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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 September 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 November 5, 2001 there were 187,717,774 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 SEPTEMBER 30, 2001
CONTENTS
Page
Number
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income:
Three Months and Nine Months ended September 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows:
Nine Months ended September 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 17
Item 3. Quantitative & Qualitative Disclosures about Market Risk 34
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 6. Exhibits and Reports on Form 8-K 34
Signature 35
2
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2001 2000
----------------------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 162,225 $ 375,025
Short-term investments ......................................... 53,680 91,612
Accounts receivable, net of allowances of $13,976 and $10,601 at
September 30, 2001 and December 31, 2000, respectively ...... 79,203 37,299
Inventories .................................................... 3,733 4,622
Prepaid taxes .................................................. 5,986 26,715
Other prepaid and current assets ............................... 18,335 11,493
Current portion of deferred tax assets ......................... 29,969 39,965
---------- ----------
Total current assets ........................................ 353,131 586,731
Long-term investments ............................................ 534,201 382,524
Property and equipment, net ...................................... 79,682 55,559
Intangible assets, net ........................................... 196,390 52,339
Long-term portion of deferred tax assets ......................... 18,984 18,977
Other assets, net ................................................ 29,546 16,443
---------- ----------
$1,211,934 $1,112,573
========== ==========
Continued
3
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------------------
(IN THOUSANDS, EXCEPT PAR VALUE)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ........................... $ 98,989 $ 78,739
Current portion of deferred revenues ............................ 88,820 80,648
----------- -----------
Total current liabilities ......................................... 187,809 159,387
Long-term portion of deferred revenues ............................ 5,230 14,082
Convertible subordinated debentures ............................... 343,570 330,497
Commitments and contingencies
Put warrants ...................................................... 19,284 15,732
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;
195,524 and 187,872 issued at September 30, 2001 and
December 31, 2000, respectively............................... 196 188
Additional paid-in capital ...................................... 471,325 351,053
Retained earnings ............................................... 400,236 320,617
Accumulated other comprehensive income (loss) ................... (740) (2,943)
----------- -----------
871,017 668,915
Less -- common stock in treasury, at cost (8,874 and 3,817 shares
at September 30, 2001 and December 31, 2000, respectively) (214,976) (76,040)
----------- -----------
Total stockholders' equity ................................... 656,041 592,875
----------- -----------
$ 1,211,934 $ 1,112,573
=========== ===========
See accompanying notes.
4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Revenues:
Revenues ..................................... $ 143,486 $ 103,482 $ 403,759 $ 317,202
Other revenues ............................... 10,009 10,009 29,822 29,890
--------- --------- --------- ---------
Total net revenues ...................... 153,495 113,491 433,581 347,092
Cost of revenues (excluding amortization presented
separately below) ............................. 7,573 8,854 22,107 22,387
--------- --------- --------- ---------
Gross margin ..................................... 145,922 104,637 411,474 324,705
Operating expenses:
Research and development ...................... 16,899 12,532 51,223 36,945
Sales, marketing and support .................. 59,067 43,999 165,318 130,613
General and administrative .................... 22,677 14,305 59,753 43,173
Amortization of intangible assets ............. 14,895 7,890 33,428 22,550
In-process research and development ........... -- -- 2,580 --
--------- --------- --------- ---------
Total operating expenses .................. 113,538 78,726 312,302 233,281
--------- --------- --------- ---------
Income from operations ........................... 32,384 25,911 99,172 91,424
Interest income .................................. 9,757 9,885 34,114 28,677
Interest expense ................................. (6,400) (4,281) (15,354) (12,665)
Other income (expense), net ...................... 4,534 (634) (2,542) (100)
--------- --------- --------- ---------
Income before income taxes ....................... 40,275 30,881 115,390 107,336
Income taxes ..................................... 12,485 9,264 35,771 32,201
--------- --------- --------- ---------
Net income ....................................... $ 27,790 $ 21,617 $ 79,619 $ 75,135
========= ========= ========= =========
Earnings per common share:
Basic earnings per share ...................... $ 0.15 $ 0.12 $ 0.43 $ 0.41
========= ========= ========= =========
Weighted average shares outstanding ........... 186,308 185,627 185,215 184,749
========= ========= ========= =========
Earnings per common share--assuming dilution:
Diluted earnings per share .................... $ 0.14 $ 0.11 $ 0.41 $ 0.37
========= ========= ========= =========
Weighted average shares outstanding ........... 196,835 192,879 195,648 201,536
========= ========= ========= =========
See accompanying notes.
