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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2275152
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6400 N.W. 6TH WAY
FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 3, 2001 there were 187,054,066 shares of the registrant's
Common Stock, $.001 par value per share, outstanding.
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CITRIX SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
CONTENTS
PAGE
NUMBER
------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
June 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income:
Three Months and Six Months ended June 30, 2001
and 2000 5
Condensed Consolidated Statements of Cash Flows:
Six Months ended June 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative & Qualitative Disclosures about Market Risk 32
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits and Reports on Form 8-K 33
Signature 34
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PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, DECEMBER 31,
2001 2000
--------------- ---------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 215,261 $ 375,025
Short-term investments.......................................... 46,917 91,612
Accounts receivable, net of allowances of $13,147 and $10,601
at June 30, 2001 and December 31, 2000, respectively.......... 55,596 37,299
Inventories..................................................... 4,136 4,622
Prepaid taxes................................................... 4,308 26,715
Other prepaid and current assets................................ 20,422 11,493
Current portion of deferred tax assets.......................... 29,340 39,965
----------- -----------
Total current assets......................................... 375,980 586,731
Long-term investments............................................. 478,794 382,524
Property and equipment, net....................................... 79,407 55,559
Intangible assets, net............................................ 203,206 52,339
Long-term portion of deferred tax assets.......................... 16,635 18,977
Other assets, net................................................. 31,408 16,443
----------- -----------
$1,185,430 $ 1,112,573
=========== ===========
CONTINUED
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CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
---------- -----------
(IN THOUSANDS, EXCEPT PAR VALUE)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................. $ 89,736 $ 78,739
Current portion of deferred revenues .............................. 93,242 80,648
----------- -----------
Total current liabilities ........................................... 182,978 159,387
Long-term portion of deferred revenues .............................. 4,096 14,082
Convertible subordinated debentures ................................. 339,171 330,497
Other long-term liabilities ......................................... 107 --
Commitments and contingencies
Put warrants ........................................................ -- 15,732
Common stock subject to repurchase .................................. 6,645 --
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; 191,109 and 187,872 issued at June 30, 2001
and December 31, 2000, respectively ............................ 191 188
Additional paid-in capital ........................................ 437,733 351,053
Retained earnings ................................................. 372,446 320,617
Accumulated other comprehensive income (loss) ..................... 1,785 (2,943)
----------- -----------
812,155 668,915
Less--common stock in treasury, at cost (7,007 and 3,817 shares at
June 30, 2001 and December 31, 2000, respectively) .............. (159,722) (76,040)
----------- -----------
Total stockholders' equity ..................................... 652,433 592,875
----------- -----------
$ 1,185,430 $ 1,112,573
=========== ===========
SEE ACCOMPANYING NOTES.
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CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Revenues:
Revenues ..................................... $ 137,334 $ 96,146 $ 260,273 $ 213,720
Other revenues ............................... 9,940 9,940 19,813 19,881
--------- --------- --------- ---------
Total net revenues ...................... 147,274 106,086 280,086 233,601
Cost of revenues (excluding amortization presented
separately below) ............................. 7,223 8,404 14,534 13,532
--------- --------- --------- ---------
Gross margin ..................................... 140,051 97,682 265,552 220,069
Operating expenses:
Research and development ...................... 18,150 12,300 34,324 24,413
Sales, marketing and support .................. 56,840 45,425 106,251 86,614
General and administrative .................... 19,061 16,213 37,076 28,868
Amortization of intangible assets ............. 12,228 7,842 18,533 14,661
In-process research and development ........... 2,580 -- 2,580 --
--------- --------- --------- ---------
Total operating expenses .................. 108,859 81,780 198,764 154,556
--------- --------- --------- ---------
Income from operations ........................... 31,192 15,902 66,788 65,513
Interest income .................................. 11,311 9,760 24,358 18,792
Interest expense ................................. (4,465) (4,246) (8,827) (8,389)
Other (expense) income, net ...................... (3,111) (26) (7,204) 538
--------- --------- --------- ---------
Income before income taxes ....................... 34,927 21,390 75,115 76,454
Income taxes ..................................... 12,033 6,417 23,286 22,936
--------- --------- --------- ---------
Net income ....................................... $ 22,894 $ 14,973 $ 51,829 $ 53,518
========= ========= ========= =========
Earnings per common share:
Basic earnings per share ...................... $ 0.12 $ 0.08 $ 0.28 $ 0.29
========= ========= ========= =========
Weighted average shares outstanding ........... 184,490 185,356 184,660 184,279
========= ========= ========= =========
Earnings per common share--assuming dilution:
Diluted earnings per share .................... $ 0.12 $ 0.07 $ 0.27 $ 0.26
========= ========= ========= =========
Weighted average shares outstanding ........... 194,001 203,316 194,794 205,833
========= ========= ========= =========
SEE ACCOMPANYING NOTES.
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CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
2001 2000
--------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income .............................................................. $ 51,829 $ 53,518
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of intangible assets .................................... 18,533 14,661
Depreciation and amortization of property and equipment .............. 13,669 8,354
Other-than-temporary decline in market value of investments .......... 6,182 --
In-process research and development .................................. 2,580 --
Provision for doubtful accounts ...................................... 1,620 1,504
Provision for product returns ........................................ 12,042 9,621
Provision for inventory reserves ..................................... 1,665 3,421
Tax benefit related to the exercise of non-statutory stock options and
disqualifying dispositions of incentive stock options ............ 10,324 72,472
Accretion of original issue discount and amortization of financing
cost ............................................................. 8,825 8,311
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable .............................................. (29,574) (11,559)
Inventories ...................................................... (1,179) (4,531)
Prepaid expenses and other current assets ........................ 15,527 (30,693)
Other assets ..................................................... (14,366) (310)
Deferred tax assets .............................................. 14,547 (1,980)
Accounts payable and accrued expenses ............................ (5,208) 10,695
Deferred revenues ................................................ 2,503 (10,805)
Income taxes payable ............................................. 4,717 (5,935)
--------- ---------
Net cash provided by operating activities ............................... 114,236 116,744
INVESTING ACTIVITIES
Purchases of investments ................................................ (173,434) (90,754)
Proceeds from sales and maturities of investments ....................... 121,533 106,105
Cash paid for acquisitions, net of cash acquired ........................ (173,266) (28,112)
Purchases of property and equipment ..................................... (32,420) (19,217)
--------- ---------
Net cash used in investing activities ................................... (257,587) (31,978)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock .............................. 39,762 50,127
Cash paid under stock repurchase programs ............................... (58,590) --
Proceeds from sale of put warrants ...................................... 2,418 --
Other ................................................................... (3) (49)
--------- ---------
Net cash (used in) provided by financing activities ..................... (16,413) 50,078
--------- ---------
Change in cash and cash equivalents ..................................... (159,764) 134,844
Cash and cash equivalents at beginning of period ........................ 375,025 216,116
--------- ---------
Cash and cash equivalents at end of period .............................. $ 215,261 $ 350,960
========= =========
SEE ACCOMPANYING NOTES.
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CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
1. BASIS 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 Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. All adjustments which, in the opinion of
management, are considered necessary for a fair presentation of the results
of operations for the periods shown are of a normal recurring nature and
have been reflected in the unaudited condensed consolidated financial
statements. The results of operations for the periods presented are not
necessarily indicative of the results expected for the full fiscal year or
for any future period. The information included in these unaudited
condensed consolidated financial statements should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in this report and the consolidated
financial statements and accompanying notes included in the Citrix Systems,
Inc. (the "Company") Annual Report on Form 10-K for the year ended December
31, 2000.
2. SIGNIFICANT 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 position and results
of operations taken as a whole, the actual amount of such estimates, when
known, will vary from these estimates.
INVESTMENTS
The Company has made strategic equity investments that are accounted for
under the cost method. The Company does not recognize changes in the fair
value of these investments in earnings unless a decline in the fair value
of the investments is considered other than temporary. For the three and
six months ended June 30, 2001, the Company recorded $2.2 and $6.2 million
in investment write-downs, which are included in other (expense) income,
net on the condensed consolidated statements of income.
In July 2001, the Company approved the sale and reinvestment of certain
long-term corporate securities to preserve the overall credit quality and
to rebalance the short and long-term maturity of its overall portfolio
subsequent to the recent cash expenditure of $187.1 million to fund the
Sequoia Software Corporation acquisition discussed below. Accordingly, at
June 30, 2001, the Company transferred corporate securities with a fair
value of $167.1 million from the held-to-maturity category to the
available-for-sale category. The fair value of amounts transferred was
approximately $3.5 million in excess of their amortized costs, which was
included in accumulated other comprehensive income. To the extent the
Company's available-for-sale securities are sold, amounts included in
accumulated other comprehensive income will be included in earnings as of
the date of the transaction.
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REVENUE RECOGNITION
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2 (as amended by SOP 98-4 and
SOP 98-9) and related interpretations, "Software Revenue Recognition."
Product revenues are recognized upon shipment of the software product only
if no significant Company obligations remain, the fee is fixed or
determinable, and collection of the resulting receivable is deemed
probable. Revenue from packaged product sales to distributors and resellers
is recorded when related products are shipped. The Company also distributes
software through electronic licensing. These revenues are recognized when
the customer is provided with the activation keys that allow the customer
to take immediate possession of the software pursuant to an executed
agreement and purchase order. In software arrangements that include rights
to multiple software products, post-contract customer support ("PCS"),
and/or other services, the Company allocates the total arrangement fee
among each deliverable based on the relative fair value of each of the
deliverables determined based on vendor-specific objective evidence
("VSOE"). The Company sells software and PCS separately and VSOE is
determined by the price charged when each element is sold separately.
