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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
<Table>
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 0-27084
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CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<Table>
DELAWARE 75-2275152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
851 WEST CYPRESS CREEK ROAD 33309
FORT LAUDERDALE, FLORIDA (Zip Code)
(Address of principal executive offices)
</Table>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(954) 267-3000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 14, 2002 (based on the last reported sale price on The
Nasdaq National Market as of such date) was $3,342,189,858. As of March 14, 2002
there were 182,834,163 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required pursuant to Part III of this report is
incorporated by reference from the Company's definitive proxy statement,
relating to the annual meeting of stockholders to be held in May 2002, pursuant
to Regulation 14A to be filed with the Securities and Exchange Commission.
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ITEM 1. BUSINESS
GENERAL
Citrix Systems, Inc. ("Citrix" or the "Company"), a Delaware corporation
founded on April 17, 1989, is a leading supplier of corporate application and
information infrastructure software and services that enable the effective and
efficient enterprise-wide deployment and management of applications and
information, including those designed for Microsoft Windows(R) operating
systems, UNIX(R) operating systems and for Web-based information systems. The
Company's MetaFrame(R) products permit organizations to provide virtual access
to Windows-based and UNIX applications without regard to location, network
connection, or type of client hardware platforms. The Company also provides
portal software and services that are designed to provide personalized, secure
Web-based access to a wide variety of business information from any location,
device or connection. The Company markets its products through multiple direct
and indirect channels such as distributors, value-added resellers and original
equipment manufacturers worldwide. The Company also promotes its products
through strategic alliance agreements with a wide variety of industry partners,
including Microsoft Corporation ("Microsoft").
THE BUSINESS NEED FOR VIRTUAL ACCESS TO INFORMATION
Globalization, increased worker mobility and the expectation of "instant"
results set by the Internet have made it vital for businesses to supply users
with fast, simple, secure information access so they can work effectively from
anywhere, on any type of device or network connection. However, enterprises face
significant roadblocks to true virtual access, especially incompatibilities
among computing platforms and infrastructures, applications and communications
protocols. Demand has increased for systems that offer users a standard,
consistent interface on any device, fast transmission of data over a variety of
networks, and the ability to deliver applications and information securely to
local and remote users over public networks, especially the Internet. Some of
the challenges to true virtual access are:
- Mixed Application Environments. Many businesses today use a mix of
application platforms, making it difficult to deploy the full digital
workplace to all users. For example, deploying both UNIX and Windows
applications to a user may require separate devices or emulation
software.
- Mixed Device Environments. The growing popularity of wireless and
diverse information appliances are adding to the wide array of client
devices used in many enterprises. Such a mix of devices can cause
accessibility and support problems.
- Remote Users. The diversity of network connection types, protocols and
transmission speeds limit the ability of organizations to deploy Windows,
UNIX, Java(TM) and Web-based applications on a cost-effective and
efficient basis to remote users such as mobile workers, telecommuters and
branch office personnel.
- Extended Enterprise. The extension of enterprise information systems to
external users, such as suppliers, distributors and customers, creates
application deployment issues that are outside the control of information
systems managers. These include the quality, performance and security of
the network connection, the client platform involved and the technical
expertise of the external user.
- Internet and e-Business Initiatives. With the global adoption of the
Internet and the drive to e-business, organizations need solutions for
Web-enabling existing business applications without the time and cost
required for re-engineering so they can be quickly included in corporate
portals, intranets, extranets, and e-business infrastructures.
- Security. Delivering sensitive business information to remote users,
especially over the Internet, raises concerns about protecting data and
ensuring privacy.
CREATING A VIRTUAL WORKPLACE THROUGH VIRTUAL ACCESS TO THE DIGITAL OFFICE
Citrix addresses these challenges by offering solutions that are designed
to provide virtual access to information, content and applications that workers
need to be productive -- regardless of their location,
2
network connection, client hardware or software platform. Citrix application
serving and portal products and services permit organizations to centrally
deliver, manage and support applications, including those designed for Windows
and UNIX operating systems, and to integrate these applications along with other
business information into a virtual workplace that offers seamless connectivity
and a consistent user experience across the Internet, intranets, extranets, wide
area networks, local area networks and wireless networks. Citrix solutions
deliver cost efficiency, productivity, business continuity, user mobility and
enhanced e-business opportunities by enabling companies to optimize existing
information technology ("IT") resources while providing secure, personalized
information access to employees, partners, customers and suppliers.
THE CITRIX SOLUTIONS
The Citrix solutions for the virtual workplace attempt to solve the core
business and technology problems that customers face today. The Citrix value
proposition is simple: Citrix solutions promote an organization's ability to
save money, increase employee productivity and gain additional flexibility in
their data centers.
- Remote Office Connectivity. Citrix provides users in remote offices
access to any application, quickly and without compromise. Citrix's
scalable server-based architecture allows instant delivery of full-
featured enterprise applications, which means new application or user
provisioning that once took weeks can now be completed in minutes.
Companies can leverage existing IT investments and extend their existing
computing environments to offices anywhere. And because control is
server-based, applications can be delivered and managed with speed, ease,
and confidence from a single reliable point. Users get what they need: a
no-compromise experience of consistent and reliable performance and
full-featured functionality.
- Application Deployment. Citrix provides a server-based system to
streamline application delivery, consolidate key corporate data and
reduce the time and resources required to deploy, implement and manage a
full range of business applications -- from enterprise resource planning
and customer resource management to office productivity software. Updates
to client code occur on a centralized server, reducing the impact on
users and IT staff when market pressures force business processes to
change. New users and acquired companies can be quickly added to the
application user base, leading to near-immediate access and productivity.
This solution Web-enables any existing Windows or UNIX applications, and
can offer substantial savings and improvements in security and stability.
- Workforce Mobility. This Citrix solution enhances workforce productivity
through a "desktop-to-go" that can be accessed anywhere, over any
connection -- wireless to Web -- giving the mobile workforce secure,
real-time access to full-featured applications without the need to
download data. With Citrix workforce mobility solutions, mobile
professionals enjoy the same feature-rich software as their colleagues at
headquarters. Overworked IT staffs gain the ability to centrally add and
effortlessly support new users and applications as needs change. And
corporate leaders welcome the enhanced performance and security of a
system in which applications and data reside safely on a centrally
managed server with only mouse clicks and screen refreshes crossing the
network.
- Business Continuity. Citrix solutions are designed to deliver
uninterrupted access to enterprise applications across servers when a
sudden information system interruption occurs. Citrix provides a vital
component of a complete business continuity solution that can reduce the
impact of natural, accidental, or man-made business interruptions by
securely delivering critical applications and information from a
fail-over data center not effected by the interruption. Files and
applications are stored and managed centrally, giving users fast, easy
and secure Web-based access to the resources they need and freeing IT
staffs to focus on restoring corporate systems rather than reinstalling
individual desktops. Citrix technology can preserve employees' ability to
access corporate information from alternative locations, enabling the
organization to conduct business without significant interruption.
3
CITRIX TECHNOLOGY
Citrix products are based on a full range of industry standard
Internet-based technologies and the Company's proprietary Independent Computing
Architecture ("ICA") technologies. The Company's MetaFrame product family
incorporates ICA(R) and allows an application's graphical user to be displayed
on virtually any client device while the application logic is executed on a
central server. Because no processing takes place on the client, this
server-based approach enables centralized management of applications, users,
servers, licenses and other system components for greater efficiency and lower
cost.
This technology also minimizes the amount of data traveling across a user's
network. Only screen refreshes, keystrokes and mouse clicks are transported to
and from the client, which allows the latest, most powerful applications to be
accessed rapidly over standard networks.
Citrix portal products are based upon the industry-standard Extensible
Markup Language ("XML"). Leveraging XML assures open systems interaction for
customers regardless of data source or platform. As the standard for future
Web-services based applications, Citrix helps with delivering a means for
customers to get from the client server world of today to the Web-services
environments of tomorrow.