5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
--------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income .................................................................... $ 79,619 $ 75,135
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of intangible assets .......................................... 33,428 22,550
Depreciation and amortization of property and equipment .................... 20,831 13,795
Other-than-temporary decline in market value of investments ................ 7,688 --
In-process research and development ........................................ 2,580 --
Provision for doubtful accounts ............................................ 2,367 1,167
Provision for product returns .............................................. 18,965 20,377
Provision for inventory reserves ........................................... 1,901 7,028
Tax benefit related to the exercise of non-statutory stock options and
disqualifying dispositions of incentive stock options .................. 22,532 72,026
Accretion of original issue discount and amortization of financing
cost ................................................................... 13,302 12,560
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable .................................................... (60,850) (17,721)
Inventories ............................................................ (1,012) (4,343)
Prepaid expenses and other current assets .............................. 17,224 (35,335)
Other assets ........................................................... (13,332) (251)
Deferred tax assets .................................................... 11,723 11,382
Accounts payable and accrued expenses .................................. 6,158 11,437
Deferred revenues ...................................................... (785) (20,025)
Income taxes payable ................................................... 4,890 (5,742)
--------- ---------
Net cash provided by operating activities ..................................... 167,229 164,040
INVESTING ACTIVITIES
Purchases of investments ...................................................... (520,760) (153,198)
Proceeds from sales and maturities of investments ............................. 401,964 220,892
Cash paid for acquisitions, net of cash acquired .............................. (183,733) (30,102)
Purchases of property and equipment ........................................... (39,857) (31,106)
--------- ---------
Net cash (used in) provided by investing activities ........................... (342,386) 6,486
FINANCING ACTIVITIES
Net proceeds from issuance of common stock .................................... 106,299 57,727
Cash paid under stock repurchase programs ..................................... (151,462) (121,901)
Proceeds from sale of put warrants ............................................ 7,528 --
Other ......................................................................... (8) (60)
--------- ---------
Net cash used in financing activities ......................................... (37,643) (64,234)
--------- ---------
Change in cash and cash equivalents ........................................... (212,800) 106,292
Cash and cash equivalents at beginning of period .............................. 375,025 216,116
--------- ---------
Cash and cash equivalents at end of period .................................... $ 162,225 $ 322,408
========= =========
See accompanying notes.
6
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 invests in marketable equity and corporate debt securities that
are classified as either held-to-maturity or available-for-sale. The
Company also makes 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
nine months ended September 30, 2001, the Company recorded $1.5 and $7.7
million, respectively, in investment write-downs, which are included in
other income (expense), net on the condensed consolidated statements of
income.
In order to preserve the overall credit quality and rebalance the short-
and long-term maturity of its available-for-sale investment portfolio, the
Company sold corporate securities investments in September 2001 and
purchased higher credit quality corporate securities with differing
maturities. The sale of securities resulted in a realized gain of
approximately $8.0 million for the three months ended September 30, 2001,
which is included in other income (expense) on the accompanying statements
of income. Amounts included in accumulated other comprehensive income
(loss) in prior periods were reclassified to earnings using the specific
identification method.
7
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, based on an analysis of historical experience, 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.