Product returns and sales allowances, including stock rotations, are
estimated and provided for at the time of sale. Non-recurring engineering
fees are recognized ratably as the work is performed. Revenues from
training and consulting are recognized when the services are performed.
Service and subscription revenues from customer maintenance fees for
ongoing customer support and product updates and upgrades are based on the
price charged or derived value of the undelivered elements and are
recognized ratably over the term of the contract, which is typically 12-24
months. Service revenues are included in net revenues on the face of the
condensed consolidated statements of income.
In May 1997, the Company entered into a five year joint license,
development and marketing agreement with Microsoft Corporation
("Microsoft"), as amended (the "Development Agreement,") pursuant to which
the Company licensed its multi-user Windows NT extensions to Microsoft for
inclusion in future versions of Windows NT server software. The initial fee
of $75 million relating to the Development Agreement is being recognized
ratably over the five-year term of the contract, which began in May 1997.
The additional $100 million received pursuant to the Development Agreement,
as amended, is being recognized ratably over the remaining term of the
contract, effective April 1998.
3. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of
common shares outstanding during the 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 options
(calculated using the treasury stock method), and put warrants (calculated
using the reverse treasury stock method). The shares of Common Stock
issuable upon conversion of the Company's convertible subordinated
debentures were excluded from the computation of diluted earnings per share
due to their anti-dilutive effect.
All share and per share data have been retroactively adjusted to reflect
the two-for-one stock split in the form of a stock dividend paid on
February 16, 2000 to stockholders of record as of January 31, 2000.
The following table sets forth the computation of basic and diluted
earnings per share:
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THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
--------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Numerator:
Net income......................... $ 22,894 $ 14,973 $ 51,829 $ 53,518
========= ======== ======== ========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 184,490 185,356 184,660 184,279
Effect of dilutive securities:
Put warrants................... 9 -- 8 --
Employee stock options......... 9,502 17,960 10,126 21,554
--------- -------- -------- --------
Dilutive potential common shares... 9,511 17,960 10,134 21,554
--------- -------- -------- --------
Denominator for diluted earnings per
share - weighted-average shares 194,001 203,316 194,794 205,833
========= ======== ======== ========
Basic earnings per share............. $ 0.12 $ 0.08 $ 0.28 $ 0.29
========= ======== ======== ========
Diluted earnings per share........... $ 0.12 $ 0.07 $ 0.27 $ 0.26
========= ======== ======== ========
4. ACQUISITION
On April 30, 2001, the Company completed the acquisition of Sequoia
Software Corporation ("Sequoia"), a provider of XML-pure portal software,
for approximately $187.1 million in cash, including approximately $2.7
million in transaction costs, all of which was paid in the second quarter
of 2001. The acquisition was accounted for as a purchase. The cost in
excess of net tangible assets acquired was approximately $171.8 million, of
which $29.4 million was allocated to core technology, $17.2 million to
other identified intangibles and $122.6 million to goodwill. The goodwill
and intangible assets are being amortized on a straight line basis over
periods ranging from three to five years. A portion of the purchase price
was allocated to in-process research and development, which had not reached
technological feasibility and had no alternative future use, for which the
Company incurred a pre-tax charge of approximately $2.6 million in the
second quarter of 2001. The results of operations of Sequoia are included
in the Company's results of operations from the date of the acquisition.
The allocation of the purchase price was based on an independent valuation
report. The purchase price allocation is subject to finalization of
pre-existing contingencies and other purchase accounting adjustments, none
of which are expected to be material.
5. SEGMENT INFORMATION
The Company operates in a single market consisting of the design,
development, marketing and support of application delivery and management
software and services for enterprise applications. Design, development,
marketing and support operations outside of the United States are conducted
through subsidiaries located primarily in Europe and the Asia Pacific
region.
The Company tracks revenue by geography and product category but does not
track expenses or identifiable assets on a product category basis. The
Company does not engage in intercompany transfers between segments. The
Company's management evaluates performance based primarily on revenues in
the geographic locations in which the Company operates. Segment profit for
each segment includes sales and marketing expenses directly attributable to
the segment and excludes certain expenses that are managed outside the
reportable segments. Costs excluded from segment profit primarily consist
of cost of revenues, research and development costs, interest, corporate
expenses, including income taxes, as well as non-recurring charges for
purchased in-process technology, and overhead costs, including rent,
utilities, depreciation and amortization. Corporate expenses are comprised
primarily of corporate marketing costs, operations and other general and
administrative expenses which are separately managed. Accounting policies
of the segments are the same as the Company's consolidated accounting
policies.
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During 1999 and 2000, wholly-owned subsidiaries were formed in various
locations within Europe, the Middle East and Africa (EMEA) and Asia
Pacific, respectively. These subsidiaries are responsible for sales and
distribution of the Company's products. Prior to this change, sales in
these geographic segments were classified as export sales from the Americas
segment. For purposes of the presentation of segment information, the sales
previously reported as Americas export sales have been reclassified to the
geographical segments where the sale was made for each of the periods
presented.
Net revenues and segment profit, classified by the major geographic areas
in which the Company operates, are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS)
Net revenues:
Americas (1) ........................... $ 72,596 $ 51,983 $ 137,492 $ 120,265
EMEA ................................... 54,540 38,091 102,547 82,207
Asia Pacific ........................... 10,198 6,072 20,234 11,248
Other (2) .............................. 9,940 9,940 19,813 19,881
--------- --------- --------- ---------
Consolidated ........................... $ 147,274 $ 106,086 $ 280,086 $ 233,601
========= ========= ========= =========
Segment profit:
Americas (1) ........................... $ 59,302 $ 42,226 $ 111,802 $ 100,581
EMEA ................................... 42,521 29,354 80,096 64,789
Asia Pacific ........................... 6,585 3,140 13,439 5,731
Other (2) .............................. 9,940 9,940 19,813 19,881
Unallocated expenses (3):
Cost of revenues ................... (7,223) (8,404) (14,534) (13,532)
Overhead costs ..................... (29,512) (20,602) (50,465) (39,243)
Research and development ........... (18,150) (12,300) (34,324) (24,413)
In-process research and development (2,580) -- (2,580) --
Net interest and other expense ..... 3,735 5,488 8,327 10,941
Other corporate expenses ........... (29,691) (27,452) (56,459) (48,281)
--------- --------- --------- ---------
Consolidated income before income taxes. $ 34,927 $ 21,390 $ 75,115 $ 76,454
========= ========= ========= =========
- ----------------
(1) The Americas segment is comprised of the United States, Canada and
Latin America.
(2) Represents royalty fees in connection with the Development Agreement.
(3) Represents expenses presented to management on a consolidated basis
only and not allocated to the geographic operating segments.
Additional information regarding revenue by products and services groups is
as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS)
Revenue:
Application Servers ......... $113,323 $ 72,870 $211,148 $168,373
Management Products ......... 12,841 14,416 27,251 27,897
Computing Appliances Products 923 1,206 2,047 3,182
Microsoft Royalties ......... 9,940 9,940 19,813 19,881
Services and Other Revenue .. 10,247 7,654 19,827 14,268
-------- -------- -------- --------
Net Revenues ................ $147,274 $106,086 $280,086 $233,601
======== ======== ======== ========
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6. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", and its corresponding amendments under SFAS No. 138.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, hedging activities, and exposure definition. SFAS No. 133
requires the Company to record all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair
value. Derivatives not designated as hedging instruments must be adjusted
to fair value through earnings in the current period. If the derivative is
a hedge, depending on the nature of the hedge, changes in fair value will
either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
application of the provisions of SFAS No. 133 may impact the volatility of
other income and other comprehensive income.
For derivative instruments that hedge the exposure of variability in
expected future cash flows that is attributable to a particular risk and
that are designated as cash flow hedges, the effective portion of the net
gain or loss on the derivative instrument is reported as a component of
other comprehensive income in stockholders' equity and reclassified into
earnings in the same period or periods during which the hedged transaction
also affects earnings. The remaining net gain or loss on the derivative
instrument in excess of the cumulative change in the present value of the
future cash flows on the hedged item, if any, is recognized in current
earnings.
For foreign currency forward contracts designated as cash flow hedges,
hedge effectiveness is measured based on changes in the fair value of the
contract attributable to changes in the forward exchange rate. Changes in
the expected future cash flows on the forecasted hedged transaction and
changes in the fair value of the forward hedge are both measured from the
contract rate to the forward exchange rate associated with the forward
contract's maturity date.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
attributing all derivatives that are designated as cash flow hedges to
specific firm commitments or forecasted transactions. The Company also
formally assesses, both at the inception of the hedge and on an ongoing
basis, whether each derivative is highly effective in offsetting changes in
cash flows of the hedged item. If it is determined that a derivative is not
highly effective as a hedge or if a derivative ceases to be a highly
effective hedge, the Company will discontinue hedge accounting
prospectively for the affected derivative. The Company does not use
derivative financial instruments for speculative or trading purposes.
