of other intangible assets remained relatively unchanged for the three months ended June 30, 2005 compared to the three months ended June 30, 2004. Amortization of other intangible assets increased $1.8 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 due primarily to certain finite lived intangible assets associated with Expertcity and Net6 acquisitions. For more information regarding the Expertcity and Net6 acquisition seeSee “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Acquisitions”Operations — Critical Accounting Policies and note 4Estimates” and Note 2 to our condensed consolidated financial statements.statements for more information related to our adoption of SFAS No. 123R.

Amortization of Other Intangible Assets

 

   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended

June 30, 2006

vs. June 30,

  

Six Months Ended

June 30, 2006

vs. June 30,

   2006  2005  2006  2005  2005  2005
   (In thousands)

Amortization of other intangible assets

  $4,150  $2,214  $8,182  $4,391  $1,936  $3,791

In-process Research and Development. In February 2004, we acquired Expertcity, and $18.7Amortization of other intangible assets increased approximately $1.9 million of the purchase price was allocated to in-process research and development, or IPR&D. The amount allocated to IPR&D had not yet reached technological feasibility, had no alternative future use and was written off at the date of the acquisition 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. There were no write-offs of IPR&D during the three months ended June 30, 2005.2006 compared to the three months ended June 30, 2005 and increased $3.8 million for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 primarily due to an increase in amortization expense related to certain finite-lived intangible assets acquired in our 2005 Acquisitions and, to a lesser extent, our 2006 Acquisition. As of June 30, 2006, we had unamortized other identified intangible assets with estimable useful lives in the net amount of $50.5 million. For more information regarding theour acquisitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisitions” and noteNote 4 to our condensed 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 20%. The rate of return included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.

Interest Income.

   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended
June 30, 2006

vs. June 30,

  

Six Months Ended

June 30, 2006

vs. June 30,

   2006  2005  2006  2005  2005  2005
   (In thousands)

Interest income

  $10,302  $5,369  $17,904  $10,001  $4,933  $7,903

Interest income increased approximately $2.8$4.9 million for the three months ended June 30, 20052006 compared to the three months ended June 30, 2004, primarily due to higher overall average cash, cash equivalent2005 and investment balances held during the second quarter of 2005 as compared to the second quarter of 2004 and higher interest rates earned on those cash, cash equivalent and investment balances. Interest income increased approximately $1.7$7.9 million for the six months ended June 30, 20052006 compared to the six months ended June 30, 2004 primarily2005 due to higher interest rates earned for the six months ended June 30, 2005 compared to the six months ended June 30, 2004 partially offset byon overall higher average cash, cash equivalent and investment balances forthat resulted primarily from increased proceeds received from employee stock-based compensation plans and cash from operations, partially offset by the six months ended June 30, 2004 comparedrepayment of our term loan facility, or the Term Loan and an increase in purchases of property and equipment primarily related to the six months ended June 30, 2005.information systems. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions” and “ – Liquidity and Capital Resources.”Resources” and Note 6 to our condensed consolidated financial statements.

Interest Expense.

   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended
June 30, 2006

vs. June 30, 2005

  

Six Months Ended
June 30 2006

vs. June 30 2005

   2006  2005  2006  2005    
   (In thousands)

Interest expense

  $73  $16  $511  $24  $57  $487

Interest expense remained relatively unchanged for the three months ended June 30, 20052006 compared to the three months ended June 30, 2004.2005. Interest expense decreased approximately $4.3increased $0.5 million for the six months ended June 30, 20052006 compared to the six months ended June 30, 2004 and2005 primarily due to the redemption ofinterest paid on our convertible subordinated debentures on March 22, 2004. We currently expect interest expenseTerm Loan prior to increase due to our entry into a senior secured revolving credit agreement and a term loan facilityits repayment in August 2005.February 2006. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and noteNote 6 and note 12 to our condensed consolidated financial statements.

Other Income Net.(Expense), Net

   Three Months Ended June 30,  Six Months Ended June 30,  

Three Months Ended
June 30, 2006

vs. June 30, 2005

  

Six Months Ended
June 30 2006

vs. June 30 2005

 
   2006  2005  2006  2005    
   (In thousands) 

Other income (expense), net

  $111  $(370) $(597) $94  $481  $(691)

Other income (expense), net decreased approximately $0.6is 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. The $0.5 million forincrease in other income (expense), net during the three months ended June 30, 20052006 compared to the three months ended June 30, 2004 and decreased approximately $1.12005 was due primarily to gains on the settlement of certain of our foreign currency contracts partially offset by losses due to the remeasurement of our foreign currency transactions. The $0.7 million decrease for the six months ended June 30, 20052006 compared to the six months ended June 30, 20042005 was due primarily due to realized losses on certain of our investments and to a lesser extent lower gains on the remeasurement of our foreign currency transactions.

Income Taxes.Taxes

On October 22, 2004, the American Jobs Creation Act, or the AJCA, was signed into law. The AJCA providesprovided for an 85% dividends received deduction on dividend distributions of foreign earnings to a U.S. taxpayer, if certain conditions are met. During the second quarter of fiscal 2005, we completed our evaluation of the effects of the repatriation provision of the AJCA. On July 29, 2005,AJCA, and our Chief Executive Officer and Board of Directors approved our Domestic Reinvestment Plan, or DRP,dividend reinvestment plan under the AJCA. The implementationDuring the second quarter of the DRP will result in the repatriation of approximately $503 million of certain of our foreign earnings, of which $500 million qualifies for the 85% dividends received deduction. Accordingly,2005, we have recorded an estimateda tax provision of approximately $24.9 million forrelated to the planned repatriationrepatriation. Additionally, during the second quarter of certain foreign earnings. Additionally,2005, we recorded athe reversal of approximately $8.8 million for income taxes on certain foreign earnings for which a deferred tax liability had been previously accrued. As a result, a net income tax expenserecorded. In September 2005, we repatriated approximately $503 million of approximately $16.1certain foreign earnings, of which $500 million was recognized in second quarter of fiscal 2005.

qualified for the 85% dividends received deduction.

We maintain certain operational and administrative processes in overseas subsidiaries and our foreign earnings are taxed at lower foreign tax rates. Our tax rate may fluctuate based on the actual geographic mix of sales in a given quarter. Other than the one-time repatriation provision under the DRP,AJCA described above, we do not expect to remit earnings from our foreign subsidiaries. Our effective tax rate increased towas approximately 24% for the three months ended June 30, 2006 and 48% for the three months ended June 30, 2005 compared to 21%and was approximately 25% for the six months ended June 30, 2006 and 35% for the six months ended June 30, 2005. The decrease in our effective tax rate for the three months ended June 30, 20042006 compared to the three months ended June 30, 2005 and the decrease in our effective tax rate for the six months ended June 30, 2006 compared to the six months ended June 30, 2005 is primarily due primarily to the additional tax expense recorded in accordance with our plans2005 due to repatriatethe repatriation of foreign earnings under the AJCA.

AJCA partially offset by an increase in the effective tax rate due to the adoption of SFAS No. 123R in 2006.

Liquidity and Capital Resources

During the six months ended June 30, 2006, we generated positive operating cash flows of $155.5 million. These cash flows related primarily to net income of $91.1 million, adjusted for, among other things, non-cash charges, including depreciation and amortization expenses of $30.4 million, the tax effect of stock-based compensation of $34.6 million and stock-based compensation expense of $25.6 million, partially offset by an operating cash outflow of $34.6 million related to the excess tax benefit related to the exercise of stock options. Our investing activities used $456.8 million of cash consisting primarily of purchases net of proceeds from sales and maturities of investments of $421.9 million, the expenditure of $21.4

million for the purchase of property and equipment and $13.4 million related to our 2006 Acquisition. Our financing activities provided cash of $161.9 million primarily related to proceeds received from the issuance of common stock under our employee stock-based compensation plans of $196.5 million, excess tax benefits from the exercise of stock-based awards of $34.6 million partially offset by the expenditure of $38.3 million for our stock repurchase program and the payment of $31.0 million on our Term Loan.