The following table sets forth the computation of basic and diluted
earnings per share:
8
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Numerator:
Net income ......................... $ 27,790 $ 21,617 $ 79,619 $ 75,135
======== ======== ======== ========
Denominator:
Denominator for basic earnings per
share - weighted-average shares 186,308 185,627 185,215 184,749
Effect of dilutive securities:
Put warrants .................. 76 -- 198 --
Employee stock options ........ 10,451 7,252 10,235 16,787
-------- -------- -------- --------
Dilutive potential common shares ... 10,527 7,252 10,433 16,787
-------- -------- -------- --------
Denominator for diluted earnings per
share - weighted-average shares 196,835 192,879 195,648 201,536
======== ======== ======== ========
Basic earnings per share ............. $ 0.15 $ 0.12 $ 0.43 $ 0.41
======== ======== ======== ========
Diluted earnings per share ........... $ 0.14 $ 0.11 $ 0.41 $ 0.37
======== ======== ======== ========
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.
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex") for approximately $47.8 million, of which
$28.7 million, excluding $275,000 in transaction costs, was paid at the
closing date, and the balance payable in equal installments 18 and 24
months after the closing date, contingent on future events, as set forth in
the acquisition agreement. In August 2001, the Company made a contingent
payment of approximately $10.5 million, of which $8.1 million was recorded
as additional purchase price to be amortized over the remaining life of the
intangible assets acquired. The remaining payment is due in February 2002.
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.
9
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 cost of goods sold and operating expenses directly
attributable to the segment and excludes certain expenses that are managed
outside the reportable segments. Costs excluded from segment profit
primarily consist of research and development costs, amortization of
intangible assets, interest, corporate expenses, income taxes, and
non-recurring charges for purchased in-process technology. Corporate
expenses are comprised primarily of corporate marketing costs, operations
and other corporate general and administrative expenses which are
separately managed. Accounting policies of the segments are the same as the
Company's consolidated accounting policies.
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS)
Net revenues:
Americas (1) .......................... $ 75,432 $ 64,128 $ 212,924 $ 184,391
EMEA .................................. 53,955 32,677 156,503 114,885
Asia Pacific .......................... 14,099 6,677 34,332 17,926
Other (2) ............................. 10,009 10,009 29,822 29,890
--------- --------- --------- ---------
Consolidated .......................... $ 153,495 $ 113,491 $ 433,581 $ 347,092
========= ========= ========= =========
Segment profit:
Americas (1) .......................... $ 39,984 $ 37,365 $ 120,110 $ 110,862
EMEA .................................. 34,418 20,510 98,766 74,909
Asia Pacific .......................... 8,084 214 18,054 2,783
Other (2) ............................. 10,009 10,009 29,822 29,890
Unallocated expenses (3):
Amortization of intangibles ....... (14,895) (7,890) (33,428) (22,550)
In process research and development -- -- (2,580) --
Research and development........... (16,899) (12,532) (51,223) (36,945)
Net interest ...................... 7,891 4,970 16,218 15,913
Other corporate expenses .......... (28,317) (21,765) (80,349) (67,526)
--------- --------- --------- ---------
Consolidated income before income taxes $ 40,275 $ 30,881 $ 115,390 $ 107,336
========= ========= ========= =========
(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.
10
Additional information regarding revenue by products and services groups is
as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS)
Revenue:
License Revenue ............. $132,497 $ 95,894 $373,017 $295,346
Services Revenue ............ 10,989 7,588 30,742 21,856
Royalty Revenue ............. 10,009 10,009 29,822 29,890
-------- -------- -------- --------
Net Revenues ................ $153,495 $113,491 $433,581 $347,092
======== ======== ======== ========
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.
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. Fluctuations in the value of the
derivative instruments are generally offset by changes in the cash flows
being hedged; however, if it is determined that a derivative is not highly
effective as a hedge or if a derivative ceases to be a highly effective
hedge, the Company will discontinue hedge accounting prospectively for the
affected derivative. 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 and purchase currency options 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.