A substantial portion of the Company's anticipated overseas expense and
capital purchasing activities are transacted in local currencies. To
protect against reductions in value and the volatility of future cash flows
caused by changes in currency exchange rates, the Company has established a
hedging program. The Company uses forward foreign exchange contracts to
reduce a portion of its exposure to these potential changes. The terms of
such instruments, and the hedging transactions to which they relate,
generally do not exceed 12 months. Principal currencies hedged are British
Pounds Sterling, Euros, Swiss Francs, and Australian Dollars. The Company
may choose not to hedge certain foreign exchange transaction exposures due
to immateriality, prohibitive economic cost of hedging particular
exposures, and availability of appropriate hedging instruments.
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The Company has a forward bond purchase agreement under which the Company
will purchase zero coupon bonds at fixed prices on certain scheduled dates
through February 2004. The agreement is designated as a hedge of the
forecasted purchases of bonds as it eliminates the variability of the
forecasted purchase price of those bonds.
In accordance with SFAS No. 133, hedges related to anticipated or
forecasted transactions are designated and documented at hedge inception as
cash flow hedges and evaluated for hedge effectiveness quarterly. For
currency forward contracts, hedge effectiveness is measured based on
changes in the fair value of the contract attributable to changes in the
forward exchange rate. Changes in the expected future cash flows on the
hedged transaction and changes in the fair value of the forward hedge are
both measured from the contract rate to the forward exchange rate
associated with the forward contract's maturity date. The effective
portions of the net gains or losses on forward contracts are reported as
components of other comprehensive income in stockholders' equity and
reclassified into earnings during the period in which the hedged
transactions affect earnings. Any residual changes in fair value of the
instruments, including ineffectiveness, are recognized in current earnings
in interest and other income.
There was no transition adjustment impact recorded in earnings or
accumulated other comprehensive income as a result of recognizing
derivatives designated as cash flow hedging instruments at fair value. For
the three and six months ended June 30, 2001, the Company recorded net
losses in operating expenses of approximately $685,000 and $733,000,
respectively, representing the effective net loss on derivative instruments
that settled in the respective periods. The hedge ineffectiveness on
existing derivative instruments for the three and six months ended June 30,
2001, was not material. In addition, there were no gains or losses
resulting from the discontinuance of cash flow hedges, as all originally
forecasted transactions are expected to occur. As of June 30, 2001, the
Company recorded $1.3 million of derivative assets and $2.3 million of
derivative liabilities, representing the fair values of the Company's
outstanding derivative instruments.
DERIVATIVE ACTIVITY IN ACCUMULATED OTHER COMPREHENSIVE INCOME
As of June 30, 2001, the Company had a net deferred loss associated with
cash flow hedges of approximately $1.1 million, net of taxes, all of which
are expected to be reclassified to earnings by the end of the current year.
The following table summarizes activity in other comprehensive income (OCI)
related to derivatives, net of taxes, during the three and six months ended
June 30, 2001:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
------------------- ---------------------
(IN THOUSANDS)
Cumulative effect of adopting SFAS No. 133 $ -- $ --
Changes in fair value of derivatives ..... (2,141) (673)
(Gains) losses reclassified from OCI ..... (456) (456)
------- -------
Change in unrealized derivative loss . $(2,597) $(1,129)
======= =======
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7. COMPREHENSIVE INCOME
Comprehensive income is comprised of two components, net income and other
comprehensive income. Other comprehensive income refers to revenue,
expenses, gains and losses that under accounting principles generally
accepted in the United States are recorded as an element of stockholders'
equity, but are excluded from net income. The Company's other comprehensive
income is comprised of changes in fair value of derivatives designated as
and effective as cash flow hedges and unrealized gains and losses, net of
taxes, on marketable securities categorized as available-for-sale. The
components of comprehensive income, net of tax, are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS)
Net income ............................... $ 22,894 $ 14,973 $ 51,829 $ 53,518
Other comprehensive income:
Change in unrealized gain (loss) on
available-for-sale securities ...... 3,579 (5,228) 5,857 4,912
Change in unrealized loss on derivative
instruments ........................ (2,597) -- (1,129) --
-------- -------- -------- --------
Comprehensive income ..................... $ 23,876 $ 9,745 $ 56,557 $ 58,430
======== ======== ======== ========
The components of accumulated other comprehensive income, net of tax, are
as follows:
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
(IN THOUSANDS)
Unrealized gain (loss) on investments ....... $ 2,914 $(2,943)
Unrealized loss on derivative instruments ... (1,129) --
------- -------
Accumulated other comprehensive income (loss) $ 1,785 $(2,943)
======= =======
8. INCOME TAXES
The Company maintains certain operational and administrative processes in
overseas subsidiaries. As a result, foreign earnings are taxed at lower
foreign tax rates. These earnings are permanently reinvested overseas in
order to fund the Company's growth in overseas markets. The Company's
estimated annual effective tax rate is 31% for 2001, up from 30% in 2000 as
a result of the non-tax deductible goodwill and intangible amortization
associated with the Sequoia acquisition, offset primarily by higher revenue
and profits in foreign entities with lower tax rates in the current year.
9. OTHER REVENUES
In May 1997, the Company entered into the Development Agreement with
Microsoft, which provides for the licensing of certain of the Company's
multi-user software enhancements and for the cooperation between the
parties for the development of certain future software. At the time of the
agreement, Microsoft held in excess of 5% of the Company's outstanding
common stock and also had a representative on the Company's Board of
Directors. Microsoft is no longer a significant stockholder and no longer
has Board representation. Amounts arising from the Development Agreement
are designated as other revenue. Development costs incurred in connection
with the Development Agreement are immaterial and are expensed as incurred
in cost of revenues. Deferred revenue at June 30, 2001 and December 31,
2000 includes $34.1 million and $53.9 million, respectively, related to
this agreement which is being recognized ratably over the five year term of
the Development Agreement, which began in May 1997.
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14
10. STOCK REPURCHASE PROGRAMS
On April 15, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to $200 million of the Company's
Common Stock. On April 26, 2001, the Board of Directors increased the scope
of the repurchase program by authorizing the Company to repurchase up to
$400 million of the Company's Common Stock (inclusive of the $200 million
approved in April 1999). Purchases will be made from time to time in the
open market and paid out of general corporate funds. During the six months
ended June 30, 2001, the Company purchased 1,136,000 shares of outstanding
Common Stock on the open market at a total cost of $31.7 million. These
shares have been recorded as treasury stock.
On August 8, 2000, the Company entered into an agreement, as amended, with
a counterparty in a private transaction to purchase up to approximately 4.8
million shares of the Company's Common Stock at various times through the
third quarter of 2002. Pursuant to the terms of the agreement, $100 million
was paid to the counterparty in the third quarter of 2000. The ultimate
number of shares repurchased will depend on market conditions. During the
six months ended June 30, 2001, the Company received 1,164,000 shares under
this agreement at a total cost of $25.1 million. These shares have been
recorded as treasury stock.
In connection with the Company's stock repurchase program, in October 2000,
the Board of Directors approved a program authorizing the Company to sell
put warrants that entitle the holder of each warrant to sell to the
Company, generally by physical delivery, one share of the Company's Common
Stock at a specified price. During the six months ended June 30, 2001, the
Company sold 590,000 put warrants at an average strike price of $31.93 and
received premium proceeds of $2.4 million. In the first six months of 2001,
the Company paid $26.9 million for the purchase of 890,000 shares upon the
exercise of outstanding put warrants, while 900,000 put warrants expired
unexercised. The common shares purchased upon exercise of these put
warrants have been recorded as treasury stock. As of June 30, 2001, 100,000
put warrants were outstanding, expiring in August 2001 with an exercise
price of $29.44. As of June 30, 2001, the Company has a total potential
repurchase obligation of approximately $2.9 million associated with the
outstanding put warrants, all of which permit a net-share settlement at the
Company's option and do not result in a put warrant obligation on the
balance sheet.
In connection with the Company's stock repurchase program, in June 2001,
the Company entered into an agreement with a counterparty requiring that
counterparty to sell to the Company up to 300,000 shares of the Company's
Common Stock at fixed prices if the Company's stock trades at designated
levels between June 15, 2001 and July 20, 2001. As of June 30, 2001, the
Company had a potential repurchase obligation associated with this
agreement of approximately $6.6 million, which is classified as common
stock subject to repurchase on the condensed consolidated balance sheets.
On July 20, 2001, the agreement expired and ultimately no shares were
repurchased under this arrangement.
11. LEGAL PROCEEDINGS
In June 2000, the Company and certain of its officers and directors were
named as defendants in several securities class action lawsuits filed in
the United States District Court for the Southern District of Florida on
behalf of purchasers of the Company's Common Stock during the period
October 20, 1999 to June 9, 2000 ("class period"). These actions have been
consolidated as In Re Citrix Systems, Inc. Securities Litigation. These
lawsuits generally allege that, during the class period, the defendants
made misstatements to the investing public about the Company's financial
condition and prospects. The complaint seeks unspecified damages and other
relief. While the Company is unable to determine the ultimate outcome of
these matters, the Company believes the plaintiffs' claims lack merit and
intends to vigorously defend the lawsuits.