During the six months ended June 30, 2005, we generated positive operating cash flows of $138.5 million. These cash flows related primarily to net income of $66.4 million, adjusted for, among other things, the tax benefitsbenefit from the exerciseeffect of non-statutory stock options and disqualifying dispositions of incentive stock optionsstock-based compensation of $13.9 million, non-cash charges,

including depreciation and amortization expenses of $21.6 million, and an aggregate increase in cash flow from our operating assets and liabilities of $33.7 million. Our investing activities provided $1.0 million of cash consisting primarily of the net proceeds, after reinvestment, from sales and maturities of investments of $13.0 million, partially offset by the expenditure of $12.0 million for the purchase of property and equipment. Our financing activities used cash of $5.3 million related primarily to our expenditure of $41.6 million for our stock repurchase program, partially offset by $36.3 million of proceeds received from the issuance of common stock under our employee stock-based compensation plans.

Cash, Cash Equivalents and Investments

During the six months ended

   June 30, 2006  December 31, 2005  

2006

Compared to

2005

   (In thousands)

Cash, cash equivalents and investments

  $835,725  $554,221  $281,504

The increase of $281.5 million in cash, cash equivalents and investments when comparing June 30, 2004, we generated positive operating cash flows of $122.9 million. These cash flows related2006 to December 31, 2005, is primarily due to net income of $40.8 million, adjusted for, among other things, tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of $12.1 million, non-cash charges, including depreciation and amortization expenses of $19.4 million, the write-off of in-process research and development associated with the Expertcity acquisition of $18.7 million, the accretion of original issue discount and amortization of financing costs on our convertible subordinated debentures of $4.3 million, the write-off of deferred debt issuance costs on our convertible subordinated debentures of $7.2 million and an aggregate increase in cash flow from our operating assets and liabilities of $16.9 million. Our investing activities provided $179.8 million of cash consisting primarily of the net proceeds, after reinvestment, from sales and maturities of investments of $295.2 million, partially offset by the expenditure of $11.7 million for the purchase of property and equipment, the expenditure of $12.9 million related to the purchase of certain licensing agreements and cash paid for the Expertcity acquisition, net of cash acquired, of $90.8 million. Our financing activities used cash of $379.0 million related primarily to our expenditure of $355.7 million to redeem our convertible subordinated debentures and the expenditure of $43.2 million related to stock repurchase programs, partially offset by theincreased proceeds received from the issuance of common stock under our employee stock-based compensation plans, of $19.9 million.

Cash, Cash Equivalents and Investments

As of June 30, 2005, we had $539.2 millioncash from operations, a decrease in cash cash equivalentspaid for acquisitions, a decrease in payments made on the Term Loan and investments compared to $417.1 million at December 31, 2004. The increasea decrease in cash cash equivalents and investments as compared to December 31, 2004, was due primarily to lower cash balances at December 31, 2004 as a result ofspent on our expenditures in December 2004 for the Net6 acquisition and higher expenditures for stock repurchase programs in the fourth quarter of 2004 compared to the second quarter of 2005.program. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Operations—Acquisitions” and “ – Liquidity and Capital Resources” and noteNote 4 to our condensed consolidated financial statements. We generally invest our cash and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash needs. Our short and long-term investments primarily consist of interest bearing securities.

In December 2000, we invested $158.1 million in held-to-maturity investments managed by an investment advisor. Our investments matured on March 22, 2004, and we received $195.4 million, all of which was used to redeem a portion of our convertible subordinated debentures.

Restricted Cash Equivalents and Investments

 

   June 30, 2006  December 31, 2005  

2006

Compared to

2005

   (In thousands)

Restricted cash equivalents and investments

  $  63,779  $  63,728  $         51

As of June 30, 2005, we had $145.6 million in restricted cash equivalents and investments compared to $149.1 million at December 31, 2004. Restricted cash equivalents and investments are primarily comprised of approximately $62.8 million in investment securities and cash equivalents pledged as collateral for specified obligations under our synthetic lease arrangement and approximately $82.0 million in investment securities were pledged as collateral for certain of our credit default contracts and interest rate swap agreements. The $3.4 million decrease in restricted cash and investments is primarily due to a decrease in the liability position of our collateralized interest rate swap agreements.arrangement. We maintain 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 pledged collateral for operating purposes. For further information regarding our synthetic lease credit default contracts and interest rate swaps, see notes 8 and 12Note 10 to our condensed consolidated financial statements.

Accounts Receivable, Net

 

   June 30, 2006  December 31, 2005  

2006

Compared to

2005

   (In thousands)

Accounts receivable, net

  $136,175  $142,015  $  (5,840)

At June 30, 2005, we had approximately $98.9 million in accounts receivable, net of allowances. The $9.5$5.8 million decrease in accounts receivable as comparedwhen comparing June 30, 2006 to December 31, 2004 resulted2005 was primarily fromdue to increased collections in January of 20052006 and to a lesser extent lower sales in the last month of the second quarter of 20052006 as compared to the last month of the fourth quarter of 2004.2005. Our allowance for returns was $1.3$1.9 million at June 30, 20052006 compared to $2.3 million at December 31, 2004.2005. The decrease of $1.0$0.4 million isin our allowance for returns was comprised of $3.6$2.6 million in credits issued for stock balancing rights during the first six months of 20052006 partially offset by $2.6$2.2 million of provisions for returns recorded during the first six months of 2005. The overall decrease in our allowance for returns is primarily due to a decrease in our overall returns experience as a percentage of our sales.2006. Our allowance for doubtful accounts was $1.8$2.5 million at June 30, 20052006 compared to $2.6$2.1 million at December 31, 2004.2005. The decreaseincrease of $0.8$0.4 million iswas comprised primarily of a $0.1an additional $1.0 million reduction of our allowanceprovisions for doubtful

accounts and $0.7recorded during the six months ended June 30, 2006 partially offset by $0.6 million of uncollectible accounts

written off, net of recoveries. 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. At June 30, 2006 and December 31, 2005, no distributor or customer accounted for more than 10% of our accounts receivable.

Convertible Subordinated DebenturesCredit Facility and Term Loan

In March 1999,Effective on August 9, 2005, we sold $850entered into the Credit Facility with a group of financial institutions, or the Lenders. The Credit Facility provides for a five year revolving line of credit in the aggregate amount of $100.0 million, principalsubject to continued covenant compliance. A portion of the revolving line of credit (i) in the aggregate amount of $25.0 million may be available for issuances of letters of credit and (ii) in the aggregate amount of $15.0 million may be available for swing line loans. The Credit Facility currently bears interest at maturitythe London Interbank Offered Rate, or LIBOR, plus 0.5% and adjusts in the future in the range of 0.5% to 1.25% above LIBOR based on the level of our zero coupon convertible subordinated debentures due March 22, 2019,total debt and our adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA. In addition, we are required to pay an annual facility fee ranging from 0.125% to 0.25% based on the aggregate amount available under the Credit Facility and the level of our total debt and adjusted EBITDA. At June 30, 2006, no funds were borrowed or outstanding under the Credit Facility.

Effective on August 9, 2005, we entered into the Term Loan with the Lenders. The Term Loan provided for an eighteen-month single-draw term loan facility in a private placement. On March 22, 2004,the aggregate amount of $100.0 million. The Term Loan’s interest rate was LIBOR plus 0.5% and adjusted in the range of 0.5% to 1.25% above LIBOR based on the level of our total debt and adjusted EBITDA. In addition, we redeemed allwere required to pay an annual facility fee ranging from 0.125% to 0.25% based on the aggregate amount of the outstanding debentures for a redemption priceTerm Loan and the level of approximately $355.7 million.our total debt and adjusted EBITDA. We used the proceeds from our held-to-maturity investments that matured on March 22, 2004 and cash on handthe Term Loan to partially fund the aggregate redemption price. Atrepatriation of certain of our foreign earnings in connection with the dateAJCA. For more information related to our long-term debt and the AJCA, see Notes 6 and 10 of redemption,our condensed consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.” In February 2006, we incurred a charge forrepaid the associated deferred debt issuance costs of approximately $7.2 million.

remaining $31.0 million outstanding under the Term Loan in full.

Stock Repurchase Program

Our Board of Directors has authorized an ongoing stock repurchase program with a total repurchase authority granted to us of $1$1.2 billion, of which $200 million was authorized in February 2005.2006. The objective of our stock repurchase program is to improve stockholders’ return. At June 30, 2005,2006, approximately $200.4$229.3 million was available to repurchase shares of our common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock.