CITRIX PRODUCTS
- Client/Server Products. The Company's client/server product line
consists primarily of MetaFrame(R) products, which include MetaFrame 1.8
for Windows Terminal Server and the MetaFrame XP product family. The
Company's MetaFrame software runs on both Windows-based server operating
systems or UNIX operating systems, and provides a comprehensive
application and information access system for the entire enterprise.
MetaFrame products can enable organizations to better deploy, manage and
access applications across the extended enterprise to a variety of client
devices, operating platforms or network connections.
MetaFrame software incorporates the Company's ICA technology, which
allows for the deployment in a bandwidth-efficient manner of enterprise
applications with the necessary scalability, performance and reliability.
These deployments often involve complex applications running on multiple
servers and accessed by numerous end-customers. Licenses are available in
both "starter kits" and "additional user license packs" to meet customer
needs for pilot installations, medium-size systems and enterprise-wide
adoption. The Company distributes its software as packaged product and
through electronic licensing.
MetaFrame 1.0 for Microsoft Windows Terminal Server first shipped in June
1998. MetaFrame for UNIX-Sun Solaris first shipped in March 2000, and
MetaFrame for UNIX - HP-UX and IBM-AIX first shipped in September 2000.
In February 2001, Citrix launched the MetaFrame XP(TM) for Windows
product family, a more powerful and feature-rich application serving
product optimized for Windows 2000 and Windows XP. MetaFrame XP is
designed to support large-scale application serving implementations with
as many as 100,000 users on 1,000 or more servers. Citrix MetaFrame XP is
offered as a product family with three editions -- XP Server, XP Advanced
and XP Enterprise. Each edition is tailored to specific customer needs
and computing environments.
Late in 2001, Citrix introduced Citrix Secure Gateway ("CSG"), which
allows users of Citrix MetaFrame XP for Windows or MetaFrame for UNIX to
simply and securely deliver Windows and UNIX applications via the
Internet without additional client software installation. CSG secures all
ICA protocol traffic traveling across the Internet between the MetaFrame
client and the CSG server using industry-standard Secure Socket Layer
("SSL") encryption technology. CSG can make firewall traversal easier,
provide heightened security with SSL encryption, simplify application
deployment and enable tight integration with MetaFrame and NFuse, the
Company's application access portal.
To provide customers with the easiest and most convenient way to keep
their Citrix software current, the Company markets Subscription Advantage
for an additional fee. Subscription Advantage is the Company's
terminology for post contract support ("PCS"). Subscription Advantage is
an annual, renewable program that provides subscribers with automatic
delivery of software upgrades, enhance-
4
ments and maintenance releases when and if they become available during
the term of their subscription.
- The Company also offers add-on management products for its MetaFrame 1.8
customers that provide enhanced management tools including Load Balancing
Services, Resource Management Services and Installation Management
Services. These management products are available for an additional
license fee on each MetaFrame 1.8 server on which they are installed. The
Company's MetaFrame XP product family incorporates the features of these
management products and do not need to be purchased by users of the
various MetaFrame XP Editions.
Citrix Extranet(TM). The Citrix Extranet(TM) product, licensed from
V-ONE Corporation, provides the means to create secure, encrypted and
authenticated virtual private networks ("VPN") that can secure
application delivery via public networks like the Internet.
Collectively, these products accounted for approximately 86%, 85% and 86%
of the Company's net revenues in 2001, 2000 and 1999, respectively.
- Web Products. Citrix's new access portal family is a second line of
products designed to deliver the virtual workplace to Citrix
end-customers. Initially, the Company's new line of Web-products will
comprise of two separately priced and marketed products:
- Citrix NFuse(TM) Classic. NFuse Classic, formerly known as Citrix
NFuse, is the Company's application access portal software that can
enable customers to integrate personalized access to existing Windows
and UNIX applications into standard Web browsers without rewriting
code. NFuse Classic allows organizations to rapidly and
cost-effectively deploy their applications on the Web. The current
version of NFuse Classic is incorporated into MetaFrame 1.8, MetaFrame
XP and MetaFrame for UNIX products and is available for no additional
cost to current MetaFrame 1.8 customers.
- Citrix NFuse(TM) Elite. During 2001, the Company previewed this
channel-ready portal software product as Project South Beach at its
annual customer conference, Citrix iForum. NFuse Elite is a
development-stage technology acquired by the Company as part of the
purchase of Sequoia Software Corporation ("Sequoia") in April 2001 and
scheduled to be launched as a new product offering in 2002. NFuse
Elite has been designed to significantly simplify and accelerate
customers' portal implementations while providing for personalized,
secure application and information access. NFuse Elite has been
further designed to allow completely Web-based access to Windows, UNIX
and Java applications, native Web-applications, and internal and
external content, through a single, secure and personalized
Web-interface.
The Company currently believes that, when and if successfully introduced by
the Company, NFuse Elite will become a key component of its solutions that allow
for a virtual workplace.
CITRIX SERVICES
Citrix provides a portfolio of services designed to allow the Company's
business partners and end-customers to maximize the value they receive from the
Company's software infrastructure products. These services are available as a
feature of our business-partnering program and are available for additional fees
to end-customers.
- Citrix Consulting Services ("CCS"). The objective of CCS is to help
ensure the successful implementation of Citrix technologies. Tested
methodologies, certified professionals and best practices developed from
real-world experience allow CCS to provide expert guidance and support to
our partners and customers to maximize the effectiveness of their total
application server computing environment.
- Support Services. To accommodate the unique support needs of customers,
preferred support services are specifically designed to address the
variety of challenges facing application server software
5
environments. Citrix offers five levels of support options, global
coverage and personalized relations management.
- Training & Certification. A series of courses are designed to allow
customers and channel members to learn new skills and effective
strategies to help plan, implement and administer Citrix products.
Students may attend courses at one of 300 Citrix Authorized Learning
Centers ("CALC") worldwide.
Services revenue accounted for approximately 7% of the Company's net
revenues in 2001 and 2000 and 4% in 1999.
CITRIX CUSTOMERS
Citrix's primary target market for its products and services is large and
medium-sized organizations that require the ability to securely manage and
provide access to business applications and information across the extended
enterprise. Currently, Citrix has more than 120,000 customers worldwide,
including 100% of the Fortune 100, 95% of the Fortune 500 and 95% of the
Financial Times FT Europe 100. During 2001, Citrix acquired a number of new
large enterprise customers requiring larger-scale deployments, such as AT&T
Wireless, the Bank of Nova Scotia, Care Tech Solutions, the Commonwealth Bank of
Australia, Compagnie Generale de Eaux-Vivendi, Ericsson Global IT, France
Telecom, New York State Electric & Gas Corp., Petroleo Brasileiro S/A
(Petrobas), Telecomputing-Norway and Telefonica Moviles Espana.
The Company markets software products through indirect channels such as
distributors and value-added resellers. Citrix offers several licensing programs
to meet a variety of deployment and purchasing needs. In 2001, most of the
Company's sales were of packaged product sold through indirect channels to
medium and small-sized businesses. The software license is delivered with the
packaged product.
For medium to large-sized organizations, the Company also offers
volume-based Corporate, Premium and Enterprise Licensing Programs. These license
arrangements consist of large multi-server farm environments typically found in
large business enterprises that want to deploy the Company's products on a
department or enterprise-wide basis. For convenience, the licenses under these
arrangements are electronically delivered to the customer and serve as keys to
activate the configuration ordered by the customer. Depending on the license
type and customer preference, the software media is delivered by either a
channel partner or directly by the Company. The Company has invested, and
continues to invest, in direct sales resources and channel partners to penetrate
these larger customers. In addition, the strong adoption of the MetaFrame XP
product family, designed to support large-scale application serving
implementations and licensed under electronic licensing arrangements has
contributed to an increase in sales under these electronic licensing
arrangements in 2001 compared to 2000. For the years ended December 31, 2001 and
2000, sales from corporate and enterprise licensing was 28% and 24%,
respectively, of product sales, a portion of which has been deferred. The
Company plans to hire additional end-customer sales professionals to increase
its marketing efforts aimed at large corporate enterprise accounts.