11
In connection with the efforts to manage the credit quality and maturities
of its available-for-sale investment portfolio, during the third quarter
of 2001 the Company terminated a forward bond purchase agreement
previously designated as a hedge of forecasted purchases of corporate
security investments. As a result, the Company recorded a realized gain of
$1.4 million, which is included in other income (expense) on the 2001
condensed consolidated statements of income.
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. The
effective portions of the net gains or losses on forward contracts and
currency options 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 or time value of
the option contracts, 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 nine months ended September 30, 2001, the Company recorded
net losses in operating expenses of approximately $955,000 and $1,688,000,
respectively, representing the effective net loss on derivative
instruments that settled in the respective periods. The hedge
ineffectiveness and changes in the time value of option contracts on
existing derivative instruments for the three and nine months ended
September 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 September
30, 2001, the Company recorded $0.5 million of derivative assets and $0.9
million of derivative liabilities, representing the fair values of the
Company's outstanding derivative instruments.
DERIVATIVE ACTIVITY IN ACCUMULATED OTHER COMPREHENSIVE INCOME
As of September 30, 2001, the Company had a net deferred loss associated
with cash flow hedges of approximately $0.4 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 nine months ended September 30, 2001:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
(IN THOUSANDS)
Cumulative effect of adopting SFAS No. 133 ...... $ -- $ --
Changes in fair value of derivatives ............ 365 (308)
Losses (gains) reclassified from OCI ............ 328 (128)
---- -----
Change in unrealized derivative loss ....... $693 $(436)
==== =====
12
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
------- ------- ------- -------
(IN THOUSANDS)
Net income ........................................... $27,790 $21,617 $79,619 $75,135
Other comprehensive income:
Change in unrealized gain (loss) on
available-for-sale securities ................ (3,218) (4,730) 2,639 182
Change in unrealized loss on derivative instruments 693 -- (436) --
------- ------- ------- -------
Comprehensive income ................................. $25,265 $16,887 $81,822 $75,317
======= ======= ======= =======
The components of accumulated other comprehensive income, net of tax, are
as follows:
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
(IN THOUSANDS)
Unrealized loss on investments .............. $(304) $(2,943)
Unrealized loss on derivative instruments ... (436) --
----- -------
Accumulated other comprehensive income (loss) $(740) $(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 September 30, 2001 and December
31, 2000 includes $24.1 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.
13
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
nine months ended September 30, 2001, the Company purchased 2,436,000
shares of outstanding Common Stock on the open market at a total cost of
$74.6 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 nine months ended September 30, 2001, the Company received
1,731,000 shares under this agreement at a total cost of $37.5 million.
These shares have been recorded as treasury stock. In September 2001, the
Company entered into a second agreement with the same counterparty in a
private transaction to purchase up to approximately 2.5 million shares of
the Company's Common Stock at various times from January 2002 through
December 2003. Pursuant to the terms of the agreement, $50 million was
paid to the counterparty in the third quarter of 2001. The ultimate number
of shares repurchased will depend on market conditions.
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 nine months ended September 30,
2001, the Company sold 1,890,000 put warrants at an average strike price
of $32.55 and received premium proceeds of $7.5 million. In the first nine
months of 2001, the Company paid $26.9 million for the purchase of 890,000
shares upon the exercise of outstanding put warrants, while 1,000,000 put
warrants expired unexercised. The common shares purchased upon exercise of
these put warrants have been recorded as treasury stock. As of September
30, 2001, 1,300,000 put warrants were outstanding, expiring on various
dates from October through December 2001, with exercise prices ranging
from $30.84 to $35.96. As of September 30, 2001, the Company has a total
potential repurchase obligation of approximately $42.7 million associated
with the outstanding put warrants, of which $19.3 million is classified as
a put warrants obligation on the condensed consolidated balance sheets.