We are authorized to make open market purchases of our common stock using general corporate funds. Additionally, we enter into structured stock repurchase arrangements with large financial institutions using general corporate funds as part of our stock repurchase program in order to lower the average cost to acquire shares. These programs include terms that require us to make upfrontup-front payments to the counter-party financial institution and result in the receipt of stock during and/or at the end of the agreement or depending on market conditions, the receipt of either stock or cash at the maturity of the agreement.

WeDuring the three months ended June 30, 2006, we received a net amount of approximately $1.8 million related to the maturity of certain of our structured stock repurchase agreements and we did not make any open market purchases during the quarter. During the three months ended June 30, 2005, we expended approximately $1.6 million, net of premiums received, inunder our stock repurchase transactions. We expended $38.3 million, net of premiums received, during the threesix months ended June 30, 20052006 and we expended $41.6 million, net of premiums received, during the six months ended June 30, 2005 under all of our stock repurchase transactions. We expended approximately $43.2 million during both the three and the six months ended June 30, 2004, net of premiums received, under all stock repurchase transactions. During the three months ended June 30, 2006, we took delivery of a total of 552,727 shares of outstanding common stock with an average price of $35.00 and during the six months ended June 30, 2006, we took delivery of a total of 1,949,077 shares of outstanding common stock with an average per share price of $29.46. During the three months ended June 30, 2005, the Companywe took delivery of a total of 527,758 shares of outstanding common stock with an average per share price of $20.12 and during the six months ended June 30, 2005, we took delivery of a total of 3,082,110 shares of outstanding common stock with an average per share price of $22.29. During the three months ended June 30, 2004, we took delivery of a total of 349,844 shares of outstanding common stock with an average per share price of $19.84 and during the six months ended June 30, 2004 we took delivery of 1,059,813 shares of outstanding common stock with an average per share price of $20.59. Some of these shares were received pursuant to prepaid programs. Since the inception of theour stock repurchase program, the average cost of shares acquired was $16.93$17.85 per share compared to an average close price during open trading windows of $20.00$21.76 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 benefits. As of June 30, 2005,2006, we have remaining prepaid notional amounts of approximately $26.0$35.4 million under structured stock repurchase agreements.agreements, which expire on various dates through February 2007. Due to the fact that the total shares to be received for the open repurchase agreements at June 30, 20052006 is not determinable until the contracts mature, the above price per share amounts exclude the remaining shares to be received subject to the agreements.

Off-Balance Sheet Arrangement

During 2002, we became a party to a synthetic lease arrangement 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 related lease debt as an asset or a liability on our condensedaccompanying consolidated balance sheets. Consequently, payments made pursuant to the lease are recorded as operating expenses in our condensed 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.

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 LIBOR, plus a margin. At any time during the lease term, we have the option to sublease the property and upon thirty-days’thirty days’ written notice, we have 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 daysdays’ notice prior to the termination of the initial lease term, we have the option to remarket the property for sale to a third

party. If we choose not to purchase the property at the end of the lease term, we have 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, we evaluate the property for indicatorsindications of permanent impairment. If an evaluation were to indicate that the fair value of the building hadproperty were to decline below $51.9 million, we would be responsible for the difference under itsour residual value guarantee, which could have a material adverse effect on our results of operations and financial condition.

The synthetic lease includes certain financial covenants including a requirement for us to maintain a pledgedrestricted cash, cash equivalent or investment balance of approximately $62.8 million in cash and/or investment securities as collateral. This amountcollateral, which is included inclassified as restricted cash equivalents and investments in our accompanying condensed consolidated balance sheets. We maintain the ability to manage the composition of the restricted investments within certain limits and to withdraw and use excess investment earnings from the restrictedpledged collateral for operating purposes. Additionally, we must maintain a minimum net cash and investment balance of $100.0 million, excluding our collateralized investments, and equity investments and outstanding debt as of the end of each fiscal quarter. As of June 30, 2005,2006, we had approximately $438.6$734.8 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 lesseelessor and prompt payment of taxes associated with the properties.property. As of June 30, 2005,2006, we were in compliance with all material provisions of the arrangement.

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 period.

Commitments

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 untilto 2025 with a total remaining obligation at June 30, 2006 of approximately $20.8$19.2 million, of which $2.4$1.8 million net of anticipated sublease income, was accrued for as of June 30, 2005,2006, and is reflected in accrued expenses and other liabilities in our condensed consolidated financial statements. In calculating this accrual, we made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. We periodically re-evaluate our estimatesestimates; and if actual circumstances prove to be materially worse than management has estimated, the total charges for these vacant facilities could be significantly higher.

On June 1, 2005, we entered into an Agreement and Plan of Merger, or the Merger Agreement, to acquire NetScaler, Inc., or NetScaler, a privately held Delaware corporation headquartered in San Jose, California. NetScaler is a leader in high performance application networking. Pursuant to the Merger Agreement, we will acquire all of the issued and outstanding voting securities of NetScaler. The total consideration for this transaction is approximately $300.0 million, of which approximately 45% is payable in cash and approximately 55% is payable in shares of our common stock. In addition, we will also assume approximately $23.0 million in unvested stock options upon the closing of the transaction. The transaction has been unanimously approved by our Board of Directors and NetScaler’s board of directors. We currently anticipate completing the transaction in the third quarter of 2005. The consummation of this transaction is subject to customary closing conditions, including approval by the stockholders of NetScaler and other customary conditions. The transaction has received clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

During August 2005, we and Citrix Systems International GMBH, our wholly-owned subsidiary, or the Subsidiary Borrower, entered into a senior revolving credit agreement, or the Credit Agreement, with a group of financial institutions, or the Lenders, led by JPMorgan Chase Bank, N.A. or JPMorgan, as administrative agent, and J.P. Morgan Securities Inc., or JPMSI, as lead arranger and bookrunner. The Credit Agreement provides initially for a five year revolving line of credit in the aggregate amount of $100,000,000, subject to continued covenant compliance. A portion of the revolving line of credit (i) in the aggregate amount of $25,000,000 may be available for issuances of letters of credit and (ii) in the aggregate amount of $15,000,000 may be available for swing line loans. All borrowings under the senior revolving credit facility are generally secured by pledges of shares of certain of our foreign subsidiaries and are guaranteed by certain of our United States subsidiaries and the borrowings of the Subsidiary Borrower are also guaranteed by certain of our foreign subsidiaries. As of the date of the filing of this quarterly report, there were no funds borrowed or outstanding under the revolving loans. We intend to use the proceeds from the Credit Agreement to fund a portion of the cash portion of the purchase price of the acquisition of all of the issued and outstanding shares of NetScaler. See note 12 of our accompanying consolidated condensed financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for additional information.

During August 2005, the Subsidiary Borrower entered into a term loan facility, or Term Loan Agreement, with a group of financial institutions led by JPMorgan, as administrative agent, and JPMSI, as lead arranger and bookrunner. The Term Loan Agreement provides for an eighteen-month single-draw term loan facility in the aggregate amount of $100,000,000. Borrowings under the term loan facility are guaranteed by us and certain of our United States and foreign subsidiaries, which guarantees are secured by pledges of shares of certain foreign subsidiaries. As of the filing date of this quarterly report, approximately $100.0 million is outstanding under the Term Loan Agreement. We intend to use the proceeds from the Term Loan Agreement to partially fund the repatriation

of certain of our foreign earnings in connection with the AJCA, as discussed in note 10 of the Company’s consolidated condensed financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” .

We may repay any future borrowings under the Credit Agreement at any time but no later than August 9, 2010. The borrowings under the revolving line of credit and the term loan bear interest and fees as set forth in the Credit Agreement and the Term Loan Agreement.

The Lenders are entitled to accelerate repayment of the loans under the Credit Agreement and the Term Loan Agreement upon the occurrence of any of various events of default, which include, among other events, as applicable, failure to pay when due any principal, interest or other amounts in respect of the loans, our or the Subsidiary Borrower’s breach of any representations and warranties (subject, in some cases, to various grace periods) or violations of any covenants under the loan documents, default under any of our or the Subsidiary Borrower’s other significant indebtedness, a bankruptcy or insolvency event with respect to us or the Subsidiary Borrower, as applicable, the rendering of a material judgement against us or the Subsidiary Borrower, material adverse developments with respect to our ERISA plans or certain changes in our control.