14
15
In September 2000, a stockholder filed a claim in the Court of Chancery of
the State of Delaware against the Company and nine of its officers and
directors alleging breach of fiduciary duty by failing to disclose all
material information concerning the Company's financial condition at the
time of the proxy solicitation. The complaint seeks unspecified damages. By
order of the court in January 2001, the action was conditionally stayed. In
February 2001, the plaintiff filed a motion with the court for award of
attorney's fees and litigation costs in the amount of $2,000,000 and
$60,000, respectively. In July 2001, in furtherance of its fee petition,
plaintiff voluntarily dismissed the action without prejudice. The Company
believes the plaintiff's claim lacks merit, however, should the action be
re-filed and ultimately proceed in Delaware court or elsewhere, the Company
is unable to determine the ultimate outcome of this matter and intends to
vigorously defend it.
12. RECLASSIFICATION
Certain reclassifications have been made for consistent presentation.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, BUSINESS COMBINATIONS. SFAS No. 141 eliminates the use of the
pooling of interests method for all business combinations initiated after
June 30, 2001. SFAS No. 141 also provides new criteria to determine whether
an acquired intangible asset should be recognized separately from goodwill,
and requires expanded disclosure requirements. All business combinations
completed after June 30, 2001 will be subject to the provisions of the
statement. The Company will adopt SFAS No. 141 in the third quarter of
2001, and the impact is not expected to be material to its consolidated
financial statements.
In July 2001, the FASB issued SFAS No. 142, GOODWILL AND INTANGIBLE ASSETS.
SFAS No. 142 eliminates amortization of goodwill, and requires an
impairment-only model to recording the value of goodwill. SFAS No. 142
requires that impairment be tested at least annually at the reporting unit
level, using a two-step impairment test. The first step determines if
goodwill is impaired by comparing the fair value of the reporting unit as a
whole to the book value. If a deficiency exists, the second step measures
the amount of the impairment loss as the difference between the implied
fair value of goodwill and its carrying amount. Other purchased intangibles
with indefinite economic lives are required to be tested for impairment
annually using a lower of cost or fair value approach. The provisions of
the statement will be effective for fiscal years beginning after December
15, 2001. Upon adoption, goodwill related to acquisitions completed before
the date of adoption would be subject to the provisions of the statement.
Amortization of the remaining book value of goodwill would cease and the
new impairment-only approach would apply. Impairment charges within the
first six months of adoption would be reported as a cumulative effect of a
change in accounting principle in the income statement. Impairment charges
thereafter would be reported in operating income. The Company plans to
adopt SFAS No. 142 in the first quarter of 2002 and is unable to reasonably
estimate the effect of adoption on its financial position or results of
operations.
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports comprehensive delivery
and management software that enables effective and efficient deployment and
management of enterprise applications, including those designed for
Microsoft Windows(R) operating systems and UNIX(R) operating systems. The
Company's Application Servers product category, which comprises the largest
source of the Company's revenue, primarily consists of the MetaFrame(R)
products and related options. The MetaFrame products, which began shipping
in the second quarter of 1998, permit organizations to deploy and manage
applications without regard to location, network connection or type of
client hardware platforms.
On May 9, 1997, the Company and Microsoft entered into a License,
Development and Marketing Agreement, as amended (the "Development
Agreement"), which provides for the licensing to Microsoft of certain of
the Company's multi-user software enhancements to Microsoft's Windows NT
Server and for the cooperation between the parties for the development of
certain future multi-user versions of Microsoft Windows NT Server, Terminal
Server Edition and Microsoft Windows 2000. As a result of the Development
Agreement, the Company continues to support the Microsoft Windows NT
platform, but the MetaFrame products and later releases no longer directly
incorporate Windows NT technology. The Company plans to continue developing
enhancements to its MetaFrame product line and expects that these products
and associated options will constitute a majority of its revenues for the
foreseeable future.
The Company's revenue recognition policies are in compliance with the
American Institute of Certified Public Accountants Statement of Position
("SOP") 97-2 (as amended by SOP 98-4 and SOP 98-9) and related
interpretations, "Software Revenue Recognition" as described in Note 2 of
the Notes to Condensed Consolidated Financial Statements included in this
report.
On April 30, 2001, the Company completed the acquisition of Sequoia
Software Corporation ("Sequoia") for approximately $187.1 million in cash,
including $2.7 million in acquisition costs. Sequoia is a provider of
XML-pure portal software. The acquisition was accounted for as a purchase.
The following discussion relating to the individual financial statement
captions, the Company's overall financial performance, operations and
financial position should be read in conjunction with the factors and
events described in "-OVERVIEW" and "-CERTAIN FACTORS WHICH MAY AFFECT
FUTURE RESULTS" which may impact the Company's future performance and
financial position.
16
17
RESULTS OF OPERATIONS
The following table sets forth statement of income data of the Company
expressed as a percentage of net revenues and as a percentage of change
from period-to-period for the periods indicated.
INCREASE/(DECREASE) FOR THE
THREE MONTHS SIX MONTHS
THREE MONTHS ENDED SIX MONTHS ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, 2001 JUNE 30, 2001
------------------ ------------------ VS. VS.
2001 2000 2001 2000 JUNE 30, 2000 JUNE 30, 2000
----- ----- ----- ----- -------------- --------------
Net revenues .................. 100.0% 100.0% 100.0% 100.0% 38.8% 19.9%
Cost of revenues (excluding
amortization presented
separately below) .......... 4.9 7.9 5.2 5.8 (14.1) 7.4
----- ----- ----- -----
Gross margin .................. 95.1 92.1 94.8 94.2 43.4 20.7
Operating expenses:
Research and development ... 12.3 11.6 12.3 10.5 47.6 40.6
Sales, marketing and support 38.6 42.8 37.9 37.1 25.1 22.7
General and administrative . 12.9 15.3 13.2 12.3 17.6 28.4
Amortization of intangible
assets .................... 8.3 7.4 6.6 6.3 55.9 26.4
In-process research and
development ............... 1.8 -- 0.9 -- * *
----- ----- ----- -----
Total operating expenses . 73.9 77.1 70.9 66.2 33.1 28.6
----- ----- ----- -----
Income from operations ........ 21.2 15.0 23.9 28.0 96.2 1.9
Interest income ............... 7.6 9.2 8.7 8.1 15.9 29.6
Interest expense .............. (3.0) (4.0) (3.2) (3.6) 5.2 5.2
Other (expense) income, net ... (2.1) -- (2.6) 0.2 * *
----- ----- ----- -----
Income before income taxes .... 23.7 20.2 26.8 32.7 63.3 (1.8)
Income taxes .................. 8.2 6.1 8.3 9.8 87.5 1.5
----- ----- ----- -----
Net income .................... 15.5% 14.1% 18.5% 22.9% 52.9% (3.2)%
===== ===== ===== =====
-----------
* Not meaningful
NET REVENUES. Net revenues are presented below in five categories:
Application Servers, Management Products, Computing Appliances Products,
Microsoft Royalties and Services and Other Revenue. Application Servers
revenue primarily represents fees related to the licensing of the Company's
MetaFrame products, subscriptions for product support, updates and upgrades
and additional user licenses. Management Products consist of Load Balancing
Services, Resource Management Services and other options. Computing
Appliances Products revenue consists of license fees and royalties from
OEMs who are granted a license to incorporate and/or market the Company's
multi-user technologies in their own product offerings. Microsoft Royalties
represent fees recognized in connection with the Development Agreement.
Services and Other Revenue consists primarily of customer support, as well
as consulting in the delivery of implementation services and systems
integration solutions.
With respect to product mix, the increase in net revenues for the three
and six months ended June 30, 2001 compared to the three and six months
ended June 30, 2000 was primarily attributable to an increase in
Application Servers revenue resulting from an increase in the number of
licenses sold of MetaFrame for Windows operating systems. Some of the
management capabilities such as Load Balancing Services and Resource
Management Services, traditionally included in Management Products, have
been bundled into the MetaFrame XP products introduced in the first quarter
of 2001. Therefore, as MetaFrame XP becomes a larger proportion of the
Company's product mix, the Application Servers revenue will increase while
Management Products revenue will continue to decrease.
17
18
An analysis of the Company's net revenues is presented below:
INCREASE/(DECREASE) FOR THE
THREE MONTHS SIX MONTHS
THREE MONTHS ENDED SIX MONTHS ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, 2001 JUNE 30, 2001
----------------------- --------------------- VS. VS.
2001 2000 2001 2000 JUNE 30, 2000 JUNE 30, 2000
---------- ---------- ---------- ------- ------------- -------------
Application Servers ......... 77% 69% 75% 72% 56% 25%
Management Products ......... 9 14 10 12 (11) (2)
Computing Appliances Products * 1 1 1 (23) (36)
Microsoft Royalties ......... 7 9 7 9 -- --
Services and Other Revenue .. 7 7 7 6 34 39
--- --- --- ---
Net Revenues ................ 100% 100% 100% 100% 39% 20%
----------
* less than one percent.
INTERNATIONAL AND SEGMENT REVENUES. International revenues (sales outside
of the United States) accounted for approximately 47% and 43% of net
revenues for the three months ended June 30, 2001 and 2000, respectively,
and approximately 48% and 41% of net revenues for the six months ended June
30, 2001 and 2000, respectively. The increase in international revenues as
a percentage of net revenues was primarily due to the Company's increased
sales and marketing efforts and continued demand for the Company's products
in Europe and Asia. For detailed information on international revenues,
please refer to Note 5 to the Company's Condensed Consolidated Financial
Statements appearing in this report.
An analysis of geographic segment net revenue is presented below:
INCREASE/(DECREASE) FOR THE
THREE MONTHS SIX MONTHS
THREE MONTHS ENDED SIX MONTHS ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, 2001 JUNE 30, 2001
------------------------- ----------------------- VS. VS.