The remaining $23.4 million of outstanding put warrants permit a net-share
settlement at the Company's option and do not result in a put warrant
obligation on the balance sheet. The outstanding put warrants classified
as a put warrants obligation on the condensed consolidated balance sheets
will be reclassified to stockholders' equity when the warrant is exercised
or expires. Under the terms of the put warrant agreements, the Company
must maintain certain levels of cash and investments balances. As of
September 30, 2001, the Company has approximately $250.1 million of cash
and investments in excess of those required levels.
14
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 (the "Class Period"). These actions were
consolidated as In Re Citrix Systems, Inc. Securities Litigation. The
lawsuits allege that, during the Class Period, the defendants made
misstatements to the investing public about the Company's financial
condition and prospects. In September 2001, the Court granted the
Company's motion to dismiss the complaint without prejudice. The
plaintiffs were given until October 22, 2001 to file an amended complaint.
The plaintiffs chose not to file an amended complaint and the court
dismissed the action with prejudice on October 30, 2001.
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 sought unspecified damages.
In January 2001, a portion of the action was stayed by the court and later
dismissed by the plaintiff without prejudice to refiling the action at a
later date. 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 September 2001, the court awarded
plaintiff $140,000 and $8,250, respectively.
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 adopted SFAS No. 141 in the third
quarter of 2001, and the impact was not 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.
Intangible assets with estimable useful lives are required to be amortized
over their respective estimated useful lives and reviewed for impairment
in accordance with SFAS Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. 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.
15
Impairment charges thereafter would be reported in operating income. The
Company plans to adopt SFAS No. 142 in the first quarter of 2002.
As of the date of adoption, the Company expects to have unamortized
goodwill in the amount of $145.0 million and unamortized identified
intangibles with estimable useful lives in the amount of $36.1 million,
all of which will be subject to the provisions of Statements 141 and 142.
In the first quarter of adoption, the Company expects a pre-tax reduction
in amortization expense of approximately $11 million. Because of the
extensive effort needed to comply with adopting Statements 141 and 142, it
is not practicable to reasonably estimate whether the Company will be
required to recognize any transitional impairment losses as the cumulative
effect of a change in accounting principle.
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 largest source of revenue 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.
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 NINE MONTHS
THREE MONTHS ENDED NINE MONTHS ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
-------------- -------------- VS. VS.
2001 2000 2001 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
----- ----- ----- ----- ------------------ ------------------
Net revenues ............................ 100.0% 100.0% 100.0% 100.0% 35.2% 24.9%
Cost of revenues (excluding amortization
presented separately below) .......... 4.9 7.8 5.1 6.5 (14.5) (1.3)
----- ----- ----- -----
Gross margin ............................ 95.1 92.2 94.9 93.5 39.5 26.7
Operating expenses:
Research and development ............. 11.0 11.0 11.8 10.6 34.8 38.6
Sales, marketing and support ......... 38.5 38.8 38.1 37.6 34.2 26.6
General and administrative ........... 14.8 12.6 13.8 12.5 58.5 38.4
Amortization of intangible assets .... 9.7 7.0 7.7 6.5 88.8 48.2
In-process research and
development ........................ -- -- 0.6 -- * *
----- ----- ----- -----
Total operating expenses ........... 74.0 69.4 72.0 67.2 44.2 33.9
----- ----- ----- -----
Income from operations .................. 21.1 22.8 22.9 26.3 25.0 8.5
Interest income ......................... 6.4 8.7 7.9 8.2 (1.3) 19.0
Interest expense ........................ (4.2) (3.7) (3.5) (3.6) 49.5 21.2
Other income (expense), net ............. 2.9 (0.6) (0.6) -- * *
----- ----- ----- -----
Income before income taxes .............. 26.2 27.2 26.7 30.9 30.4 7.5
Income taxes ............................ 8.1 8.2 8.3 9.3 34.8 11.1
----- ----- ----- -----
Net income .............................. 18.1% 19.0% 18.4% 21.6% 28.6% (6.0)%
===== ===== ===== =====
* Not meaningful.