Under the Credit Agreement and the Term Loan Agreement, we and the Subsidiary Borrower must comply with various financial and non-financial covenants. The financial covenants consist of a minimum interest coverage ratio and a maximum consolidated leverage ratio. The primary non-financial covenants limit our and the Subsidiary Borrower’s ability to pay dividends (other than pursuant to the DRP), conduct certain mergers or acquisitions, make certain investments and loans, incur future indebtedness or liens, alter our capital structure and sell stock or assets.

The Lenders, including JPMorgan and JPMSI, and/or their affiliates have provided and may continue to provide commercial banking, investment management, and other services to the Company, its affiliates and employees, for which they receive customary fees and commissions.

Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2005.2006. We believe that our 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.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures About Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 4.CONTROLS AND PROCEDURES

Certain Factors Which May Affect Future ResultsEvaluation of Disclosure Controls and Procedures

As of June 30, 2006, the Company’s management, with the participation of the Company’s President and Chief Executive Officer and the Company’s Senior Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-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 Senior Vice President and Chief Financial Officer concluded that, as of June 30, 2006, the Company’s disclosure controls and procedures were effective in ensuring that material information 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 Senior Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2006, there were no 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.

PART II. OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

Our operating results and financial condition have variedIn 2006, the Company has been sued in the past and could inUnited States District Court for the future vary significantly depending on a numberNorthern District 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-Q,Ohio and in the documents incorporatedUnited States District Court for the Southern District of Florida, in each case for alleged infringement of U.S. patents by reference into this Form 10-Q, that are not historical facts, including, but not limited to statements concerning new products, product development and offerings, Subscription Advantage, Access Suite products, the Citrix Online division, closingDivision’s GoToMyPC service. The complaints name Citrix Systems, Inc. and Citrix Online LLC, a wholly-owned subsidiary of the acquisitionCompany, as defendants and seek unspecified damages and other relief. In response, the Company filed answers denying that GoToMyPC infringes these patents and alleging, among other things, that the asserted claims of NetScaler, Inc., competitionthese patents are invalid. The Company believes that it has meritorious defenses to the allegations made in the complaints and strategy, product price and inventory, deferred revenues, economic and market conditions, revenue recognition, profits, growthintends to vigorously defend these lawsuits; however, it is unable to currently determine the ultimate outcome of revenues, Product License revenues, License Update revenues, Services revenues, costthese matters or the potential exposure to loss, if any.

In addition, the Company is a defendant in various matters of revenues, operating expenses, sales, marketing and support expenses, interest expense, restricted cash and investments, credit agreements, research and development expenses, valuations of investments and derivative instruments, technology relationships, reinvestment or repatriation of foreign earnings, gross margins, amortization expense and intangible assets, impairment charges, anticipated operating and capital expenditure requirements, cash inflows, contractual obligations, in-process research and development, acquisitions, stock repurchases, investment transactions, liquidity, litigation matters, intellectual property matters, distribution channels, stock price, Advisor Rewards Program, SFAS 123R, third party licenses and potential debt or equity financings constitute forward-looking statements and are made under the safe harbor provisionsgenerally arising out of the Private Securities Litigation Reform Actnormal course of 1995. These statements are neither promises nor guarantees. Our actualbusiness. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate outcome would not materially affect the Company’s financial position, results of operations and financial conditionor cash flows.

ITEM 1A.RISK FACTORS

There have varied and couldbeen no material changes in the future vary significantlyour risk factors from those stateddisclosed in any forward-looking statements. The followingItem 1A (“Risk Factors”) of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which was filed with the Securities and Exchange Commission on March 14, 2006. For convenience, our updated risk factors among others, could cause actual results to differ materially from those contained in forward-looking statements madeare included below in this Form 10-Q, in the documents incorporated by reference into this Form 10-Q 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.

Item 1A.

Our long sales cycle for enterprise-wide sales could cause significant variability in our revenue and operating results for any particular period.

In recent quarters, a growing number of our large and medium-sized customers have decided to implement our enterprise customer license arrangements on a departmentdepartmental or enterprise-wide basis. 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.

We have a long sales cycle for these enterprise-wide sales because:

 

our sales force generally needs to explain and demonstrate the benefits of a large-scale deployment of our product to potential and existing customers prior to sale;

 

our service personnel typically spend a significant amount of time assisting potential customers in their testing and evaluation of our products and services;

 

our customers are typically large and medium size organizations that carefully research their technology needs and the many potential projects prior to making capital expenditures for software infrastructure; and

 

before making a purchase, our potential customers usually must get approvals from various levels of decision makers within their organizations, and this process can be lengthy.

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 face intense competition, which could result in fewer customer orders and reduced revenues and margins.

We competesell our products in intensely competitive markets. Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do.

For example, our ability to market our Virtualization Systems products, including Presentation Server, the Access Suite, and its individual products including: Presentation Server, Secure Access Manager, Conferencing Manager and Password Manager,Essentials and other future product offerings, could be affected by Microsoft’s licensing and pricing scheme for client devices, servers and applications. Further, the announcement of the release, and the actual release, of new Windows-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 and service offerings.

In addition, alternative products for secure, remote access in the Internet software and hardwareappliance markets directly and indirectly compete with our current product linelines and our Web-based desk-top access products and services, including GoToAssist, GoToMyPC and GoToMeeting and anticipated future product and service offerings.

online services.

Existing or new products and services that extend Internet software and hardwareappliances to provide Web-based information and application access or high performance interactive computing can materially impact our ability to sell our products and

services in this market. Our current competitors in this market include Microsoft, Adobe Systems, Inc., Cisco Systems, Inc, EMC2, F5 Networks, Inc., Hewlett- Packard Company, IBM Corporation, Juniper Networks, Inc., Oracle Corporation, Sun Microsystems, Inc., Cisco Systems, Inc., Webex Communications, Inc., Symantec Corporation, and other providersmakers of 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,appliances, 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.

Sales of products within our Access SuiteVirtualization Systems product line constitute a substantial majority of our revenue.

We anticipate that sales of products within our Access SuiteVirtualization Systems product line and related enhancements will constitute a substantial majority of our revenue for the foreseeable future. Our ability to continue to generate revenue from our Access SuiteVirtualization Systems products will depend on market acceptance of Windows Server Operating Systems and/or UNIX Operating Systems. Declines in demand for our Access SuiteVirtualization Systems products could occur as a result of:

 

new competitive product releases and updates to existing products;

 

price competition;

technological change;

decreasing or stagnant information technology spending levels;

 

general economic conditions; or

 

lack of success of entities with which we have a technology relationship.

If our customers do not continue to purchase our Access SuiteVirtualization Systems 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:

 

rapid technological change;

 

evolving industry standards;

 

fluctuations in customer demand;

 

changes in customer requirements; and

 

frequent new product and service introductions and enhancements.

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, our business, results of operations and financial condition could be adversely affected. Our future success could be hindered by:

 

delays in our introduction of new products and services;

 

delays in market acceptance of new products and services or new releases of our current products and services; and

 

our, or a competitor’s, announcement of new product or service enhancements or technologies that could replace or shorten the life cycle of our existing product and service offerings.

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 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.

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 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 to fund these additional costs.

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-yearfive year technology collaboration and licensing agreement with Microsoft Corporation. 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 of 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 businessIf we fail to manage our operations and grow revenue or fail to continue to effectively control expenses, our future operating results could be adversely impacted by conditions affecting the information technology market.affected.

The demandHistorically, 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 current growth and any future growth 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 depends substantially upon the general demand for business-related computer hardwarein a timely and software, which fluctuates basedcost-effective way. Our future operating results could also depend on numerous factors, including capital spending levels, the spending levelsour ability to manage:

our expanding product lines;

our marketing and growthsales organizations; and

our client support organization as installations of our currentproducts increase.