STRATEGIC RELATIONSHIPS
The Company has entered into a number of strategic relationships to develop
customer markets for its products, broaden the use of the ICA protocol as an
emerging industry standard technology for distributed Windows and non-Windows
applications and to accelerate the development of its existing and future
product lines.
Microsoft. Since its inception, the Company has had a number of license
agreements with Microsoft, including licenses relating to Microsoft OS/2,
Windows 3.x, Windows for Workgroups, Windows NT, Windows CE and Internet
Explorer. These agreements have provided the Company with access to certain
Microsoft source and object code, technical support and other materials. The
license agreements had an initial term that expired in September 1994 and was
subsequently extended until September 2001. In July 1996, the Company entered
into a license, development and marketing agreement with Microsoft relating to
the inclusion of ICA as an embedded component in future versions of Windows 95,
Windows 98, Windows NT, Windows 2000 and Internet Explorer for Windows. Pursuant
to this agreement, as amended, the Company
6
licenses its ICA technology to Microsoft, royalty-free, and Microsoft agreed to
make commercially reasonable efforts to include this technology in the above
Microsoft Windows family of products. Generally, under the July 1996 license,
development and marketing agreement, Microsoft is not permitted to distribute or
sub-license a product derived from the Company's ICA technology.
In May 1997, the Company entered into a five year joint license,
development and marketing agreement with 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. Pursuant to the Development Agreement, the Company's
multi-user Windows NT extensions technology was incorporated into Microsoft's NT
Terminal Server, which was released in July 1998, and Windows 2000 Server, which
was released in February 2000. Additionally, Microsoft agreed to endorse only
the Company's ICA protocol as the preferred way to provide multi-user Windows
access for devices other than Windows client devices, which obligation expired
in November 1999. Since November 1999, Microsoft has been permitted to market or
endorse other methods to provide multi-user Windows access to non-Windows client
devices, which methods compete with products of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Certain Factors Which May Affect Future
Results."
There can be no assurances that the Company's agreements with Microsoft
will be extended or renewed by Microsoft upon their respective expirations or
that, if renewed or extended, such agreements will be on terms favorable to the
Company or its stockholders.
Additional Strategic Relationships. As of December 31, 2001, the Company
has entered into approximately 150 ICA license agreements. Currently, more than
200 different devices incorporate Citrix ICA, ranging from Linux terminals to
information appliances, such as wireless phones and handheld devices. ICA
licensees include IBM, Compaq, Wyse Technologies, Hewlett Packard, Hitachi,
Motorola, Samsung, Sharp, Symbol Technologies and Nokia, among others.
In addition, the Citrix Business Alliance(TM) ("CBA") is a coalition of
industry-leading companies from across the IT spectrum who work with the Company
to design and market complementary solutions for the Company and CBA customers.
By the end of 2001, CBA membership had grown to approximately 900 members,
including hardware, software, global and regional consulting partners. CBA
members include Microsoft, Compaq, IBM, EMC2, Hewlett Packard, Siebel Systems,
PeopleSoft, SAP AG, Computer Associates, BMC Software, JD Edwards and National
Semiconductor.
RESEARCH AND DEVELOPMENT
The Company focuses its research and development efforts on developing new
products and core technologies for its markets and further enhancing the
functionality, reliability, performance and flexibility of existing products.
The Company solicits extensive input concerning product development from users,
both directly from end-customers and indirectly through its channel partners.
The Company believes that its software development team and core
technologies represent a significant competitive advantage for the Company.
Included in the software development team is a group focused on research
activities that include prototyping ways to integrate emerging technologies and
standards into the Company's product offerings, such as emerging Web services
technologies and Microsoft's new .NET technologies. Other groups within the
software development team have expertise in XML-based software development,
multi-tier Web-based application development and deployment, and Java applets
"sandbox" technologies from the Internet. The software development team also
includes a number of key employees who were instrumental in the release of
Microsoft's Window's NT 4.0 Terminal Server Edition, have expertise in UNIX
operating system environments (Solaris, AIX, HP-UX, and Linux), and were key
members from the engineering team that developed the original version of OS/2 at
IBM. During 2001, 2000 and 1999, the Company incurred research and development
expenses of approximately $67.7 million, $50.6 million and $37.4 million,
respectively.
7
The Company's research and development efforts have recently included the
development of a new channel-ready portal product, scheduled for release in
2002. See "-- Citrix Products -- Web Products."
SALES, MARKETING AND SUPPORT
The Company markets its products through multiple indirect channels
worldwide, including distributors, value-added resellers, system integrators,
independent software vendors and original equipment manufacturer ("OEM")
licensees, as well as through a end-customer sales force. The Company provides
training and certification to integrators, value-added resellers and consultants
for a full-range of MetaFrame-based application deployment and management
solutions and services through its Citrix Solutions Network(TM) ("CSN") program.
As of December 31, 2001, the Company had relationships with approximately
100 distributors and approximately 7,150 CSN providers worldwide. A number of
the Company's strategic partners and OEM licensees provide additional
end-customer sales channels for the Company's products under either a Citrix
brand or embedded in the licensee's own software product.
The Company's sales and marketing organization actively supports its
distributors and resellers. The Company's marketing department provides
training, sales event support, sales collateral, advertising, direct mail and
public relations coverage to its indirect channels to aid in market development
and in attracting new customers. The Company's sales organization consists of
field-based systems sales engineers and corporate sales professionals.
Additional sales personnel, based in North America, Europe, Africa, Asia, India,
Australia and South America, support these field personnel. These additional
sales personnel recruit prospective customers, provide technical advice with
respect to the Company's products and work closely with key distributors and
resellers of the Company's products. During 2001, the Company grew its
end-customer sales force to include sales professionals working closely with
medium and large enterprise customers to bring the appropriate combination of
partners for licensing, integration and consulting to meet the customer's needs.
These and other account penetration efforts are part of the Company's strategy
to reach higher within the customer's IT organization. The Company currently
plans to expand end-customer sales efforts to market its products to large
corporate enterprise accounts.
The Company provides most of its distributors with product return rights
for stock balancing, which are estimated and provided for at the time of sale as
a reduction of revenue. Stock balancing rights permit distributors to return
products to the Company for credit, within specified limits and subject to
ordering an equal dollar amount of other Citrix products. The Company is not
obligated to accept product returns from its distributors under any other
conditions, unless the product item is defective in manufacture. Product items
returned to the Company under the stock balancing program must be in new, unused
and in unopened condition . The Company also provides most of its distributors
with price protection rights. Price protection rights require that the Company
grant retroactive price adjustments for inventories of Citrix products held by
distributors if the Company lowers its prices for such products within a
specified time period. In the event that the Company determines to reduce its
prices, it will establish a reserve to cover exposure to distributor inventory.
The Company has no current plans to reduce the prices of its products.
The majority of the Company's service activities are related to post-sale
technical support, pre- and post-sale consulting and Citrix product training
services. Technical support is offered to channel partners and end-customers
through Citrix call centers located in the United States, Ireland and Australia.
The Company provides technical advice to channel and strategic partners, who are
utilized as first line support for their end-customers, in most cases.
End-customers can choose from a comprehensive fee-based support program ranging
from one-time incident charges to an enterprise-level support agreement covering
multiple sites and servers. In addition, the Company provides technical advice
through its on-line services, including its Web-based Knowledge Center. Citrix
consulting services provides on-site systems design and implementation services
targeted primarily at enterprise-level clients with complex IT environments, and
is also responsible for the development of implementation of best practices that
are disseminated to Citrix partners and end-customers. Leveraging these
solutions enables Citrix and its channel partners to sell deeper and more
strategically, reaching new buyers within existing customer organizations and
delivering a compelling business
8
message to prospective customers. Sales and technical training is provided
through the Company's CALC program, which includes a number of the world's
leading IT training organizations. These training programs are designed for
business partners and end-customers and include courses for system
administration and advanced system integration. CALCs are staffed with
instructors that have been Citrix certified and teach their students using
Citrix-developed courseware.