Net Revenues. Previously, the Company presented revenues in the
following five categories: Application Servers, Management Products,
Computing Appliances Products, Microsoft Royalties and Services and Other
Revenue. Application Servers revenue primarily represented fees related to
the licensing of the Company's MetaFrame products, subscriptions for
product support, updates and upgrades and additional user licenses.
Management Products consisted of Load Balancing Services, Resource
Management Services and other options. Computing Appliances Products
revenue consisted 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
represented fees recognized in connection with the Development Agreement.
Services and Other Revenue consisted primarily of customer support, as
well as consulting in the delivery of implementation services and systems
integration solutions.
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. As a result, the Company has reclassified net
revenues into the following three categories as presented below: License
Revenue, Services Revenue, and Royalty Revenue. License Revenue primarily
represents fees related to the licensing of the Company's MetaFrame
products, subscriptions for product support, updates and upgrades,
additional user licenses, management options such as Load Balancing
Services and Resource
18
Management Services, and license fees from OEMs who are granted a license
to incorporate and/or market the Company's multi-user technologies in their
own product offerings. Services Revenue consists primarily of customer
support and consulting in the delivery of implementation services and
systems integration solutions. Royalty Revenue represents the fees
recognized in connection with the Development Agreement.
With respect to product mix, the increase in net revenues for the three
and nine months ended September 30, 2001 compared to the three and nine
months ended September 30, 2000 was primarily attributable to an increase
in License Revenue resulting from an increase in the number of licenses
sold of MetaFrame for Windows operating systems. The Company expects that
License Revenues will continue to make up a large percentage of net
revenues.
An analysis of the Company's net revenues is presented below:
INCREASE FOR THE
----------------------------------------
THREE MONTHS NINE MONTHS
THREE MONTHS ENDED NINE MONTHS ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------ VS. VS.
2001 2000 2001 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
---- ---- ---- ---- ------------------ ------------------
License Revenue........ 86% 84% 86% 85% 38% 26%
Services Revenue....... 7 7 7 6 45 41
Royalty Revenue........ 7 9 7 9 -- --
--- --- --- ---
Net Revenues........... 100% 100% 100% 100% 35% 25%
International and Geographic Segment Revenues. International revenues
(sales outside of the United States) accounted for approximately 47% and
37% of net revenues for the three months ended September 30, 2001 and
2000, respectively, and approximately 48% and 40% of net revenues for the
nine months ended September 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 FOR THE
----------------------------------------
THREE MONTHS NINE MONTHS
THREE MONTHS ENDED NINE MONTHS ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ----------------- VS. VS.
2001 2000 2001 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
---- ---- ---- ---- ------------------ ------------------
Americas (1)....... 49% 56% 49% 53% 18% 15%
EMEA............... 35 29 36 33 65 36
Asia Pacific....... 9 6 8 5 111 92
Other (2).......... 7 9 7 9 -- --
--- --- --- ---
Net Revenues....... 100% 100% 100% 100% 35% 25%
(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.
19
In terms of geographic segments, the increase in net revenues for the
three and nine months ended September 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,
and in the EMEA segment, particularly due to increased market acceptance
in Europe. Revenue by geographic segment as a percentage of net revenues
for the three and nine month periods ended September 30, 2001 compared to
the same periods in 2000 reflects a decrease in the Americas as revenues
in the EMEA and Asia Pacific segments have increased.
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 nine months ended September 30, 2001 compared to the three
and nine months ended September 30, 2000 primarily due to reserves for
obsolete inventory recorded in the second and third quarters 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 September 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 nine months ended
September 30, 2001 as compared to the same period in the prior year was
primarily due to increased staffing and associated costs, as well as costs
incurred for third party software and external consultants and developers
to expand and enhance the Company's product lines.