In addition, to the extent our revenue grows, if at all, we believe that our cost of revenues and prospective customers and general economic conditions. Fluctuations in the demand forcertain operating expenses could also increase. We believe that we could incur additional costs, including 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 and lower our gross margins. For example, due to our recent acquisitions, we currently expect that our future revenue will include a greater level of revenue from appliance sales as compared to our historical level of appliance sales, which we expect will reduce our gross margins from their historical levels. However, we cannot currently quantify the costs for such transactions that have not yet occurred or of these developing trends in our business. 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 Presentation Server for Windows operating systems. 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 or services 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 have a material adverse effect onimmediately and adversely affect our business, results of operations for that quarter. Also, due to the fixed nature of many of our expenses and financial condition. In the past, adverse economic conditions decreased demandour current expectation for revenue growth, our products and negatively impacted our financial results. Future economic projections for the information technology sector are uncertain. If an uncertain information technology spending environment persists, it could continue to negatively impact our business, results ofincome from operations and financial condition.

cash flows from operating and investing activities could be lower than in recent years.

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, the proposed NetScaler acquisition,including our 2005 Acquisitions and our 2006 Acquisition, 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:

difficulties and delays integrating the operations, technologies, and products of the acquired companies;

 

undetected errors or unauthorized use of a third-party’s code in products of the acquired companies;

 

the risk of diverting management’s attention from normal daily operations of the business;

 

potential difficulties in completing projects associated with purchased in-process research and development;

 

risks of entering markets in which we have no or limited direct prior experience and where competitors have stronger market positions and which are highly competitive;

 

the potential loss of key employees of the acquired company; and

 

an uncertain sales and earnings stream from the acquired company, which could unexpectedly dilute our earnings.

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 anticipated benefits of acquiring NetScaler may not be realized.

We entered into a merger agreement with NetScaler with the expectation that the acquisition will 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 technology, products, services, distribution channels and customer contacts with NetScaler’s. Moreover, by adding NetScaler products to our current product portfolio, we expect to enable our customers to further lower costs and increase the performance of their Presentation Server systems and offer greater performance and lower costs for customers deploying Web-based applications and services. We may not realize any of these benefits.

In addition, we may not achieve the anticipated benefits of our acquisition of NetScaler as rapidly as, or to the extent, anticipated by our management and certain financial or industry analysts, and others may not perceive the same benefits of the acquisition as we do. For example, NetScaler’s contribution to our financial results may not meet the current expectations of our management for a number of reasons, including the integration risks described below, and could dilute our profits beyond the current expectations of our management. In addition, operations and costs incurred and potential liabilities assumed in connection with our acquisition of NetScaler also could have an adverse effect on our business, financial condition and operating results. If these risks materialize, our stock price could be materially adversely affected.

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 acquisitions of Sequoia Software Corporation in 20012004, our 2005 Acquisitions and Expertcity and Net6 in 2004. We expect to record significant additional goodwill and other intangible amounts in connection with the acquisition of NetScaler when the acquisition is consummated.our 2006 Acquisition. 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.impairment at the reporting unit level (operating segment). As of June 30, 20052006 we had $361.8$598.9 million of goodwill. We expect to record significant additional goodwill, of which approximately $234.3 million of goodwill was recorded in connection with our proposed acquisition2005 Acquisitions and $7.4 million of NetScaler.goodwill was recorded in connection with our 2006 Acquisition. 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 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.

Furthermore, impairment testing requires significant judgment, including the identification of reporting units based on our internal reporting structure that reflects the way we manage our business and operations and to which our goodwill and intangible assets would be assigned. Significant judgments are required to estimate the fair value of our goodwill and intangible assets, including estimating future cash flows, determining appropriate discount rates, estimating the applicable tax rates, foreign exchange rates and interest rates, projecting the future industry trends and market conditions, and making other assumptions. Changes in these estimates and assumptions, including changes in our reporting structure, could materially affect our determinations of fair value.

We recorded approximately $324.6 million of goodwill and intangible assets in connection with our 2005 Acquisitions and our 2006 Acquisition. 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 in 2004, our 2005 Acquisitions or our 2006 Acquisition 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.

At June 30, 2005,2006, we had $77.4$128.2 million, net, of unamortized identified intangibles, with estimable useful lives, which consist ofinclude core and product technology we purchased in acquisitions or under third party licenses. We expect to record significant additional identified intangible assets in connection with our proposed acquisition of NetScaler when the acquisition is consummated. We have commercialized and currently market the Sequoia and other licensed technology through our secure access infrastructure software, which includes Citrix Secure Access Manager and Citrix Password Manager. We currently market the technologies acquired in the Expertcity and Net6our acquisitions through our Citrix Online Division products, Application Networking products, Advanced Solutions products and Citrix Gateway divisions.Management Solutions products. 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, appliances and services.continue to accept our Citrix Online Division products. If we fail to complete the development of our anticipated future product and service offerings, including product offerings acquired through the NetScaler acquisition, if we fail to complete them in a timely manner, or if we are unsuccessful in selling any new lines of products, appliances 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. An impairment charge could have a material adverse effect on our results of operations. 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 $270.7 million of goodwill and intangible assets in connection with our 2004 acquisitions. In addition, we expect to record significant additional goodwill and other intangible assets in connection with our proposed acquisition of NetScaler when the acquisition is consummated. 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 or NetScaler 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 resultsOur business could be adversely affected.impacted by conditions affecting the information technology market.

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 opportunitiesThe demand for our products and services depends substantially upon the general demand for business-related computer appliances 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 timely and cost-effective way. Our future operating results could also dependmaterial adverse effect on our abilitybusiness, 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 information technology sector are uncertain. If an uncertain information technology spending environment persists, it could negatively impact our business, results of operations and financial condition.

Our business could be adversely affected if we are unable to manage:expand and diversify our distribution channels.

We currently intend to continue to expand our expanding product line;

distribution channels by leveraging our marketingrelationships 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 and to sell our newer products. This will require additional resources, as we will need to expand our internal sales organizations; and

service coverage of these customers. If we fail in these efforts and cannot expand or diversify our client support organization as installationsdistribution 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, increase.

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 royaltieswhich could increase our cost of revenues and operating expenses. However,Through our accessPARTNER network, Citrix Authorized Learning Centers and other programs, we cannotare currently quantify the costs for such transactions that have not yet occurred. In addition, we may needinvesting, and intend to use a substantial portion ofcontinue to invest, significant resources to develop these channels, which could reduce 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 Presentation Server 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 or services 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.

profits.

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 new licensing programs, including offering specified and unspecified enhancements to our current and future product and service lines. Such changes could result in recognizing revenues over the contract term as opposed to upon the initial shipment or licensing of our software product. 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.

Sales of our Subscription Advantage product constitute substantially all of our License Updates revenue and a large portion of our deferred revenue.

We anticipate that sales of our Subscription Advantage product will continue to constitute a substantial portion of our License Updates revenue and a large portion of our deferred revenue for the foreseeable future.revenue. Our ability to continue to generate both recognized and deferred revenue from our Subscription Advantage product will depend on our customers continuing to perceive value in automatic delivery of our software upgrades and enhancements. A decrease in demand for our Subscription Advantage product could occur as a result of a decrease in demand for our Access SuiteVirtualization Systems products. If our customers do not continue to purchase our Subscription Advantage product, our License Updates revenue and deferred revenue would decrease significantly and our results of operations and financial condition would be adversely affected.

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, development and engineering operations in countries outside of the United States including, ifas a result of our proposed acquisition of NetScaler, is consummated, product development in Bangalore, India. During the first half of 2005,three months ended June 30, 2006, we derived approximately 51%46% 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:

compliance with foreign regulatory and market requirements;

 

variability of foreign economic, political and labor conditions;

 

changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by United States export laws;

 

longer accounts receivable payment cycles;

 

potentially adverse tax consequences;

 

difficulties in protecting intellectual property; and

 

burdens of complying with a wide variety of foreign laws.laws; and

 

as we generate cash flow in non-U.S. jurisdictions, if required, we may experience difficulty transferring such funds to the U.S. in a tax efficient manner.

Our results of operations are also 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 approximately 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 onif the weakness or strength of the dollar was weak in the prior year. If the dollar is strong in the current year, most of the benefits will be reflected in our operating costs. 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. BecauseIn the dollar was generally weak in 2004, operating expenses are expected to be higher infirst six months of 2005 but further dollar weakness in 2005 will not have an additional material impact on our operating expenses until 2006.

were generally lower due to a stronger dollar compared to the first six months of 2006 during which our operating expenses were higher due to the dollar being generally weaker.