OPERATIONS
The Company controls all purchasing, inventory, scheduling, order
processing and accounting functions related to its operations. Production,
warehousing and fulfillment are performed by independent contractors on a
purchase order basis in the United States and in Ireland. Shipping is primarily
performed at the locations of the independent contractors, although limited
shipments are made from the Company's facilities. Master software CD-ROMs,
development of user manuals, packaging designs, initial product quality control
and testing are performed at the Company's facilities. The independent
contractors duplicate CD-ROMs, print documentation, and package and assemble
product to the Company's specifications. To date, the Company has not
experienced any material difficulties or delays in the manufacture and assembly
of its products.
During 2001, the Company experienced an increase in market acceptance of
its corporate and enterprise licensing programs. Such increased market
acceptance reduced the level of packaged inventory the Company must maintain to
fulfill customer orders.
The Company has identified and evaluated alternative manufacturing vendors
and believes that such alternative vendors are capable of producing the
requisite quality and volumes at competitive prices. However, if difficulties
and delays were to be encountered, and transition to an alternate manufacturer
was not completed promptly, the Company's business, results of operations, and
financial condition could be materially adversely affected.
The Company generally ships products upon receipt of an order. As a result,
the Company does not have significant backlog at any given time, and does not
consider backlog to be a significant indicator of future performance.
COMPETITION
The Company believes that other software companies have entered or will
enter the market with solutions that involve a similar approach to the Company's
Windows client/server product. In particular, Novell, Inc., GraphOn Corporation,
Tarantella Inc. and New Moon Systems, Inc. market products that claim to have
functions similar to those found in Citrix MetaFrame. Additionally, Microsoft
includes as a component of the Microsoft Windows NT Server 4.0, Terminal Server
Editions and Windows 2000 Servers (collectively, "Windows Operating Systems"),
certain capabilities of the Company's MetaFrame Product. See "-- Strategic
Relationships" and "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Certain Factors Which May Affect Future Results."
The announcement of the release, and the actual release, of products competitive
to the Company's existing and future product lines, could cause existing and
potential customers of the Company to postpone or cancel plans to license
certain of the Company's existing and future product offerings, which would
adversely impact the Company's business, results of operations, and financial
condition.
In addition, alternative products exist for Web-applications in the
Internet software market that directly or indirectly compete with the Company's
products and anticipated future product offerings. Existing or new products that
extend Internet software to provide database access or interactive computing may
materially impact the Company's ability to sell its products in this market.
Competitors in this market include Microsoft, AOL Time Warner, ORACLE, Sun
Microsystems and other makers of Web application software. 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. These competitors and other potential
competitors may have significantly greater financial, technical, sales,
marketing, support and other resources than the Company. There can be no
assurance that the Company will be able to establish and maintain a
9
market position in the face of increased competition. Additionally, price
competition may become more significant in the future; although the Company
believes that price has historically been a less significant competitive factor
than product performance, reliability and functionality. The Company may not be
able to maintain its historic prices, which could adversely affect the Company's
business, results of operations and financial condition.
PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon proprietary technology. The
Company has filed patent applications in the United States and foreign
countries. A number of patents have been issued domestically and in foreign
countries, while other patent applications are currently pending. The Company
also takes steps to protect its technology under copyright laws. However, patent
protection and existing copyright laws afford only limited protection for the
Company's technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent, as do the laws of
the United States. Accordingly, the Company also relies on trade secret
protection and confidentiality and proprietary information agreements to protect
its proprietary technology. The Company has trademarks or registered trademarks
in the United States and other countries, including Citrix(R) , ICA(R),
MetaFrame(R), WinFrame(R), Citrix Business Alliance(TM), Citrix Extranet(TM),
NFuse(TM), Classic, NFuse(TM), Bilte, MetaFrameXP(TM), VideoFrame(TM), and the
Citrix(R) logo. The loss of any material trade secret, trademark, trade name or
copyright could have a material adverse effect on the Company. There can be no
assurance that the Company's efforts to protect its proprietary technology
rights will be successful. Despite the Company's precautions, it may be possible
for unauthorized third parties to copy certain portions of the Company's
products or to obtain and use information that the Company regards as
proprietary. A significant portion of the Company's sales is derived from the
licensing of Company packaged products under "shrink wrap" license agreements
that are not signed by licensees and electronic licensing agreements, which may
be unenforceable under the laws of certain foreign jurisdictions. Although the
Company does not believe that its products infringe on the rights of third
parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such assertion
will not result in costly litigation or require the Company to obtain a license
to proprietary technology rights of such parties. In addition, there can be no
assurance that such licenses will be available on reasonable terms or at all.
While the Company's competitive position may be affected by its ability to
protect its proprietary information, the Company believes that because of the
rapid pace of technological change in the industry, factors such as the
technical expertise, knowledge and innovative skill of the Company's management
and technical personnel, its strategic relationships, name recognition, the
timeliness and quality of support services provided by the Company and its
ability to rapidly develop, enhance and market software products may be more
significant in maintaining the Company's competitive position.
EMPLOYEES
As of December 31, 2001, the Company had approximately 1,880 employees. The
Company's relations with its French employees are governed by certain labor
regulations in the region. The Company believes its relations with employees are
good.
ITEM 2. PROPERTIES
The Company's corporate offices are located in Fort Lauderdale, Florida. To
consolidate certain of the Company's corporate offices and to accommodate the
Company's projected growth, the Company leased approximately 140,000 square feet
of space in Fort Lauderdale and plans to occupy this new facility during 2002.
Upon occupancy of this new facility, the Company plans to sublease certain of
the space in the various buildings for the remainder of their respective lease
terms. Including this new facility, the Company's corporate offices currently
consist of leased and subleased office space totaling approximately 406,000
square feet. In addition, the Company leases approximately 137,000 square feet
of office space in other locations in the United States and Canada.
10
The Company leases and subleases a total of approximately 218,000 square
feet of office space in various other facilities in Europe, Latin America and
the Asia Pacific region. In addition, during 2001, the Company purchased land
and buildings in the United Kingdom with approximately 41,000 square feet of
office space for a total purchase consideration of approximately $27 million.
ITEM 3. 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 generally alleged that,
during the Class Period, the defendants made misstatements to the investing
public about the Company's financial condition and prospects. The Court
dismissed the action with prejudice on October 30, 2001.
In September 2000, a shareholder 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 attorneys' fees
and litigation costs in the amount of $2,000,000 and $60,000, respectively. In
September 2001, the Court awarded the plaintiff $140,000 and $8,250 for
attorneys' fees and litigation costs, respectively. On February 22, 2002,
plaintiffs refiled the remaining portion of the action. The Company believes
that the claim lacks merit, however, the Company is unable to determine the
ultimate outcome of this matter and intends to vigorously defend it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is currently traded on The Nasdaq National
Market under the symbol "CTXS." The following table sets forth the high and low
closing prices for the Company's Common Stock as reported on The Nasdaq National
Market for the periods indicated, as adjusted to the nearest cent and to reflect
the two-for-one stock split in the form of a stock dividend declared on January
19, 2000 and paid on February 16, 2000 to holders of record of the Company's
Common Stock on January 31, 2000. Such information reflects inter-dealer prices,
without retail markup, markdown or commission and may not represent actual
transactions.
<Table>
<Caption>
HIGH LOW
------- ------
YEAR ENDED DECEMBER 31, 2002:
First quarter (through March 14, 2002).................... $ 23.98 $13.50
YEAR ENDED DECEMBER 31, 2001:
Fourth quarter............................................ $ 25.80 $19.81
Third quarter............................................. $ 36.69 $18.38
Second quarter............................................ $ 34.90 $18.19
First quarter............................................. $ 36.63 $17.31
YEAR ENDED DECEMBER 31, 2000:
Fourth quarter............................................ $ 30.88 $17.13
Third quarter............................................. $ 23.75 $14.31
Second quarter............................................ $ 83.69 $18.44
First quarter............................................. $118.56 $52.50
</Table>
On March 14, 2002, the last reported sale price of the Common Stock on The
Nasdaq National Market was $18.41 per share. As of March 14, 2002, there were
approximately 1,094 holders of record of the Common Stock.