2001 2000 2001 2000 JUNE 30, 2000 JUNE 30, 2000
---------- ---------- ---------- ------ ------------- -------------
Americas (1) 49% 49% 49% 51% 40% 14%
EMEA ....... 37 36 37 35 43 25
Asia Pacific 7 6 7 5 68 80
Other (2) .. 7 9 7 9 -- --
--- --- --- ---
Net Revenues 100% 100% 100% 100% 39% 20%
----------------
(1) The Americas segment is comprised of the United States, Canada and
Latin America.
(2) Primarily represents royalty fees earned in connection with the
Development Agreement.
In terms of geographic segments, the increase in net revenues for the
three and six months ended June 30, 2001 compared to the same periods in
2000 was primarily due to the Company's increased sales and marketing
efforts and continued demand for the Company's products across all
geographic segments. Revenues have notably increased in the Asia Pacific
segment, particularly due to increased market acceptance in Japan. Revenue
by geographic segment as a percentage of net revenues remained relatively
constant for the three and six month periods ended June 30, 2001 compared
to the same periods in 2000.
18
19
The Company expects to continue investing in international markets and
expanding its international operations by establishing additional foreign
operations, hiring personnel, expanding its international sales force and
adding new third party channel partners.
COST OF REVENUES. Cost of revenues consisted primarily of compensation
and other personnel-related costs for consulting services, as well as the
cost of royalties, product media and duplication, manuals, packaging
materials and shipping expense. All development costs incurred in
connection with the Development Agreement are immaterial and are expensed
as incurred in cost of revenues. The Company's cost of revenues exclude
amortization of core technology.
GROSS MARGIN. Gross margin as a percentage of net revenue increased for
the three and six months ended June 30, 2001 compared to the three and six
months ended June 30, 2000 primarily due to a reserve for obsolete
inventory recorded in the second quarter of 2000. The Company anticipates
gross margin as a percentage of net revenues will remain relatively stable
as compared with current levels.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consisted primarily of personnel-related costs. All development costs
included in the research and development of software products and
enhancements to existing products have been expensed as incurred except for
certain intangible assets related to acquisitions described herein. The
increase in research and development expenses for the three months ended
June 30, 2001 as compared to the same period in the prior year resulted
primarily from increased staffing, associated salaries and related expenses
required to expand the Company's product lines. The increase in research
and development expenses for the six months ended June 30, 2001 as compared
to the same period in the prior year was primarily due to costs incurred
for third party software and external consultants and developers to expand
and enhance the Company's product lines, as well as increased staffing and
associated costs.
SALES, MARKETING AND SUPPORT EXPENSES. The increase in sales, marketing
and support expenses for the three and six months ended June 30, 2001
resulted primarily from increased headcount levels and associated salaries,
commissions and related expenses. The increase was also due to a higher
level of marketing programs directed at customer and business partner
acquisition and retention, and additional promotional activities related to
specific products, such as MetaFrame XP introduced in February 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. The increase in general and
administrative expenses for the three and six months ended June 30, 2001 as
compared to the comparable periods in 2000 resulted primarily from
increased staff, associated salaries and related expenses necessary to
support overall increases in the scope of the Company's operations. The
increase was also due to an increase in legal fees relating to litigation
matters and accounting fees.
AMORTIZATION OF INTANGIBLE ASSETS. The amortization of goodwill and
identifiable intangible assets increased for the three and six months ended
June30, 2001 as compared to the comparable periods in 2000 due to the
acquisition of Sequoia in the second quarter of 2001. As of June 30, 2001,
the Company had net goodwill and identifiable intangible assets of $203.2
million with remaining useful lives of one to five years. The Company
anticipates that amortization of goodwill and identifiable intangible
assets will increase for the remainder of 2001 primarily due to the full
quarter effect of the acquisition of Sequoia, and as the Company continues
to search for suitable acquisition candidates.
19
20
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill (and
intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to annual impairment tests in accordance with
the statements. Other intangibles will continue to be amortized over their
useful lives. The Company will apply the new rules on accounting for
goodwill and other intangible assets beginning in the first quarter of
2002. As a result, application of the nonamortization provisions of the
statements is expected to result in a decrease in amortization of goodwill
and identifiable intangibles in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill
and indefinite-lived intangible assets as of January 1, 2002, and has not
yet determined what the effect of these tests will be on the earnings and
financial position of the Company.
INTEREST INCOME. Interest income for the three and six months ended June
30, 2001 as compared to the same periods in 2000, increased as the Company
changed the composition of its investment portfolio in the fourth quarter
of 2000 from tax-exempt and taxable to predominantly taxable securities.
The Company may acquire or make investments in companies it believes are
related to its strategic objectives. Such investments will reduce the
Company's cash and/or investment balances and therefore may reduce interest
income.
INTEREST EXPENSE. The increase in interest expense for the three and six
months ended June 30, 2001 as compared to the same periods in 2000 was
primarily due to the accretion of the original issue discount related to
the zero coupon convertible subordinated debentures.
OTHER (EXPENSE) INCOME, NET. The increase in other (expense) income, net
for the three and six months ended June 30, 2001 as compared to the same
periods in 2000, was primarily due to a $3.9 and $2.2 million loss in the
first and second quarters of 2001, respectively, resulting from an
other-than-temporary decline in fair value of certain of the Company's
equity investments. The Company may acquire or make investments in
companies it believes are related to its strategic objectives. The Company
periodically evaluates the carrying value of its investments to determine
if there has been any impairment of value that is other-than-temporary.
INCOME TAXES. The Company's estimated annual effective tax rate is 31%
for 2001, up from 30% in 2000 as a result of the non-tax deductible
goodwill and intangible amortization associated with the Sequoia
acquisition, offset primarily by higher revenue and profits in foreign
entities with lower tax rates in the current year.
IN-PROCESS RESEARCH AND DEVELOPMENT
In 1999, the Company completed the acquisition of certain in-process
software technologies from ViewSoft, in which it allocated $2.3 million of
the purchase price to in-process research and development.
Since the date of acquisition, the Company has used some of the acquired
in-process technology to develop new product offerings and enhancements,
which will become part of the Company's suite of products when completed.
The Company currently expects to complete the development of the project
associated with the Viewsoft acquisition in the third quarter of 2002. Upon
completion, the Company intends to embed this technology into portal
technology offerings.
20
21
The nature of the efforts required to develop and integrate the acquired
in-process technology into commercially viable products or features and
functionalities within the Company's suite of existing products principally
relate to the completion of all planning, designing and testing activities
that are necessary to establish that the products can be produced to meet
design requirements, including functions, features and technical
performance requirements. The Company currently expects that products
utilizing the acquired in-process technology will be successfully
developed, but there can be no assurance that commercial viability of any
of these products will be achieved. Furthermore, future developments in the
software industry, particularly the server-based computing environment,
changes in technology, changes in other products and offerings or other
developments may cause the Company to alter or abandon product plans.
Failure to complete the development of this project in its entirety, or
in a timely manner, could have a material adverse impact on the Company's
financial condition and results of operations. No assurance can be given
that actual revenues and operating profit attributable to acquired
in-process research and development will not deviate from the projections
used to initially value such technology when acquired. Ongoing operations
and financial results for acquired assets, and the Company as a whole, are
subject to a variety of factors, which may not have been known or estimable
at the date of such transactions.
The in-process research and development acquired in the ViewSoft
acquisition consisted primarily of one significant research and development
project, ViewSoft Internet 4.0. This project enables multi-tier, web-based
application development and deployment. At the date of the valuation,
ViewSoft was in development with this product. The product was intended to
operate in the multi-tier web application market and was not intended to
operate in a MetaFrame environment. The Company is currently exploring the
potential for integrating this technology into its portal products.
The remaining efforts to complete the project relate primarily to
integration work and any associated design, development or rework that may
be required to support this integration. The research and development risks
associated with this project relate primarily to potential product
limitations and any rework that will be required for integration with the
Company's portal software.
The actual and estimated costs to complete and completion dates of the
in-process and core technology acquired are as follows:
VIEWSOFT
--------
(IN THOUSANDS)
Date acquired........................................... July 1999
Cost incurred to date................................... $5,800
Estimated cost to complete.............................. 410
-------------
Total estimated project cost............................ $6,210
=============
Estimated cost to complete at date of valuation......... $ 660
=============
Estimated completion date at date of valuation.......... Fourth Quarter
of 1999
Estimated completion date............................... Third Quarter
of 2002
21
22
The estimated completion date of the ViewSoft project has been delayed
from the originally anticipated completion date due to increases in project
scope, a longer testing period, transition of the development team, and
design, development and rework required to integrate the technology with
the Company's portal offerings. The Company is currently unable to
determine the impact of such delays on its business, future results of
operations and financial condition. There can be no assurance that the
Company will not incur additional charges in subsequent periods to reflect
costs associated with completing this project or that the Company will be
successful in its efforts to integrate and further develop this technology.