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, including products obtained through acquisitions, 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,tradename, 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:

 

Differences in International Law; Enforceability of Licenses. The laws of some foreign countries do not protect our intellectua1intellectual property to the same extent as do the laws of the United States and Canada. For example, we derive a significant portion of our sales from licensing our packaged products under “shrink wrap” or “click-to-accept” license agreements that are not signed by licensees and electronic enterprise customer licensing arrangements that are delivered electronically, all of which could be unenforceable under the laws of many foreign jurisdictions in which we license our products.

 

Third Party Infringement Claims. As we expand our product lines, including our Application Networking products and our Citrix Online Division products, through product development and acquisitions including the proposed acquisition of NetScaler, and the number of products and competitors in our industry segments increase and the functionality of these products overlap, we could become increasingly subject to infringement claims and claims to the unauthorized use of a third-party’s code in our products. 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, we could receive more patent infringement claims. Responding to any infringement claim, regardless of its validity, could result in costly litigation; injunctive relief or require us to obtain a license to intellectual property rights of those third parties. Licenses may not be available on reasonable terms, on terms compatible with the protection of our proprietary rights, or at all. In addition, attention to these claims could divert our management’s time and attention from developing our business. If a successful claim is made against us and we fail to develop or license a substitute technology, our business, results of operations, financial condition or cash flows could be materially adversely affected.

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,Dell Inc., Hewlett-Packard Company, International Business Machines Corporation, Hewlett-Packard Company, Dell Inc.SAP 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:

 

undetected errors or unauthorized use of another person’s code in the third party’s software;

 

disagreement over the scope of the license and other key terms, such as royalties payable; and

 

infringement actions brought by third party licensees; and

 

termination or expiration of the license.

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 portionor all 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 Presentation Server 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. In 2005, we also introduced a new product, Citrix Access EssentialsTM, specifically developed, packaged and priced to bring secure application virtualization and efficient centralized management of information resources to small and mid-sized businesses. We cannot guarantee that our small-sized customer marketing initiative or new product 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 and appliances. 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, defaults or defaultsterminations 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 or acquired products, 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 lessor for our headquarters office buildings in Fort Lauderdale, Florida. The synthetic lease qualifies for operating lease accounting treatment under SFAS No. 13,Accounting for Leases, so we do not include the property or the associated lease debt on our consolidated balance sheet. However, if the lessor were to change its ownership of our property or significantly change its ownership of other properties that it currently holds, under FIN No. 46,Consolidation of Variable Interest Entities (revised) we could be required to consolidate the entity, the leased facility and the debt at that 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, 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.

We have entered into credit facility agreements that restrict our ability to conduct our business and failure to comply with such agreements may have an adverse effect on our liquidity and financial position.

In August, 2005, the Company and its subsidiary, Citrix Systems International GmbH, entered into separate credit facility agreements that contain financial covenants tied to maximum consolidated leverage and minimum interest coverage, among other things. The credit facility agreements also contain affirmative and negative covenants, including limitations related to indebtedness, contingent obligations, liens, mergers, acquisitions, investments, assets sales and other corporate changes of the Company, and payment of dividends, including dividends from our subsidiaries to us. If we fail to comply with these covenants or any other provision of the credit facility agreements, we may be in default under the credit facility agreements, and we cannot assure you that we will be able to obtain the necessary waivers or amendments of such default. Upon an event of default under our credit facility agreements not otherwise amended or waived, the affected lenders could accelerate the repayment of principal and accrued interest on their outstanding loans and terminate their commitments to lend additional funds, which may have a material adverse effect on our liquidity and financial position.

If our security measures are breached and unauthorized access is obtained to our Citrix 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 condition and the operating results for our Citrix Online division.

Evolving regulation of the Web may adversely affect our Citrix Online division.

As Web commerce continues to evolve, 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 online 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 able to fund our product development and acquisitions and fulfill our future obligations.

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 the payment of our 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, 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. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

If we lose key personnel or cannot hire enough qualified employees, our ability to manage our business could be adversely affected.

Our success depends, in large part, upon the services of a number of key employees. Except 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 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 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 may 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.

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 lessor for our headquarters office buildings in Fort Lauderdale, Florida. The synthetic lease qualifies for operating lease accounting treatment under SFAS No. 13,Accounting for Leases, so we do not include the property or the associated lease debt on our condensed consolidated balance sheet. However, if the lessor were to change its ownership of our property or significantly change its ownership of other properties that it currently holds, under FIN No. 46,Consolidation of Variable Interest Entities (revised) we could be required to consolidate the entity, the leased facility and the debt at that 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, 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.

We have entered into credit facility agreements that restrict our ability to conduct our business and failure to comply with such agreements may have an adverse effect on our business, liquidity and financial position.

The Company and its subsidiary, Citrix Systems International GmbH, maintain credit facility agreements that contain financial covenants tied to maximum consolidated leverage and minimum interest coverage, among other things. The credit facility agreements also contain affirmative and negative covenants, including limitations related to indebtedness, contingent obligations, liens, mergers, acquisitions, investments, sales of assets and other corporate changes of the Company, and payment of dividends, including dividends from our subsidiaries to us. If we fail to comply with these covenants or any other provision of the credit facility agreements, we may be in default under the credit facility agreements, and we cannot assure you that we will be able to obtain the necessary waivers or amendments of such default. Upon an event of default under our credit facility agreements not otherwise amended or waived, the affected lenders could accelerate the repayment of any outstanding principal and accrued interest on their outstanding loans and terminate their commitments to lend additional funds, which may have a material adverse effect on our liquidity and financial position.

If our security measures are breached and unauthorized access is obtained to our Citrix 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, GoToAssist or GoToWebinar 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 are 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 condition and the operating results for our Citrix Online Division.

Evolving regulation of the Web may adversely affect our Citrix Online Division.

As Web commerce continues to evolve, 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 online 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.

Disruption of our operations at our corporate headquarters, particularly due to natural disasters, could negatively impact our results of operations.

Significant portions of our computer equipment, intellectual property resources and personnel, including critical resources dedicated to research and development and administrative support functions are presently located at our corporate headquarters in Fort Lauderdale, Florida, an area of the country that is particularly prone to hurricanes, or our various locations in southern California, an area of the country that is particularly prone to earthquakes. The occurrence of a natural disaster or other unanticipated catastrophes, such as a hurricane or earthquake, could cause interruptions in our operations. For example, in October 2005, Hurricane Wilma passed through southern Florida causing extensive damage to the region, including some minor damage to our corporate headquarters facility. Extensive or multiple interruptions in our operations due to future natural disasters or unanticipated catastrophes could severely disrupt our operations and have a material adverse effect on our results of operations.

If we do not generate sufficient cash flow from operations in the future, we may not be able to fund our product development and acquisitions and fulfill our future obligations.

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 the payment of our 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, 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. 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

If stock balancing returns or price adjustments exceed our reserves, our operating results could be adversely affected.

We provide most of our distributors with stock balancing return rights, 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 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.

Our stock price could be volatile, and you could lose the value of your investment.

Our stock price has been volatile and has fluctuated significantly to date.in the past. The trading price of our stock is likely to continue to be volatile and subject to fluctuations.fluctuations in the future. Your investment in our stock could lose some or all of its value. Some of the factors that could significantly affect the market price of our stock include:

 

actual or anticipated variations in operating and financial results;

 

analyst reports or recommendations;

 

changes in interest rates; and

 

other events or factors, many of which are beyond our control.

The stock market in general, The Nasdaq Global Select Market, (formerly, the Nasdaq National MarketMarket) 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.

Changes in financial accounting standards related to share-based payments are expected to have a material adverse impact on our reported results of operations.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R,Share-Based Payment.Payment. SFAS No. 123R is a complex accounting standard that requires companies to expense the fair value of employee stock options and similar awards and iswas effective as of January 1, 2006 for the Company.us. The adoption of the new standard is expected toSFAS No. 123R could have a material adverse impact on our reported results of operations for periods after its effectiveness.operations. 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 financial accounting standards. This requirement willmay reduce our net operating cash flows and increase net financing cash flows in periods after effectiveness of the new standard.flows. Additionally, SFAS No. 123R could adversely impact our ability to provide accurate financial guidance concerning our expected results of operations on a GAAP basis for periods after its effectiveness due to the variability of the factors used to estimate the values of share-based payments. As

Furthermore, the application of SFAS No. 123R requires significant judgment and the use of estimates, particularly surrounding stock price volatility, option forfeiture rates and expected option lives, to build a model for appropriately valuing share-based compensation. There is little experience or guidance with respect to developing these assumptions and models. There is also uncertainty as to how SFAS No. 123R will be interpreted and applied as companies and their advisors gain more experience with the standard.