The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends on its capital stock
in the foreseeable future.
In connection with the Company's stock repurchase program, as discussed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operation -- Liquidity and Capital Resources," 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. The
issuance of these securities is exempt from registration under Section 4(2) of
the Securities Act of 1933.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net revenues.................................. $ 591,629 $ 470,446 $ 403,285 $248,636 $123,933
Cost of revenues (excluding amortization,
presented separately below)................. 29,848 29,054 14,579 16,682 12,304
---------- ---------- ---------- -------- --------
Gross margin.................................. 561,781 441,392 388,706 231,954 111,629
Operating expenses:
Research and development.................... 67,699 50,622 37,363 22,858 6,948
Sales, marketing and support................ 224,108 180,384 121,302 74,855 35,352
General and administrative.................. 85,212 58,685 37,757 20,131 10,651
Amortization of intangible assets........... 48,831 30,395 18,480 10,190 --
In-process research and development......... 2,580 -- 2,300 18,416 3,950
Write-down of technology(a)................. -- 9,081 -- -- --
---------- ---------- ---------- -------- --------
Total operating expenses.................. 428,430 329,167 217,202 146,450 56,901
---------- ---------- ---------- -------- --------
Income from operations........................ 133,351 112,225 171,504 85,504 54,728
Interest income............................... 42,006 41,313 25,302 10,878 10,447
Interest expense.............................. (20,553) (17,099) (12,532) (133) --
Other expense, net............................ (2,253) (1,422) (1,549) (777) (553)
---------- ---------- ---------- -------- --------
Income before income taxes.................... 152,551 135,017 182,725 95,472 64,622
Income taxes.................................. 47,291 40,505 65,781 34,370 23,264
---------- ---------- ---------- -------- --------
Net income.................................... $ 105,260 $ 94,512 $ 116,944 $ 61,102 $ 41,358
========== ========== ========== ======== ========
Diluted earnings per share(b)................. $ 0.54 $ 0.47 $ 0.61 $ 0.33 $ 0.24
========== ========== ========== ======== ========
Diluted weighted-average shares
outstanding(b).............................. 194,498 199,731 192,566 182,594 174,524
========== ========== ========== ======== ========
</Table>
<Table>
<Caption>
DECEMBER 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................... $ 153,554 $ 427,344 $ 433,249 $158,900 $222,916
Total assets.................................. 1,208,230 1,112,573 1,037,857 431,380 282,668
Long term debt, capital lease obligations and
put warrants................................ 362,768 346,229 313,940 48 8
Stockholders' equity.......................... 647,330 592,875 533,070 297,454 196,848
</Table>
- ---------------
(a) In the fourth quarter of 2000, the Company recorded impairment write-downs
of previously acquired core technology of $9.1 million, as further discussed
in "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations."
(b) Diluted earnings per share and diluted weighted-average shares outstanding
have been adjusted to reflect the two-for-one stock split in the form of a
stock dividend declared on May 17, 1996 and paid on June 4, 1996 to holders
of record of the Company's Common Stock on May 28, 1996; the three-for-two
stock split in the form of a stock dividend declared on January 25, 1998 and
paid on February 20, 1998 to holders of record of the Company's Common Stock
on February 12, 1998; the two-for-one stock split in the form of a stock
dividend declared on March 1, 1999 and paid on March 25, 1999 to holders of
record of the Company's Common Stock on March 17, 1999; and the two-for-one
stock split in the form of a stock dividend declared on January 19, 2000 and
paid on February 16, 2000 to holders of record of the Company's Common Stock
on January 31, 2000.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports comprehensive corporate
application and information infrastructure software and services that enable
effective and efficient enterprise-wide deployment and management of
applications and information, including those designed for Microsoft Windows
operating systems,UNIX operating systems and for Web-based information 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 provide virtual access to Windows-based
and UNIX applications without regard to location, network connection or type of
client hardware platforms. The Company also provides portal software and
services that are designed to provide personalized, secure Web-based access to a
wide variety of business information from any location, device or connection.
The Company markets its products through multiple direct and indirect channels
such as distributors, value-added resellers and original equipment manufacturers
worldwide.
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
Windows NT Server, Terminal Server Edition and Microsoft Windows 2000
(collectively, "Windows Server Operating Systems"). The Development Agreement
also provides for each party to develop its own enhancements to the jointly
developed products, which may provide access to Windows Server Operating Systems
base platforms from a wide variety of computing devices. In June 1998, the
Company released its MetaFrame product, a Company-developed enhancement that
implements the Independent Computing Architecture ("ICA(R)") on the Windows
Server Operating Systems. In addition, Microsoft and the Company have agreed to
engage in certain joint marketing efforts to promote the use of Windows Server
Operating Systems-based multi-user software and the Company's ICA protocol.
Pursuant to the terms of the Development Agreement, in May 1997, the Company
received $75 million as a non-refundable royalty payment for engineering and
support services to be rendered by the Company. Under the terms of the
Development Agreement, the Company received additional payments totaling $100
million in April 1998. No additional payments are due pursuant to the
Development Agreement. 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 is being recognized ratably over the remaining term
of the contract, effective April 1998.
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 currently
plans to continue developing enhancements to its MetaFrame products and
currently expects that these products and associated options will constitute a
majority of its revenues for the foreseeable future. The term of the Development
Agreement expires in May 2002.
ACQUISITIONS
The Company has acquired technology related to its strategic objectives. In
July 1999 and April 2001, the Company completed the acquisitions of ViewSoft,
Inc. ("Viewsoft") and Sequoia Software Corporation ("Sequoia") for approximately
$33.5 million and $182.6 million, respectively.
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex") for approximately $47.8 million. At the date of
acquisition, the Company paid approximately $28.9 million in consideration and
closing costs. Pursuant to the acquisition agreement, the remaining purchase
consideration, plus interest, was contingently payable based on future events.
During 2001, these contingencies were met, resulting in approximately $16.2
million of additional purchase price and $2.9 million in compensation to the
former owners. Pursuant to the acquisition agreement, payment of the contingent
amounts and associated interest were made in August 2001 and February 2002 for
$10.5 million and $10.7 million, respectively. There are no remaining contingent
obligations.
14
These acquisitions were accounted for under the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
Accounting for Business Combinations. The Company allocated the cost of the
acquisitions to the assets acquired and the liabilities assumed based on their
estimated fair values. Except for Innovex, the acquired intangible assets
included in-process technology projects, among other assets, which were related
to research and development that had not reached technological feasibility and
for which there was no alternative future use.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an ongoing basis, management evaluates its estimates,
including those that relate to product returns, multiple-element revenue
arrangements, customer programs, bad debts, investments, intangible assets,
income tax contingencies and litigation. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions and conditions. If actual results
significantly differ from management's estimates, the Company's financial
condition and results of operations could be materially impacted.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. The Company records estimated reductions to
revenue for customer programs and incentive offerings including volume-based
incentives and price protection. If market conditions were to decline, the
Company may take actions to increase customer incentive offerings and possibly
result in an incremental reduction to revenue at the time the incentive is
offered. The Company also records a reduction in revenue for estimated sales
returns and stock rotations. These estimates are based on historical sales
returns, analysis of credit memo data and other known factors. If the historical
data the Company uses to calculate these estimates does not properly reflect
future returns, revenue may be misstated.