Sales, Marketing and Support Expenses. The increase in sales, marketing
and support expenses for the three and nine months ended September 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.
20
General and Administrative Expenses. The increase in general and
administrative expenses for the three and nine months ended September 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 a reallocation of certain overhead costs from
other departments into certain general and administrative costs centers.
Additionally, the increase for the nine months ended September 30, 2001 as
compared to the comparable period in 2000 was 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 nine months
ended September 30, 2001 as compared to the comparable periods in 2000 due
to the acquisition of Sequoia in the second quarter of 2001, and payment
of the first installment in August 2001 of the contingent payments
associated with the Innovex acquisition, resulting in an additional $8.1
million of goodwill. As of September 30, 2001, the Company had net
goodwill and identifiable intangible assets of $196.4 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
Innovex contingent payment made in the third quarter of 2001 and as the
Company continues to search for suitable acquisition candidates.
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 these 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 of the date of adoption, the Company expects to have
unamortized goodwill in the amount of $145.0 million and unamortized
identified intangibles with estimable useful lives in the amount of $36.1
million, all of which will be subject to the provisions of Statements 141
and 142. In the first quarter of adoption, the Company expects a pre-tax
reduction in amortization expense of approximately $11 million as a result
of applying the nonamortization provisions of the statement. During 2002,
the Company will complete the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002. Because of the
extensive effort needed to comply with adopting Statements 141 and 142, it
is not practicable to reasonably estimate whether it will be required to
recognize any transitional impairment losses as the cumulative effect of a
change in accounting principle, or what the effect of these tests will be
on the earnings and financial position of the Company.
Interest Income. Interest income for the three months ended September
30, 2001 remained relatively flat while the nine months ended September
30, 2001 as compared to the same period 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
nine months ended September 30, 2001 as compared to the same periods in
2000 was primarily due to interest on contingent payments associated with
the Innovex acquisition, as well as the accretion of the original issue
discount related to the zero coupon convertible subordinated debentures.
21
Other Income (Expense), Net. The increase in other income (expense),
net for the three months ended September 30, 2001 compared to the same
period in 2000 was primarily due to realized gains of $8.0 million
associated with purchases and sales of available-for-sale securities and
associated contracts, partially offset by a $1.5 million loss in the third
quarter of 2001 resulting from an other-than-temporary decline in fair
value of certain of the Company's equity investments. The decrease in
other income (expense), net for the nine months ended September 30, 2001
compared to the same period in 2000 was primarily due to $7.7 million of
losses recorded in the first nine months of 2001 resulting from
other-than-temporary declines 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.
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.
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.
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.
22
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 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........................................................ $5,900
Estimated cost to complete................................................... 310
------
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
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.
23
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, the Company generated
positive operating cash flows of $167.2 million, related primarily to net
income of $79.6 million, adjusted for, among other things, tax benefits
from the exercise of non-statutory stock options and disqualifying
dispositions of incentive stock options of $22.5 million, non-cash charges
including depreciation and amortization expense of $54.3 million, and
provisions for product returns of $19.0 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 $36.0
million. Cash used in investing activities of $342.4 million related
primarily to net cash paid for acquisitions, primarily Sequoia, of $183.7
million, the net purchase of investments of $118.8 million and the
expenditure of $39.9 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 $37.6 million related
to the expenditure of $151.5 million for stock repurchase programs,
partially offset by the proceeds from the issuance of common stock under
the Company's stock option plans of $106.3 million.
As of September 30, 2001, the Company had $750.1 million in cash and
investments, including $162.2 million in cash and cash equivalents, and
$165.3 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. To the extent that such transactions
result in the liquidation of securities classified as available for sale,
gains and losses will be reclassified from other comprehensive income
(loss) and be realized in the period of such transaction.