There is a risk that, as we and others gain experience with SFAS No. 123R or as a result of subsequent accounting guidelines, we could determine that the adoptionassumptions or model we used requires modification. Any such modification could result in significantly different charges in future periods and, potentially, could require us to correct the charges taken in prior periods. Any such corrections of the new standardcharges taken in the first quarter of 2006a prior period could negatively affect our results of operations, stock price and our stock price volatility.

Our business is subject to seasonal fluctuations.

Our business is subject to seasonal fluctuations. Historically, our net revenues have fluctuated quarterly and have generally been the highest in the fourth quarter of our fiscal year due to corporate calendar year-end spending trends. In addition, quarterly results are affected by the timing of the release of new products and services. Because of the seasonality of the Company’s business, results for any quarter, especially our fourth quarter, are not necessarily indicative of the results that may be achieved for the full fiscal year.

Our business and investments could be adversely impacted by unfavorable economic political and social conditions.

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. Impairment in the value

of these investments may disrupt our ongoing business and distract management. As of June 30, 2005,2006 we had $419.1$500.5 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 affect 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources.”

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures About Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

As of June 30, 2005, the Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Vice President and Chief Financial Officer concluded that, as of June 30, 2005, the Company’s disclosure controls and procedures were effective in ensuring that material information 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 Chief Executive Officer and the Company’s Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a defendant in various 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 any ultimate outcome would not materially affect the Company’s financial position, results of operations or cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer

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$1.2 billion, of which $200$200.0 million was authorized in February 2005,2006, the objective of which is to manage actual and anticipated dilution and to improve stockholders’ returns. At June 30, 2005,2006, approximately $200.4$229.3 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 June 30, 2005:2006:

 

   

(a)

Total Number

of Shares

(or Units)

Purchased (1)


  

(b)

Average Price

Paid per Share


  

(c)

Total Number of Shares

(or Units) Purchased as

Part of Publicly

Announced Plans or

Programs


  

(d)

Maximum Number

(or approximate dollar value)

of Shares (or Units) that

may yet be Purchased

under the Plans or

Programs


 

April 1, 2005 through April 30, 2005

  132,917  $22.19(2) 132,917  $186,208 

May 1, 2005 through May 31, 2005

  97,461   22.21(2) 97,461   202,155(3)

June 1, 2005 through June 30, 2005

  297,380   22.07(2) 297,380   200,373 
   
      
     

Total

  527,758  $22.13(2) 527,758  $200,373 
  

(a)

Total Number

of Shares

(or Units)

Purchased (1)

 

(b)

Average Price

Paid per Share

(or Unit)

  

(c)

Total Number of Shares

(or Units) Purchased as

Part of Publicly

Announced Plans or

Programs

 

(d)

Maximum Number

(or approximate dollar value)

of Shares (or Units) that

may yet be Purchased

under the Plans or

Programs

 

April 1, 2006 through April 30, 2006

 128,578 $38.08 (2) 128,578 $227,501 

May 1, 2006 through May 31, 2006

 183,052  46.78 (2) 183,052  202,501 

June 1, 2006 through June 30, 2006

 241,097  35.52 (2) 241,097  229,300 (3)
      

Total

 552,727 $39.85 (2) 552,727 $229,300 
      

(1)Represents shares received under the Company’s prepaid stock repurchase programs and shares acquired in open market purchases.programs. The Company expendedreceived a net amount of $1.6approximately $1.8 million dollars related to the maturity of certain of its structured stock repurchase agreements and did not make any open market purchases during the quarter ended June 30, 2005 for repurchases of the Company’s common stock.quarter. For more information see note 11 to the Company’s condensed consolidated financial statements.
(2)These amounts represent the cumulative average price paid per share, excluding the effect of premiums received, 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 May 2005.June 2006.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Company’s annual meeting of stockholdersstockholder’s held on May 5, 2005,18, 2006, the Company’s stockholders took the following actions:

The Company’s stockholders elected Murray J. DemoThomas F. Bogan and John W. White,Gary E. Morin, each as a Class III director, to serve for a three-year term expiring at the Company’s annual meeting of stockholders in 20082009 or until his successor has been duly elected and qualified or until his earlier resignation or removal. The directors were elected by a plurality of the votes cast at the 20052006 annual meeting as follows: 133,999,773150,848,470 shares voted for the election of Mr. DemoBogan and 105,549,688150,982,583 shares voted for the election of Mr. White;Morin; and 14,193,7034,061,338 shares were withheld from the election of Mr. DemoBogan and 42,643,7883,927,225 shares were withheld from the election of Mr. White.Morin. No other persons were nominated, nor received votes, for election as a director of the Company at the 20052006 annual meeting. The other directors of the Company whose terms continued after the 20052006 annual meeting were Thomas F. Bogan,Mark B. Templeton, Stephen M. Dow, Gary E. Morin, Godfrey R. Sullivan, Murray J. Demo and Mark B. Templeton.

John W. White. John W. White resigned as a director of the Company in the second quarter of 2006, after the annual meeting of stockholders, and Mr. Asiff Hirji was elected by the remaining directors to fill the vacancy created by Mr. White’s resignation.

The Company’s stockholders approved the amendment to the Company’s 2005 Equity Incentive Plan. The votes cast at the 20052006 annual meeting were as follows: 80,236,83498,360,465 shares voted for, 36,294,98831,526,894 shares voted against 990,601and 942,027 shares abstained from voting and 30,671,053 shares were broker non-votes.voting.

The Company’s stockholders approved the Company’s 2005 Employee Stock Purchase Plan. The votes cast at the 2005 annual meeting were as follows: 96,344,260 shares voted for, 20,199,522 shares voted against, 978,640 shares abstained from voting and 30,671,054 shares were broker non-votes.

The Company’s stockholders approved the ratification of the appointmentaccounting firm of Ernst & Young LLP as the Company’s Independent Auditorsindependent registered public accountants for the fiscal year 2005.2006. The votes cast at the 20052006 annual meeting were as follows: 142,888,967148,372,476 shares voted for, 4,394,147 shares5,509,925 voted against and 910,362946,406 shares abstained from voting.

ITEM 5.OTHER INFORMATION

10b5-1 Trading Plan. 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 Gary E. Morin, a member of the Company’s Board of Directors entered into a trading plan during the second quarter of 2006 in accordance with Rule 10b5-1 and the Company’s policy 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.

Amendment of 2005 Equity Incentive Plan. In February 2006, the Company’s Board of Directors approved an amendment to the 2005 Plan to increase the number of shares of common stock authorized for issuance under the 2005 Plan by 5,400,000 shares and increased the number of shares of common stock issuable pursuant to awards of restricted stock, restricted stock units, performance units or stock grants by 500,000. At the Company’s annual meeting held on May 18, 2006, the Company’s stockholders approved the amendment to the 2005 Plan. As a result of the amendment, an aggregate of 15,500,500 shares of common stock are reserved for issuance under the 2005 Plan, of which 1,000,000 may be issued pursuant to awards of restricted stock, restricted stock units, performance units or stock grants. No other changes were made to the 2005 Plan.

Non-Employee Director Compensation. During the second quarter of 2006, the Company began awarding non-vested stock units with service-based vesting to its non-employee directors pursuant to the terms of the 2005 Plan and a restricted stock unit agreement for non-employee directors and in accordance with the Company’s policy concerning compensation of non-employee directors. Such awards of non-vested stock units generally vest in equal monthly installments during a one-year period from the date of the award, and vesting continues for so long as such non-employee director maintains a business relationship or other association with the Company and its subsidiaries. A copy of the form of Restricted Stock Unit Agreement for Non-Employee Directors is filed with this Form 10-Q as Exhibit 10.1.

Change in Control Agreement.On August 4, 2005,2006, the Company entered into a change ofin control agreementsagreement with each of Messrs. TempletonBrett M. Caine, the Company’s Group Vice President and certain senior executives of the Company, namely, Messrs. Friedman, Henshall and Burris (the “Senior Executives”).General Manager, Citrix Online Division. Under the terms of these agreements.his agreement, Mr. Templeton and the Senior Executives areCaine is entitled to receive certain compensation and benefits in the event of a “change-in-control” of the Company.