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 at the outset of the
arrangement. In the case of non-cancelable product licensing arrangements under
which certain original equipment manufacturers ("OEMs") have software
reproduction rights, initial recognition of revenue also requires delivery and
customer acceptance of the product master or first copy. Subsequent recognition
of revenues is based upon reported royalties from the OEMs. Revenue from
packaged product sales to distributors and resellers is recorded when related
products are shipped. Revenues from enterprise and corporate licensing
arrangements are recognized when the related products are shipped and the
customer has been electronically provided with the licenses that include the
activation keys that allow the customer to take immediate possession of the
software pursuant to an agreement or purchase order. In software arrangements
that include rights to multiple software products, post-contract customer
support ("PCS"), and/or other services, the Company allocates the total
arrangement fee among each deliverable based on the relative fair value of each
of the deliverables determined based on vendor-specific objective evidence
("VSOE"). The Company sells software and PCS separately and VSOE is determined
by the price charged when each element is sold separately. Product returns and
sales allowances, including stock rotations, are estimated and provided for at
the time of sale. Non-recurring engineering fees are recognized ratably as the
work is performed. Revenues from training and consulting are recognized when the
services are performed. Service and PCS 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
15
ratably over the term of the contract, which is typically 12 to 24 months.
Service revenues are included in net revenues on the face of the consolidated
statements of income.
The Company adopted the provisions of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB101") in October 2000. SAB 101 does not supersede the software
industry specific revenue recognition guidance, but provides current
interpretations of revenue recognition requirements. The adoption of SAB 101 did
not have a significant effect on the Company's financial position or results of
operations.
The Company provides for potential uncollectible accounts receivable based
on customer specific information and historical collection experience. If market
conditions decline, actual collection experience may not meet expectations and
may result in increased bad debt expenses.
The carrying value of the Company's net deferred tax assets assumes that
the Company will be able to generate sufficient future taxable income in certain
tax jurisdictions, based on estimates and assumptions. If these estimates and
assumptions change in the future, the Company may be required to record
valuation allowances against its deferred tax assets resulting in additional
income tax expenses.
In assessing the recoverability of the Company's goodwill and other
intangible assets, the Company must make estimates of expected future cash flows
and other factors to determine the fair value of the respective assets. If these
estimates and their related assumptions change in the future, the Company may be
required to record impairment charges. The Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002 and will be required to analyze its goodwill for
impairment on an annual basis. The Company does not expect to record any
impairment charges as a result of the adoption of this statement.
The fair value of certain of the Company's cash equivalents and investments
is dependent on the performance of the companies or funds in which the Company
has invested, as well as the volatility inherent in the external markets for
these investments. In assessing the potential impairment for these investments,
the Company considers these factors as well as forecasted financial performance
of its investees. During the year ended December 31, 2001, the Company recorded
$7.7 million of losses resulting from other-than-temporary declines in fair
value of certain of the Company's equity investments.
The following discussion relating to the individual financial statement
captions, the Company's overall financial performance, operations and financial
position should be read in conjunction with the factors and events described in
"-- Overview" and "-- Certain Factors Which May Affect Future Results" which may
impact the Company's future performance and financial position.
16
RESULTS OF OPERATIONS
The following table sets forth the consolidated statements 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:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001 2000
------------------------ COMPARED TO COMPARED TO
2001 2000 1999 2000 1999
------ ------ ------ ----------- -----------
Net revenues.................................. 100.0% 100.0% 100.0% 25.8% 16.7%
Cost of revenues (excluding amortization,
presented separately below)................. 5.1 6.2 3.6 0.3 99.3
----- ----- -----
Gross margin.................................. 94.9 93.8 96.4 27.3 13.6
Operating expenses:
Research and development.................... 11.4 10.8 9.3 33.7 35.5
Sales, marketing and support................ 37.9 38.3 30.1 24.2 48.7
General and administrative.................. 14.4 12.5 9.4 45.2 55.4
Amortization of intangible assets........... 8.3 6.5 4.6 60.7 64.5
In-process research and development......... 0.4 -- 0.5 * *
Write-down of technology.................... -- 1.9 -- * *
----- ----- -----
Total operating expenses................. 72.4 70.0 53.9 30.2 51.5
----- ----- -----
Income from operations........................ 22.5 23.8 42.5 18.8 (34.6)
Interest income............................... 7.1 8.8 6.3 1.7 63.3
Interest expense.............................. (3.5) (3.6) (3.1) 20.2 36.4
Other expense, net............................ (0.3) (0.3) (0.4) 58.4 (8.2)
----- ----- -----
Income before income taxes.................... 25.8 28.7 45.3 13.0 (26.1)
Income taxes.................................. 8.0 8.6 16.3 16.8 (38.4)
----- ----- -----
Net income.................................... 17.8% 20.1% 29.0% 11.4 (19.2)
===== ===== =====
</Table>
- ---------------
* not meaningful.
Net Revenues. The Company's operations consist of the design, development,
marketing and support of corporate application and information infrastructure
software and services for enterprise-wide deployment and management of
applications and information. 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, Subscription Advantage, the Company's
terminology for PCS, 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.
Certain of the Company's software management products 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,
Subscription Advantage, additional user licenses, unbundled management products
(such as load balancing services and resource 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
17
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.
The increase in net revenues in 2001 was primarily attributable to an
increase in License Revenue resulting from an increase in the number of
MetaFrame licenses sold for Windows operating systems, specifically due to
market acceptance of the Company's MetaFrame XP family of products introduced in
February 2001. The Company expects that License Revenues will continue to
represent a large percentage of net revenues. The increase in net revenues in
2001 was also due to an increase in Services Revenue due primarily to an
increase in larger scale corporate and enterprise licensing arrangements that
typically require professional services to ensure successful implementation of
Citrix technologies. The revenue from the Development Agreement with Microsoft
will terminate in May 2002 upon the expiration of the term of the Development
Agreement.
The increase in net revenues in 2000 was primarily attributable to an
increase in License Revenue resulting from an increase in the number of
MetaFrame licenses sold. This increase was partially offset by a decrease in
revenue from the WinFrame(R) product line. WinFrame is the Company's Windows
application server software based on Windows NT 3.51. The increase in net
revenues in 2000 was also due to an increase in the volume of shipments of
certain management products included in License Revenue, specifically, load
balancing services and resource management services, and to a lesser extent an
increase in Services Revenue due to consulting revenue resulting from the
Company's corporate and enterprise customers and initiatives utilizing personnel
acquired in the Innovex acquisition.
An analysis of the Company's net revenues is presented below:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, REVENUE REVENUE
------------------------ GROWTH GROWTH
2001 2000 1999 2000 TO 2001 1999 TO 2000
------ ------ ------ ------------ ------------
License Revenue............................... 86.4% 85.0% 86.2% 27.7% 15.1%
Services Revenue.............................. 6.9 6.5 3.9 33.8 93.0
Royalty Revenue............................... 6.7 8.5 9.9 (0.2) 0.2
----- ----- -----
Net Revenues.................................. 100.0% 100.0% 100.0% 25.8 16.7
===== ===== =====
</Table>
International and Segment Revenues. International revenues (sales outside
of the United States) accounted for approximately 48.0%, 40.3% and 38.7% of net
revenues for the years ended December 31, 2001, 2000 and 1999, 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, as well as the economic impact of
slower IT spending in the United States during 2001. The Company is unable to
determine if slower IT spending will continue in the United States during 2002.
Geographic segment revenues have notably increased in the Asia-Pacific
segment, particularly due to increased sales in Japan, and in the EMEA segment,
particularly due to increased sales in Europe. The increased market acceptance
overseas during 2001 represents the result of the Company's investment in global
operations and development of international markets over the past two years. The
Company currently anticipates that international revenues will account for an
increasing percentage of net revenues in the future as the Company continues to
invest in overseas markets. For additional information on international
revenues, please refer to Note 12 to the Company's Consolidated Financial
Statements appearing in Item 8 of this Annual Report.
18
An analysis of geographic segment net revenue is presented below:
<Table>
<Caption>
YEAR ENDED DECEMBER 31, REVENUE REVENUE
------------------------ GROWTH GROWTH
2001 2000 1999 2000 TO 2001 1999 TO 2000
------ ------ ------ ------------ ------------
Americas(1)................................... 48.9% 52.8% 53.0% 16.4% 16.3%
EMEA(2)....................................... 36.6 33.7 32.1 36.6 22.4
Asia-Pacific.................................. 7.8 5.0 5.0 95.8 16.2
Other(3)...................................... 6.7 8.5 9.9 (0.2) 0.2
----- ----- -----
Consolidated net revenues..................... 100.0% 100.0% 100.0% 25.8 16.7
===== ===== =====
</Table>
- ---------------
(1) The Americas segment is comprised of the United States, Canada and Latin
America.