At September 30, 2001, the Company had approximately $79.2 million in
accounts receivable, net of allowances, and $94.1 million of deferred
revenues, of which the Company anticipates $88.8 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
nine months ended September 30, 2001, the Company purchased 2,436,000
shares of outstanding Common Stock on the open market at an average price
of $30.62 per share, for an aggregate cost of $74.6 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
24
in the third quarter of 2000. The ultimate number of shares repurchased
will depend on market conditions. During the nine months ended September
30, 2001, the Company received 1,731,000 shares under this agreement at an
average price of $21.65 per share, for an aggregate cost of $37.5 million.
These shares have been recorded as treasury stock. In September 2001, the
Company entered into a second agreement with the same counterparty in a
private transaction to purchase up to approximately 2.5 million shares of
the Company's Common Stock at various times from January 2002 through
December 2003. Pursuant to the terms of the agreement, $50 million was paid
to the counterparty in the third quarter of 2001. The ultimate number of
shares repurchased will depend on market conditions.
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 nine months ended September 30,
2001, the Company sold 1,890,000 put warrants at an average strike price
of $32.55 and received premium proceeds of $7.5 million. In the first nine
months of 2001, the Company paid $26.9 million for the purchase of 890,000
shares upon the exercise of outstanding put warrants, while 1,000,000 put
warrants expired unexercised. The common shares purchased upon exercise of
these put warrants have been recorded as treasury stock. As of September
30, 2001, 1,300,000 put warrants were outstanding, expiring on various
dates from October through December 2001 with exercise prices ranging from
$30.84 to $35.96. As of September 30, 2001, the Company has a total
potential repurchase obligation of approximately $42.7 million associated
with the outstanding put warrants. Under the terms of the put warrant
agreements, the Company must maintain certain levels of cash and
investments balances. As of September 30, 2001, the Company has
approximately $250.1 million of cash and investments in excess of those
required levels.
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 September 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.
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.
25
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:
- 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.
- 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.
- 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.
- Product Release Delays. There may be delays in the release and
shipment of future versions of Windows Server Operating Systems.
- 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
26
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
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.
27
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:
- 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.
- 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.
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:
- rapid technological change;
- evolving industry standards;
28
- changes in end-user requirements; and
- 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.
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.
29
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.
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:
- difficulties in integration of the operations, technologies, and
products of the acquired companies;
- the risk of diverting management's attention from normal daily
operations of the business;
30
- potential difficulties in completing projects associated with
purchased in process research and development;
- 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;
- the potential loss of key employees of the acquired company; and
- 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 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.
31
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:
- difficulties in staffing and managing foreign operations;
- dependence on independent distributors and resellers;
- fluctuations in foreign currency exchange rates;
- compliance with foreign regulatory and market requirements;
- variability of foreign economic and political conditions;
- changing restrictions imposed by regulatory requirements, tariffs or
other trade barriers or by United States export laws;
- costs of localizing products and marketing such products in foreign
countries;
- longer accounts receivable payment cycles;
- potentially adverse tax consequences, including restrictions on
repatriation of earnings;
- difficulties in protecting intellectual property; and
- burdens of complying with a wide variety of foreign laws.
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.
32
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.
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.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risks at September 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 (the "Class Period"). These actions were
consolidated as In Re Citrix Systems, Inc. Securities Litigation. The
lawsuits allege that, during the Class Period, the defendants made
misstatements to the investing public about the Company's financial
condition and prospects. In September 2001, the Court granted the
Company's motion to dismiss the complaint without prejudice. The
plaintiffs were given until October 22, 2001 to file an amended complaint.
The plaintiffs chose not to file an amended complaint and the court
dismissed the action with prejudice on October 30, 2001.
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 sought
unspecified damages. In January 2001, a portion of the action was stayed
by the court and later dismissed by the plaintiff without prejudice to
refiling the action at a later date. 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 September 2001,
the court awarded plaintiff $140,000 and $8,250, respectively.
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
third quarter of 2001.
34
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 14 day of November,
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)
35