In the event the Company terminates Mr. Templeton without cause or if Mr. Templeton resigns his position for any reason inthat, during the 12-month period following a change-in-control, hechange in control, the Company terminates Mr. Caine other than for cause, or Mr. Caine terminates his employment for “good reason,” Mr. Caine is entitled to receive a lump sum payment equal to twoone times his annual base salary plus his target bonus, both determined as of the date hisMr. Caine’s employment is terminated or, if higher, as of immediately prior to the change-in-control.change in control. Additionally, Mr. Templeton will receive, at the Company’s expense, certain benefits, including health, dental and life insurance, for two years following the date of termination.

In the event that, during the 12-month period following a change-in-control, the Company terminates any of the Senior Executives, other than for cause, or any of the Senior Executives terminates his or her employment for “good reason,” such Senior Executive is entitled to receive a lump sum payment equal to one times his or her annual base salary plus his or her target bonus, both determined as of the date such Senior Executive’s employment is terminated or, if higher, as of immediately prior to the change-in-control. Additionally, the Senior ExecutivesCaine will receive, at the Company’s expense, certain benefits, including health, dental and life insurance, for 18 months following the date of termination.

Upon a change-in-control,change in control, all stock options and other stock-basedequity-based awards granted to each of Messrs. Templeton and the Senior ExecutivesMr. Caine will immediately accelerate and become fully exercisable as of the effective date of the change-in-control.change-in-control such that all stock options and other equity-based awards shall be fully vested and all performance criteria set forth in the applicable award agreement will be deemed fully attained. Mr. Templeton and the Senior Executives areCaine is also entitled to a “gross-up payment” that, on an after-tax basis, is equal to the taxes imposed on the severance payments under the change-in-control agreementsagreement in the event any payment or benefit to the executivehim is considered an “excess parachute payment” and subject to an excise tax under the Internal Revenue Code.

Agreement to Acquire Orbital Data Corporation.On August 4, 2006, the Company and Banyan Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Orbital Data Corporation, a privately held Delaware corporation headquartered in San Mateo, California (“Orbital Data”), and John Jaggers as the stockholder representative. There are no material relationships among the Company and Orbital Data or among any of their respective subsidiaries and any of the parties to the Merger Agreement and related agreements, other than in respect of such agreements themselves.

ITEM 6. EXHIBITSPursuant to the Merger Agreement, the Company proposes to acquire all of the issued and outstanding voting securities of Orbital Data by means of a merger of Orbital Data and Merger Sub, with Orbital Data continuing as the surviving corporation (the “Merger”). The consideration payable to the shareholders of Orbital Data in this transaction is cash of approximately $50 million and the assumption of approximately 0.3 million in unvested stock-based instruments, each of which upon vesting will be exercisable for the right to receive one share of the Company’s common stock.

This transaction has been unanimously approved by the board of directors of both the Company and Orbital Data. The parties to the Merger Agreement anticipate completing this transaction in the third quarter of 2006, subject to customary closing conditions, including approval by the stockholders of Orbital Data.

The foregoing description of the transaction does not purport to be complete and is qualified in its entirety by reference to the complete text of the Merger Agreement, which will be filed with the Company’s Quarterly Report on Form 10-Q for the period ending September 30, 2006, unless earlier terminated or filed.

 

ITEM 6.EXHIBITS

(a)List of exhibits

 

Exhibit No.


  

Description


2.1

10.1*

  Form of Restricted Stock Unit Agreement and Plan of Merger dated as of June 1, 2005 by and amongfor Non-Employee Directors under the Company, NCAR Acquisition Corporation, NCAR, LLC and NetScaler,Citrix Systems, Inc.
2.2Amendment No.1 to Agreement and Plan of Merger dated as of June 1, 2005 by and among the Company, NCAR Acquisition Corporation, NCAR, LLC and NetScaler, Inc.
10.1(1)*2005 Equity Incentive Plan
10.2(2)*

10.2*

  

Amendment to Citrix Systems, Inc. 2005 Employee Stock PurchaseEquity Incentive Plan

10.3(3)*

10.3*

  2005 Equity Incentive Plan Incentive Stock Option Master Agreement (Domestic)
10.4(4)*

Citrix Systems, Inc. 2005 Equity Incentive Plan Non-Qualified Stock Option Master Agreement (Domestic)

10.5*

10.4*

  

Citrix Systems, Inc. 2005 Equity Incentive Plan Stock Option Master Agreement (French)

10.5*

Change in Control Agreement, dated as of August 4, 20052006, by and between Citrix Systems, Inc. and Mark B. TempletonBrett M. Caine

10.6*

31.1

  Change in Control Agreement dated as of August 4, 2005 between Citrix Systems, Inc. and each of David J. Henshall, David R. Friedman and John C. Burris

Rule 13a-14(a) / 15d-14(a) Certification

31.1

31.2

  

Rule 13a-14(a) / 15d-14(a) Certification

31.2

32.1

  Rule 13a-14(a) / 15d-14(a) Certification
32.1

Section 1350 Certifications


*Indicates a management contract or any compensatory plan, contract or arrangement.
(1)Incorporated herein by reference to Exhibit 10.1 of the Company’s quarterly report on Form 10-Q dated as of May 6, 2005.
(2)Incorporated herein by reference to Exhibit 10.2 of the Company’s quarterly report on Form 10-Q dated as of May 6, 2005.
(3)Incorporated herein by reference to Exhibit 10.3 of the Company’s quarterly report on Form 10-Q dated as of May 6, 2005.
(4)Incorporated herein by reference to Exhibit 10.4 of the Company’s quarterly report on Form 10-Q dated as of May 6, 2005.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 9th8th day of August 2005.2006.

 

CITRIX SYSTEMS, INC.

By:

 

/s/ DAVIDDAVID J. HENSHALLHENSHALL


 

David J. Henshall

 

Senior Vice President and Chief Financial Officer

 

(Authorized Officer and Principal Financial Officer)

EXHIBIT INDEX

 

Exhibit No.

  

Description


2.110.1*  Form of Restricted Stock Unit Agreement and Plan of Merger dated as of June 1, 2005 by and amongfor Non-Employee Directors under the Company, NCAR Acquisition Corporation, NCAR, LLC and NetScaler,Citrix Systems, Inc.
2.2Amendment No.1 to Agreement and Plan of Merger dated as of June 1, 2005 by and among the Company, NCAR Acquisition Corporation, NCAR, LLC and NetScaler, Inc.
10.1(1)*2005 Equity Incentive Plan
10.2(2)*10.2*  

Amendment to Citrix Systems, Inc. 2005 Employee Stock PurchaseEquity Incentive Plan

10.3(3)*10.3*  2005 Equity Incentive Plan Incentive Stock Option Master Agreement (Domestic)
10.4(4)*

Citrix Systems, Inc. 2005 Equity Incentive Plan Non-Qualified Stock Option Master Agreement (Domestic)

10.4*

Citrix Systems, Inc. 2005 Equity Incentive Plan Stock Option Master Agreement (French)

10.5*  

Change in Control Agreement, dated as of August 4, 20052006, by and between Citrix Systems, Inc. and Mark B. Templeton

10.6*Change in Control Agreement dated as of August 4, 2005 between Citrix Systems, Inc. and each of David J. Henshall, David R. Friedman and John C. BurrisBrett M. Caine

31.1  

Rule 13a-14(a) / 15d-14(a) Certification

31.2  

Rule 13a-14(a) / 15d-14(a) Certification

32.1  

Section 1350 Certifications


*Indicates a management contract or any compensatory plan, contract or arrangement.
(1)Incorporated herein by reference to Exhibit 10.1 of the Company’s quarterly report on Form 10-Q dated as of May 6, 2005.
(2)Incorporated herein by reference to Exhibit 10.2 of the Company’s quarterly report on Form 10-Q dated as of May 6, 2005.
(3)Incorporated herein by reference to Exhibit 10.3 of the Company’s quarterly report on Form 10-Q dated as of May 6, 2005.
(4)Incorporated herein by reference to Exhibit 10.4 of the Company’s quarterly report on Form 10-Q dated as of May 6, 2005.

45