In April 2001, the Company completed the acquisition of Sequoia Software
Corporation. A portion of the purchase price was allocated to in-process
research and development, which had not reached technological feasibility
and had no alternative future use, for which the Company incurred a pre-tax
charge of approximately $2.6 million in the second quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001, the Company generated positive
operating cash flows of $114.2 million, related primarily to net income of
$51.8 million, adjusted for, among other things, tax benefits from the
exercise of non-statutory stock options and disqualifying dispositions of
incentive stock options of $10.3 million, non-cash charges including
depreciation and amortization expense of $32.2 million, and provisions for
product returns of $12.0 million primarily due to stock rotations. These
cash inflows were partially offset by an aggregate decrease in cash flow
from operating assets and liabilities of $13.0 million. Cash used in
investing activities of $257.6 million related primarily to net cash paid
for the acquisition of Sequoia of $173.3 million, the net purchase of
investments of $51.9 million and the expenditure of $32.4 million for the
purchase of property and buildings and costs associated with the Company's
enterprise resource planning implementation. Cash used in financing
activities of $16.4 million related to the expenditure of $58.6 million for
stock repurchase programs, partially offset by the proceeds from the
issuance of common stock under the Company's stock option plans of $39.8
million.
As of June 30, 2001, the Company had $741.0 million in cash and
investments, including $215.3 million in cash and cash equivalents, and
$193.0 million of working capital. The Company's cash and cash equivalents
are invested in investment grade, highly liquid securities to minimize
interest rate risk and allow for flexibility in the event of immediate cash
needs. The Company's short- and long-term investments consist primarily of
corporate securities, government securities, commercial paper, and
strategic equity investments. The Company's investments are classified as
available for sale or as held-to-maturity, therefore, the Company does not
recognize changes in the fair value of these investments in earnings unless
a decline in the fair value of the investments is other than temporary.
The Company regularly evaluates interest rate sensitivity as well as the
scheduled maturity dates of its underlying cash and investments portfolio.
From time-to-time, the Company may execute transactions to preserve the
overall credit quality of its investments and to rebalance the short and
long-term maturity of the overall portfolio to match planned sources and
uses of such funds. In July 2001, the Company approved certain investment
transactions which include the sale and reinvestment of certain long-term
corporate security investments. These transactions are designed to preserve
the overall credit quality and to rebalance the short and long-term
maturity of the overall portfolio subsequent to the recent cash expenditure
of $187.1 million to fund the Sequoia Software Corporation acquisition
discussed below.
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At June 30, 2001, the Company had approximately $55.6 million in accounts
receivable, net of allowances, and $97.3 million of deferred revenues, of
which the Company anticipates $93.2 million will be earned over the next
twelve months.
On April 15, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to $200 million of the Company's
Common Stock. On April 26, 2001, the Board of Directors increased the scope
of the repurchase program by authorizing the Company to repurchase up to
$400 million of the Company's Common Stock (inclusive of the $200 million
approved in April 1999). Purchases will be made from time to time in the
open market and paid out of general corporate funds. During the six months
ended June 30, 2001, the Company purchased 1,136,000 shares of outstanding
Common Stock on the open market at an average price of $27.93 per share.
These shares have been recorded as treasury stock.
On August 8, 2000, the Company entered into an agreement, as amended,
with a counterparty in a private transaction to purchase up to
approximately 4.8 million shares of the Company's Common Stock at various
times through the third quarter of 2002. Pursuant to the terms of the
agreement, $100 million was paid to the counterparty in the third quarter
of 2000. The ultimate number of shares repurchased will depend on market
conditions. During the six months ended June 30, 2001, the Company received
1,164,000 shares under this agreement at an average price of $21.56 per
share. These shares have been recorded as treasury stock.
In connection with the Company's stock repurchase program, in October
2000, the Board of Directors approved a program authorizing the Company to
sell put warrants that entitle the holder of each warrant to sell to the
Company, generally by physical delivery, one share of the Company's Common
Stock at a specified price. During the six months ended June 30, 2001, the
Company sold 590,000 put warrants at an average strike price of $31.93 and
received premium proceeds of $2.4 million. In the first six months of 2001,
the Company paid $26.9 million for the purchase of 890,000 shares upon the
exercise of outstanding put warrants, while 900,000 put warrants expired
unexercised. The common shares purchased upon exercise of these put
warrants have been recorded as treasury stock. As of June 30, 2001, 100,000
put warrants were outstanding, expiring in August 2001 with an exercise
price of $29.44. As of June 30, 2001, the Company has a total potential
repurchase obligation of approximately $2.9 million associated with the
outstanding put warrants.
In connection with the Company's stock repurchase program, in June 2001,
the Company entered into an agreement with a counterparty requiring that
counterparty to sell to the Company up to 300,000 shares of the Company's
Common Stock at fixed prices if the Company's stock trades at designated
levels between June 15, 2001 and July 20, 2001. As of June 30, 2001, the
Company had a potential repurchase obligation associated with this
agreement of approximately $6.6 million, which is classified as common
stock subject to repurchase on the condensed consolidated balance sheet. On
July 20, 2001, the agreement expired and ultimately no shares were
repurchased under this arrangement.
In October 2000, the Board of Directors approved a program authorizing
the Company to repurchase up to $25 million of the zero coupon convertible
subordinated debentures in open market purchases. As of June 30, 2001, none
of the Company's debentures had been repurchased under this program.
On April 30, 2001, the Company completed the acquisition of Sequoia
Software Corporation for approximately $187.1 million in cash, including
approximately $2.7 million in transaction costs, all of which was paid in
the second quarter of 2001.
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The Company believes existing cash and investments together with cash
flow expected from operations will be sufficient to meet operating and
capital expenditures requirements through 2001. The Company may from time
to time seek to raise additional funds through public or private financing.
The Company may also acquire or make investments in companies it believes
are related to its strategic objectives. Such investments may reduce the
Company's available working capital.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
The Company's operating results and financial condition have varied in
the past and may in the future vary significantly depending on a number of
factors. Except for the historical information in this report, the matters
contained in this report include forward-looking statements that involve
risks and uncertainties. The following factors, among others, could cause
actual results to differ materially from those contained in forward-looking
statements made in this report and presented elsewhere by management from
time to time. Such factors, among others, may have a material adverse
effect upon the Company's business, results of operations and financial
condition.
RELIANCE UPON STRATEGIC RELATIONSHIP WITH MICROSOFT
Microsoft is the leading provider of desktop operating systems. The
Company depends upon the license of key technology from Microsoft,
including certain source and object code licenses and technical support.
The Company also depends upon its strategic alliance agreement with
Microsoft pursuant to which the Company and Microsoft have agreed to
cooperate to develop advanced operating systems and promote Windows
application program interfaces. The Company's relationship with Microsoft
is subject to the following risks and uncertainties, which individually, or
in the aggregate, could cause a material adverse effect in the Company's
business, results of operations and financial condition:
o COMPETITION WITH MICROSOFT. Microsoft Windows NT Server, Terminal
Server Edition and Microsoft Windows 2000 (collectively, "Windows
Server Operating Systems") are, and future product offerings by
Microsoft may be, competitive with the Company's current MetaFrame
products, and any future product offerings by the Company.
o EXPIRATION OF MICROSOFT'S ENDORSEMENT OF THE ICA PROTOCOL. Microsoft's
obligation to endorse only the Company's ICA protocol as the preferred
method to provide multi-user Windows access for devices other than
Windows clients expired in November 1999. Microsoft may now market or
endorse other methods to provide multi-user Windows access to
non-Windows client devices.
o DEPENDENCE ON MICROSOFT FOR COMMERCIALIZATION. The Company's ability to
successfully commercialize certain of its MetaFrame products depends on
Microsoft's ability to market Windows Server Operating Systems
products. The Company does not have control over Microsoft's
distributors and resellers and, to the Company's knowledge, Microsoft's
distributors and resellers are not obligated to purchase products from
Microsoft.
o PRODUCT RELEASE DELAYS. There may be delays in the release and shipment
of future versions of Windows Server Operating Systems.
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o TERMINATION OF DEVELOPMENT AGREEMENT OBLIGATIONS. The Company's
Development Agreement with Microsoft expires in May 2002. Upon
expiration, Microsoft may change its Windows NT, Terminal Server
Edition or Windows 2000 products to render them inoperable with the
Company's MetaFrame product offerings. Further, upon termination of the
Development Agreement, Microsoft may facilitate the ability of third
parties to compete with the Company's MetaFrame products. Finally,
future product offerings by Microsoft do not need to provide for
interoperability with the Company's products. The lack of
interoperability between present or future Microsoft products and the
Company's products could cause a material adverse effect in the
Company's business, results of operations and financial condition.
DEPENDENCE UPON BROAD-BASED ACCEPTANCE OF ICA PROTOCOL
The Company believes that its success in the markets in which it competes
will depend upon its ability to make ICA protocol a widely accepted
standard for supporting Windows and UNIX applications. If another standard
emerges or if the Company otherwise fails to achieve wide acceptance of the
ICA protocol as a standard for supporting Windows or UNIX applications, the
Company's business, operating results and financial condition could be
materially adversely affected. Microsoft includes as a component of Windows
Server Operating Systems its Remote Desktop Protocol (RDP), which has
certain of the capabilities of the Company's ICA protocol, and may offer
customers a competitive solution. The Company believes that its success is
dependent on its ability to enhance and differentiate its ICA protocol, and
foster broad acceptance of the ICA protocol based on its performance,
scalability, reliability and enhanced features. In addition, the Company's
ability to win broad market acceptance of its ICA protocol will depend upon
the degree of success achieved by its strategic partners in marketing their
respective platforms, product pricing and customers' assessment of its
technical, managerial service and support expertise. If another standard
emerges or if the Company fails to achieve wide acceptance of the ICA
protocol as a standard for supporting Windows and UNIX applications, the
Company's business, operating results and financial condition could be
materially adversely affected.