(2) Defined as Europe, Middle East and Africa.
(3) Represents royalty fees in connection with the Development Agreement.
The Company currently expects to continue investing in international
markets and expanding its international operations by establishing additional
foreign locations, hiring personnel, expanding its international sales force and
adding new third party channel partners. International revenues may fluctuate in
future periods as a result of difficulties in staffing, dependence on an
independent distribution channel, competition, variability of foreign economic
and political conditions and changing restrictions imposed by regulatory
requirements, localized product release timing and related issues of marketing
such products in foreign countries.
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 expensed as incurred and are reported as cost of
revenues. The Company's cost of revenues exclude amortization of core
technology. The increases in cost of revenues for 2001 and 2000 was due to the
overall increase in packaged product sales and increases in compensation and
other costs of providing services revenues. These increases were offset in part
by a reduction of the level of inventory necessary to fulfill customer orders
due to increased market acceptance of corporate and enterprise licenses. As
previously mentioned, corporate and enterprise license sales are typically
fulfilled with a nominal level of product media and the licenses are delivered
electronically. The cost of fulfilling such sales is less than traditional
packaged product sales, thereby reducing costs of revenues as a percentage of
revenue.
Gross Margin. The increase in gross margin as a percentage of net revenue
from 2000 to 2001 was primarily due to larger reserves for obsolete inventory
recorded in 2000. To a lesser extent, this increase was also due to an increase
in sales of corporate and enterprise licensing, which have a higher gross margin
versus traditional packaged product as a percentage of product revenue. The
Company currently anticipates that gross margin as a percentage of net revenues
will remain relatively stable as compared with current levels. However, gross
margin may fluctuate from time to time based on these factors.
The decrease in gross margin as a percentage of net revenues from 1999 to
2000 was primarily due to obsolescence charges and the impact of higher
consulting services revenue, which has a lower gross profit margin than that
associated software licenses. The identified obsolete inventory was destroyed in
2000.
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 the acquisitions described herein. Increases in research and
development expenses in 2001 and 2000 resulted primarily from additional
staffing, associated salaries and related expenses. The increase in 2001 was
also due to costs incurred for third party software and external consultants and
developers used to expand and enhance the Company's product lines, including
feature releases of MetaFrame and research and development efforts on
anticipated future product offerings.
19
Sales, Marketing and Support Expenses. The increase in sales, marketing
and support expenses in 2001 and 2000 resulted primarily from increased
personnel for sales, services and marketing and associated salaries, commissions
and related expenses in order to increase the Company's sales, consulting and
marketing efforts. Included in such marketing efforts in 2001 was the Company's
expansion of its end-customer sales force in connection with marketing to large
corporate enterprise accounts. The increase was also due to a higher level of
marketing programs directed at customer and business partner acquisition and
retention, and additional promotional activities related to specific products,
such as MetaFrame XP introduced in February 2001.
General and Administrative Expenses. Increases in general and
administrative expenses in 2001 and 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 during 2001 was
also due to increased depreciation from the Company's enterprise resource
planning system implemented in 2001, as well as the reallocation of certain
overhead costs from other departments into certain general and administrative
cost centers and an increase in consulting and accounting fees. The increase in
2000 was also due to an increase in legal fees relating to litigation and
general corporate matters.
Amortization of Intangible Assets. The increases in amortization of
goodwill and identifiable intangible assets in 2001 and 2000 are primarily due
to the acquisitions of ViewSoft in July 1999, Innovex in February 2000 and
Sequoia in April 2001. These acquisitions resulted in additional goodwill and
identifiable intangible assets of approximately $31.1 million, $26.7 million and
$169.9 million, respectively, at their respective dates of acquisition.
Additionally, for 2001, the increase was also due to additional goodwill of
approximately $16.2 million associated with purchase price contingencies related
to the acquisition of Innovex. As of December 31, 2001, the Company had net
goodwill and identifiable intangible assets of $185.9 million, associated with
these transactions.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and No. 142, Goodwill and Other Intangible Assets, which
were adopted by the Company on July 1, 2001 and January 1, 2002, respectively.
Under the new rules, goodwill (and intangible assets deemed to have indefinite
lives) will no longer be amortized but will be subject to an annual impairment
test. 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. At the date of
adoption, the Company had unamortized goodwill, including acquired work force,
in the amount of $152.4 million, which will not be amortized in the future and
which will be subject to the annual impairment test of SFAS 142. At January 1,
2002, the Company had unamortized identified intangibles with estimable useful
lives in the amount of $36.6 million, which will continue to be amortized in
accordance with the provisions of SFAS 141 and 142. For the quarter ended March
31, 2002, the Company expects to record amortization expense of approximately
$3.5 million related to these assets. The Company has completed the required
impairment tests of goodwill and indefinite-lived intangible assets as of
January 1, 2002 and does not anticipate an impairment charge during 2002 upon
the adoption of this statement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Which May
Affect Future Results."
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 ("IPR&D"). In April 2001, the Company acquired Sequoia, of which
$2.6 million of the purchase price was allocated to IPR&D. The amounts allocated
to IPR&D in the respective acquisitions had not reached technological
feasibility, had no alternative future use and were written off at the
acquisition dates.
The Company's efforts with respect to the acquired technologies currently
consist of integration work and any associated design, development or rework
that may be required to support the integration of the technologies into the
Company's anticipated future product 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
20
Company currently expects that it will successfully develop products utilizing
the acquired in-process technology, 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 in 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.
Write-Down of Technology. The Company periodically reviews its goodwill
and other intangible assets to determine if any impairment exists. In June 1998,
the Company completed its acquisition of APM Ltd. ("APM"). The acquired core
technology consisted primarily of a Java software product that would operate in
a MetaFrame server environment. At the time of the acquisition, it was
anticipated that there was a growing demand for Java client applications. Since
the acquisition, the market has not developed as originally anticipated. In the
second quarter of 2000, management changed the Java application server product
to a Java Performance Pack product, which adds performance enhancements and
management tools to other Citrix products. By the fourth quarter of 2000, the
Company had developed a Java Performance Pack and was assessing the market
demand for this technology. As of December 31, 2000, the Company did not believe
that there were sufficient projected cash flows to support the net book value of
the core technology associated with the APM acquisition. In addition, the
Company determined that there was no alternative future use for the acquired
technology. As a result, the Company recorded a write-down of $7.3 million,
representing the net book value of the APM core technology as of December 31,
2000.
In July 1998, the Company completed its acquisition of VDOnet Corporation
Ltd. ("VDOnet"). The acquired core technology consisted primarily of the ICA
Video Services project which allowed video applications and applications
containing videos to be viewed on an ICA client. Subsequent development efforts
resulted in the VideoFrame(TM) 1.0 product, which was shipped in the third
quarter of 1999, but has resulted in few sales to end-customers. Since the
acquisition, the Company has explored alternative uses for the acquired
technology. By the third quarter of 2000, the Company was exploring uses related
primarily to delivering video applications in a server-based computing
environment and video streaming with ICA devices. In the fourth quarter of 2000,
the Company reviewed potential modifications to its cash flow projections based
on identified alternative uses for the technology. As a result of its
evaluation, the Company did not believe that there were sufficient projected
cash flows to support the carrying value of the core technology. As a result,
the Company recorded a write-down of $1.8 million, representing the net book
value of the VDOnet core technology as of December 31, 2000.
Interest Income. Interest income increased in 2001 as compared to 2000
principally from the Company changing the composition of its investment
portfolio in the fourth quarter of 2000 from tax-exempt and taxable to
predominantly taxable securities, partially offset by a decrease in interest
rates during 2001. The increase in 2000 was primarily due to the full year
effect of interest earned on the invested net proceeds from the issuance of the
zero coupon convertible subordinated debentures in March 1999 and interest from
the increase in cash from operations.