DEPENDENCE UPON STRATEGIC RELATIONSHIPS
In addition to its relationship with Microsoft, the Company has strategic
relationships with IBM, Compaq, Hewlett Packard and others. The Company
depends upon its strategic partners to successfully incorporate the
Company's technology into their products and to market and sell such
products. If the Company is unable to maintain its current strategic
relationships or develop additional strategic relationships, or if any of
its key strategic partners are unsuccessful at incorporating the Company's
technology into their products or marketing or selling such products, the
Company's business, operating results and financial condition could be
materially adversely affected.
COMPETITION
The markets in which the Company competes, including the application
server market and the portal market, are intensely competitive. Most of its
competitors and potential competitors, including Microsoft, have
significantly greater financial, technical, sales and marketing and other
resources than the Company. The announcement of the release and the actual
release of products competitive with the Company's existing and future
product lines, such as Windows Server Operating Systems and related
enhancements, could cause existing and potential customers of the Company
to postpone or cancel plans to license the Company's products. This would
adversely impact the Company's business, operating results and financial
condition. Furthermore, the Company's ability to market ICA, MetaFrame and
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other future product offerings may be affected by Microsoft's licensing and
pricing scheme for client devices implementing the Company's product
offerings, which attach to Windows Server Operating Systems.
In addition, alternative products exist for web applications in the
internet software market that directly or indirectly compete with the
Company's products. Existing or new products that extend internet software
to provide database access or interactive computing may materially impact
the Company's ability to sell its products in this market. As markets for
the Company's products continue to develop, additional companies, including
companies with significant market presence in the computer hardware,
software and networking industries, may enter the markets in which the
Company competes and further intensify competition. Finally, although the
Company believes that price has historically been a less significant
competitive factor than product performance, reliability and functionality,
the Company believes that price competition may become more significant in
the future. The Company may not be able to maintain its historic prices and
margins, and any inability to do so could adversely affect its business,
results of operations and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company relies primarily on a combination of copyright, trademark and
trade secret laws, as well as confidentiality procedures and contractual
provisions, to protect its proprietary rights. The Company's efforts to
protect its proprietary technology rights may not be successful. The loss
of any material trade secret, trademark, tradename, or copyright could have
a material adverse effect on the Company. Despite the Company's
precautions, it may be possible for unauthorized third parties to copy
certain portions of the Company's products or to obtain and use information
regarded as proprietary. A significant portion of the Company's sales are
derived from the licensing of its packaged products under "shrink wrap"
license agreements that are not signed by licensees and electronic
licensing agreements that may be unenforceable under the laws of certain
foreign jurisdictions. In addition, the Company's ability to protect its
proprietary rights may be affected by the following:
o DIFFERENCES IN INTERNATIONAL LAW. The laws of some foreign countries do
not protect the Company's intellectual property to the same extent as
do the laws of the United States and Canada.
o THIRD PARTY INFRINGEMENT CLAIMS. Third parties may assert infringement
claims against the Company in the future. This may result in costly
litigation or require the Company to obtain a license to intellectual
property rights of such third parties. Such licenses may not be
available on reasonable terms or at all.
PRODUCT CONCENTRATION
The Company anticipates that its MetaFrame product line and related
enhancements will constitute the majority of its revenue for the
foreseeable future. The Company's ability to generate revenue from its
MetaFrame product will depend upon market acceptance of Windows Server
Operating Systems and/or UNIX Operating Systems. Declines in demand for
products based on MetaFrame technology may occur as a result of new
competitive product releases, price competition, new products or updates to
existing products, lack of success of the Company's strategic partners,
technological change or other factors.
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DEPENDENCE ON KEY PERSONNEL
The Company's success will depend, in large part, upon the services of a
number of key employees. The Company does not have long-term employment
agreements with any of its key personnel. Any officer or employee can
terminate his or her relationship at any time.
The effective management of the Company's anticipated growth will depend,
in a large part, upon the Company's ability to (i) retain its highly
skilled technical, managerial and marketing personnel; and (ii) to attract
and maintain replacements for and additions to such personnel in the
future. Competition for such personnel is intense and may affect the
Company's ability to successfully attract, assimilate or retain
sufficiently qualified personnel.
NEW PRODUCTS AND TECHNOLOGICAL CHANGE
The markets for the Company's products are relatively new and are
characterized by:
o rapid technological change;
o evolving industry standards;
o changes in end-user requirements; and
o frequent new product introductions and enhancements.
These market characteristics will require the Company to continually
enhance its current products and develop and introduce new products to keep
pace with technological developments and respond to evolving end-user
requirements. Additionally, the Company and others may announce new product
enhancements or technologies that could replace or shorten the life cycle
of the Company's existing product offerings.
The Company believes it will incur additional costs and royalties
associated with the development, licensing or acquisition of new
technologies or enhancements to existing products. This will increase the
Company's cost of revenues and operating expenses. The Company cannot
currently quantify such increase with respect to transactions that have not
occurred. The Company may use a substantial portion of its cash and
investments to fund these additional costs.
The Company believes that it will continue to rely, in part, on third
party licensing arrangements to enhance and differentiate the Company's
products. Such licensing arrangements are subject to a number of risks and
uncertainties such as undetected errors in third party software,
disagreement over the scope of the license and other key terms, such as
royalties payable, and infringement actions brought by third party
licensees. In addition, the loss or inability to maintain any of these
third party licenses could result in delays in the shipment or release of
the Company products, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company may need to hire additional personnel to develop new
products, product enhancements and technologies. If the Company is unable
to add the necessary staff and resources, future enhancement and additional
features to its existing or future products may be delayed, which may have
a material adverse effect on the Company's business, results of operations
and financial condition.
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POTENTIAL FOR UNDETECTED ERRORS
Despite significant testing by the Company and by current and potential
customers, new products may contain errors after commencement of commercial
shipments. Additionally, the Company's products depend upon certain third
party products, which may contain defects and could reduce the performance
of the Company's products or render them useless. Since the Company's
products are often used in mission-critical applications, errors in the
Company's products or the products of third parties upon which the
Company's products rely could give rise to warranty or other claims by the
Company's customers.
RELIANCE UPON INDIRECT DISTRIBUTION CHANNELS AND MAJOR DISTRIBUTORS
The Company relies significantly on independent distributors and
resellers for the marketing and distribution of its products. The Company
does not control its distributors and resellers. Additionally, the
Company's distributors and resellers are not obligated to purchase products
from the Company and may also represent other lines of products.
NEED TO EXPAND CHANNELS OF DISTRIBUTION
The Company intends to leverage its relationships with hardware and
software vendors and systems integrators to encourage them to recommend or
distribute the Company's products. In addition, an integral part of the
Company's strategy is to expand its ability to reach large enterprise
customers by adding channel partners and expanding its offering of
consulting services. The Company is currently investing, and intends to
continue to invest, significant resources to develop these channels, which
could reduce the Company's profits.
NEED TO ATTRACT LARGE ENTERPRISE CUSTOMERS
The Company intends to expand its ability to reach large enterprise
customers by adding channel partners and expanding its offering of
consulting services. The Company's inability to attract large enterprise
customers could have a material adverse effect on its business, operating
results and financial condition. Additionally, large enterprise customers
usually request special pricing and generally have longer sales cycles,
which could negatively impact the Company's revenues. Further, as the
Company attempts to attract large enterprise customers, it may need to
increase corporate branding activities, which will increase the Company's
operating expenses, but may not proportionally increase its operating
revenues.
MAINTENANCE OF GROWTH RATE
The Company's revenue growth rate in 2001 may not approach the levels
attained in recent years. The Company's growth during recent years is
largely attributable to the introduction of MetaFrame for Windows in
mid-1998 and WinFrame in late 1995. There can be no assurance that the
markets in which the Company operates, including the application server
market, the ASP market and the portal market, will grow in the manner
predicted by independent third parties. In addition, to the extent revenue
growth continues, the Company believes that its cost of revenues and
certain operating expenses will also increase. Due to the fixed nature of a
significant portion of such expenses, together with the possibility of
slower revenue growth, its income from operations and cash flows from
operating and investing activities may decrease as a percentage of revenues
in 2001.
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IN-PROCESS RESEARCH AND DEVELOPMENT VALUATION
The Company has in the past re-evaluated the amounts charged to
in-process research and development in connection with certain acquisitions
and licensing arrangements. The amount and rate of amortization of such
amounts are subject to a number of risks and uncertainties, including,
without limitation, the effects of any changes in accounting standards or
guidance adopted by the staff of the Securities and Exchange Commission or
the accounting profession. Any changes in accounting standards or guidance
adopted by the staff of the Securities and Exchange Commission, may
materially adversely affect future results of operations through increased
amortization expense.
ROLE OF MERGERS AND ACQUISITIONS
Acquisitions involve numerous risks, including the following:
o difficulties in integration of the operations, technologies, and
products of the acquired companies;
o the risk of diverting management's attention from normal daily
operations of the business;
o potential difficulties in completing projects associated with purchased
in process research and development;
o risks of entering markets in which the Company has no or limited direct
prior experience and where competitors in such markets have stronger
market positions;
o the potential loss of key employees of the acquired company; and
o an uncertain sales and earnings stream from the acquired entity, which
may result in unexpected dilution to the Company's earnings.
Mergers and acquisitions of high-technology companies, including the
Company's recent acquisition of Sequoia Software Corporation, are
inherently risky, and no assurance can be given that the Company's previous
or future acquisitions will be successful and will not have a material
adverse affect on the Company's business, operating results or financial
condition. In addition, there can be no assurance that the combined company
resulting from any such acquisition can continue to support the growth
achieved by the companies separately. The Company must also focus on its
ability to manage and integrate any such acquisition. Failure to manage
growth effectively and successfully integrate acquired companies could
adversely affect the Company's business and operating results.
REVENUE RECOGNITION PROCESS
The Company continually re-evaluates its programs, including specific
license terms and conditions, to market its current and future products and
services. The Company may implement new programs, including offering
specified and unspecified enhancements to its current and future product
lines. The Company may recognize revenues associated with such enhancements
after the initial shipment or licensing of the software product or over the
product's life cycle. The Company has implemented a new licensing model
associated with the release of MetaFrame XP in February 2001. The Company
may implement a different licensing model, in certain circumstances, which
would result in the recognition of licensing fees over a longer period,
which may result in decreasing revenue. The timing of the implementation of
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such programs, the timing of the release of such enhancements and other
factors may impact the timing of the Company's recognition of revenues and
related expenses associated with its products, related enhancements and
services and could adversely affect the Company's business and operating
results.
PRODUCT RETURNS AND PRICE REDUCTIONS
The Company provides certain of its distributors with product return
rights for stock balancing or limited product evaluation. The Company also
provides certain of its distributors with price protection rights. To cover
these product returns and price protections, the Company has established
reserves based on its evaluation of historical trends and current
circumstances. These reserves may not be sufficient to cover product
returns and price protections in the future, in which case the Company's
operating results may be adversely affected.
INTERNATIONAL OPERATIONS
The Company's continued growth and profitability will require further
expansion of its international operations. To successfully expand
international sales, the Company must establish additional foreign
operations, hire additional personnel and recruit additional international
resellers. Such international operations are subject to certain risks, such
as:
o difficulties in staffing and managing foreign operations;
o dependence on independent distributors and resellers;
o fluctuations in foreign currency exchange rates;
o compliance with foreign regulatory and market requirements;
o variability of foreign economic and political conditions;
o changing restrictions imposed by regulatory requirements, tariffs or
other trade barriers or by United States export laws;
o costs of localizing products and marketing such products in foreign
countries;
o longer accounts receivable payment cycles;
o potentially adverse tax consequences, including restrictions on
repatriation of earnings;
o difficulties in protecting intellectual property; and
o burdens of complying with a wide variety of foreign laws.
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VOLATILITY OF STOCK PRICE
The market price for the Company's Common Stock has been volatile and has
fluctuated significantly to date. The trading price of the Common Stock is
likely to continue to be highly volatile and subject to wide fluctuations
in response to factors such as actual or anticipated variations in
operating and financial results, anticipated revenue or earnings growth,
analyst reports or recommendations and other events or factors, many of
which are beyond the Company's control. In addition, the stock market in
general, and The Nasdaq National Market and the market for software
companies and technology companies in particular, have experienced extreme
price and volume fluctuations. These broad market and industry factors may
materially and adversely affect the market price of the Common Stock,
regardless of the Company's actual operating performance. In the past,
following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted
against such companies. For example, several class-action lawsuits were
instituted against the Company, its directors, and certain of its officers
last year following a decline in the Company's stock price. Such
litigation, and other future litigation, could result in substantial costs
and a diversion of management's attention and resources, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
FLUCTUATIONS IN ECONOMIC AND MARKET CONDITIONS
The demand for the Company's products depends in part upon the general
demand for computer hardware and software, which fluctuates based on
numerous factors, including capital spending levels and general economic
conditions. Fluctuations in the demand for the Company's products could
have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's short and long-term investments with various financial
institutions are subject to risks inherent with fluctuations in general
economic and market conditions. Such fluctuations could cause an adverse
effect in the value of such investments and could even result in a total
loss of certain of the Company's investments. A total loss of one or more
investments could result in a material adverse effect in the Company's
financial position.
MANAGEMENT OF GROWTH AND HIGHER OPERATING EXPENSES
The Company has recently experienced rapid growth in the scope of its
operations, the number of its employees and the geographic area of its
operations. In addition, the Company has completed certain domestic and
international acquisitions. Such growth and assimilation of acquired
operations and personnel of such acquired companies has placed and may
continue to place a significant strain on the Company's managerial,
operational and financial resources. To manage its growth effectively, the
Company must continue to implement and improve additional management and
financial systems and controls. The Company believes that it has made
adequate allowances for the costs and risks associated with these
expansions. However, its systems, procedures or controls may not be
adequate to support its current or future operations. In addition, the
Company may not be able to effectively manage this expansion and still
achieve the rapid execution necessary to fully exploit the market
opportunity for its products and services in a timely and cost-effective
manner. The Company's future operating results will also depend on its
ability to manage its expanding product line, expand its sales and
marketing organizations and expand its support organization commensurate
with the increasing base of its installed product.
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The Company plans to increase its professional staff during 2001 as it
expands sales, marketing and support and product development efforts, as
well as associated administrative systems, to support planned growth. As a
result of this planned growth in the size of its staff, the Company
believes that it may require additional domestic and international
facilities during 2001. Although the Company believes that the cost of such
additional facilities will not significantly impact its financial position
or results of operations, the Company anticipates that operating expenses
will increase during 2001 as a result of its planned growth in staff. Such
an increase in operating expenses may reduce its income from operations and
cash flows from operating activities in 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risks at June 30, 2001 are not significantly
different from those discussed in "Part II, Item 7A - Quantitative and
Qualitative Disclosures About Market Risk" in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000. Also, refer to "Note 6 -
Derivative Financial Instruments," of this Form 10-Q for additional
discussion regarding the Company's market risks, its accounting for
derivatives, and the impact of adoption of SFAS No. 133.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2000, the Company and certain of its officers and directors were
named as defendants in several securities class action lawsuits filed in
the United States District Court for the Southern District of Florida on
behalf of purchasers of the Company's Common Stock during the period
October 20, 1999 to June 9, 2000 ("class period"). These actions have been
consolidated as In Re Citrix Systems, Inc. Securities Litigation. These
lawsuits generally allege that, during the class period, the defendants
made misstatements to the investing public about the Company's financial
condition and prospects. The complaint seeks unspecified damages and other
relief. While the Company is unable to determine the ultimate outcome of
these matters, the Company believes the plaintiffs' claims lack merit and
intends to vigorously defend the lawsuits.
In September 2000, a stockholder filed a claim in the Court of Chancery
of the State of Delaware against the Company and nine of its officers and
directors alleging breach of fiduciary duty by failing to disclose all
material information concerning the Company's financial condition at the
time of the proxy solicitation. The complaint seeks unspecified damages. By
order of the court in January 2001, the action was conditionally stayed. In
February 2001, the plaintiff filed a motion with the court for award of
attorney's fees and litigation costs in the amount of $2,000,000 and
$60,000, respectively. In July 2001, in furtherance of its fee petition,
plaintiff voluntarily dismissed the action without prejudice. The Company
believes the plaintiff's claim lacks merit, however, should the action be
re-filed and ultimately proceed in Delaware court or elsewhere, the Company
is unable to determine the ultimate outcome of this matter and intends to
vigorously defend it.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held May 17, 2001, the
Company's stockholders took the following actions:
(1) The Company's stockholders elected Mark B. Templeton, Kevin R.
Compton and Stephen M. Dow, each as Class III directors, to serve
for a three-year term expiring at the Company's annual meeting of
stockholders in 2003 or until his successor has been duly elected
and qualified or until his earlier resignation or removal. Election
of the directors was determined by a plurality of the votes cast at
the 2001 Annual Meeting. With respect to such matter, the votes
were cast as follows: 151,442,470 shares voted for the election of
Mr. Templeton; 151,500,341 shares voted for the election of Mr.
Compton and 151,496,704 shares voted for the election of Mr. Dow;
and 1,541,051 shares were withheld from the election of Mr.
Templeton; 1,483,180 shares were withheld from the election of Mr.
Compton and 1,486,817 shares were withheld from the election of Mr.
Dow. No other persons were nominated, nor received votes, for
election as directors of the Company at the 2001 Annual Meeting.
The other directors of the Company whose term of office continued
after the annual meeting were: Robert N. Goldman, Tyrone F. Pike,
Roger W. Roberts, John W. White and Marvin W. Adams.
(2) The Company's stockholders did not approve the proposal of the 2001
Director and Officer Stock Option and Incentive Plan. With respect
to such matter, the votes were cast as follows: 33,005,213 shares
voted for the proposal, 65,712,918 shares voted against the
proposal, 795,322 shares were withheld from the voting on the
proposal, and 53,465,168 shares did not vote with respect to the
proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits to be filed with this report.
(b) There were no reports on Form 8-K filed by the Company during the
second quarter of 2001.
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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 14th day of August 2001.
CITRIX SYSTEMS, INC.
By: /s/ JOHN P. CUNNINGHAM
----------------------------------
John P. Cunningham
Chief Financial Officer and Senior Vice-President
of Finance and Operations, Treasurer and
Assistant Secretary
(Authorized Officer and Principal Financial Officer)
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