Interest Expense. The increase in interest expense for 2001 as compared to
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 issued in March
1999. The increase in interest expense in 2000 compared to 1999 was due
primarily to accretion of the original issue discount related to the convertible
subordinated debentures.
Other Expense, Net. The change in other expense, net for 2001 compared to
2000 was the result of $7.7 million of losses recorded in 2001 resulting from
other-than-temporary declines in the fair value of certain of the Company's
equity investments, as well as approximately $2.4 million of foreign exchange
losses partially offset by realized gains of $8.0 million associated with
purchases and sales of available-for-sale securities and associated contracts.
Income Taxes. The increase in the effective tax rate from 30% in 2000 to
31% in 2001 resulted primarily from non-deductible goodwill associated with the
acquisition of Sequoia offset in part by a rate decrease resulting from
increased foreign earnings which were taxed at lower foreign tax rates. In July
1999, the Company changed its organizational structure whereby it moved certain
operational and administrative
21
processes to overseas subsidiaries. The repositioning resulted in foreign
earnings being taxed at lower foreign tax rates, as the Company's foreign
earnings are considered permanently reinvested overseas. As a result of these
organizational changes, the Company's effective tax rate decreased to 30% in
2000 from 36% in 1999.
LIQUIDITY AND CAPITAL RESOURCES
During 2001, the Company generated positive operating cash flows of $229.8
million related primarily to net income of $105.3 million, adjusted for non-cash
items including tax benefits from the exercise of non-statutory stock options
and disqualifying dispositions of incentive stock options of $28.0 million,
depreciation and amortization expenses of $79.6 million, provisions for product
returns of $22.5 million (primarily due to the Company's stock rotation program)
and the accretion of original issue discount and amortization of financing costs
on the Company's convertible subordinated debentures of $17.9 million. These
cash inflows were partially offset by an aggregate decrease in cash flow from
operating assets and liabilities of $39.4 million. Cash used in investing
activities of $382.2 million related primarily to net cash paid for acquisitions
(primarily in connection with the acquisition of Sequoia), of $183.8 million,
the net purchase of investments of $137.9 million and $60.6 million for the
purchase of property and equipment and costs associated with the Company's
enterprise resource planning ("ERP") system implementation. Approximately $11.9
million has been capitalized through December 31, 2001 related to the Company's
ERP system, and no future capital expenditures are planned in connection with
the Company's ERP system. Cash used in financing activities of $83.0 million
related primarily to the expenditure of $210.2 million for stock repurchase
programs, partially offset by the proceeds from the issuance of common stock
under the Company's stock option plans of $117.4 million and $12.0 million
generated from premiums received upon the sale of put warrants.
During 2000, the Company generated positive operating cash flows of $243.2
million related primarily to net income of $94.5 million, adjusted for non-cash
items including tax benefits from the exercise of non-statutory stock options
and disqualifying dispositions of incentive stock options of $63.9 million,
depreciation and amortization expenses of $50.2 million, and provisions for
product returns and inventory obsolescence of $34.8 million (primarily due to
the Company's stock rotation program). These cash inflows were partially offset
by an aggregate decrease in cash flow from operating assets and liabilities of
$26.6 million. Cash used in investing activities of $1.8 million for 2000
related primarily to the expenditure of $43.5 million for the purchase of
computer equipment, leasehold improvements and office equipment to support the
Company's growth and expansion, and net cash paid for acquisitions, primarily
Innovex of $30.1 million, partially offset by cash inflows from the net sale of
investments totaling $73.2 million. Cash used in financing activities of $82.6
million related primarily to the expenditure of $157.9 million for stock
repurchase programs, partially offset by $70.5 million from the issuance of
common stock under the Company's stock option and employee stock purchase plans
and $4.9 million generated from premiums charged in the sale of put warrants.
At December 31, 2001, the Company's working capital was $153.6 million
compared to $427.3 million at December 31, 2000. The decrease in working capital
is primarily due to a shift of cash and investments from short to long-term
investments.
At December 31, 2001, the Company had $65.0 million in accounts receivable,
mostly due under normal 30-day payment terms, net of allowances. The increase in
accounts receivable compared to 2000 is primarily attributed to the increase in
the Company's revenues. From time to time, Citrix may maintain individually
significant accounts receivable balances from its distributors or customers,
which are comprised of large business enterprises, governments and small and
medium-sized businesses. If the financial condition of its distributors or
customers deteriorates, the Company's operating results could be adversely
affected. One such distributor accounted for approximately 14% of accounts
receivable as of December 31, 2001. In 2000, this distributor accounted for 17%
of accounts receivable. During these periods, no other distributor or customer
accounted for more than 10% of accounts receivable.
At December 31, 2001, the Company had $746.7 million in cash and
investments, including $139.7 million in cash and cash equivalents. The
Company's cash and cash equivalents are generally 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
22
securities, municipal securities and commercial paper. 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. From time to time, the Company makes equity investments
that are accounted for under the cost method due to the limited extent of the
Company's ownership interest and lack of the Company's ability to exert
significant influence over the investees. As of December 31, 2001 and 2000, such
investments were recorded at the lower of cost or estimated net realizable
value. During 2001, the Company recorded $7.7 million of losses resulting from
other-than-temporary declines in fair value of certain of the Company's equity
investments. At December 31, 2001, the Company's remaining equity investments
were not material.
The Company leases a significant portion of its worldwide facilities under
non-cancelable operating leases. Future payments due under these non-cancelable
operating leases are $20.8 million, $18.4 million, $14.7 million, $13.4 million
and $11.6 million for the years ending December 31, 2002, 2003, 2004, 2005 and
2006, respectively. Thereafter, payments due total $76.6 million.
During 2001, the Company purchased Sequoia for approximately $182.6 million
in cash. In order to improve the overall credit quality and rebalance the short
and long-term maturity of its investment portfolio subsequent to the cash
expenditure, the Company sold corporate debt securities that were previously
designated as held-to-maturity and purchased higher credit quality corporate
debt securities with interest rates that reset quarterly. Additionally, during
2001, the Company terminated a forward bond purchase agreement previously
designated as a hedge of forecasted purchases of corporate security investments.
The sale of securities and the termination of the forward bond purchase
agreement resulted in a realized gain of approximately $8.0 million, which is
included in other expense, net on the accompanying consolidated statements of
income.
In March 1999, the Company sold $850 million principal amount at maturity
of its zero coupon convertible subordinated debentures (the "Debentures") due in
March 2019, in a private placement. The Debentures were priced with a yield to
maturity of 5.25% and resulted in net proceeds to the Company of approximately
$291.9 million, net of original discount and net of debt issuance costs of $9.6
million. Except under limited circumstances, no interest will be paid prior to
maturity. The Debentures are convertible at the option of the security holder at
any time on or before the maturity date at a conversion rate of 14.0612 shares
of the Company's Common Stock for each $1,000 principal amount at maturity of
the Debentures, subject to adjustment in certain events. The Company may redeem
the Debentures on or after March 22, 2004, and holders may require the Company
to repurchase the Debentures, on fixed dates and at set redemption prices (equal
to the issue price plus accrued original discount), beginning on March 22, 2004.
The Company's investment program considered the possible redemption of the
Debentures in 2004, and it is the current intention of the Company to maintain
sufficient liquidity in the event that redemption is required, or the Debentures
are otherwise repurchased at the Company's option.
In December 2000, the Company invested $158.1 million in a trust ("Trust")
managed by an investment advisor. The Company's investment comprises all of the
Trust's assets. The Trust assets primarily consist of AAA-rated zero-coupon
corporate securities that mature on March 22, 2004. The Trust entered into a
credit risk swap agreement with the investment advisor, which effectively
increased the yield on the Trust assets and for which value the Trust assumed
the credit risk of ten investment-grade companies. The effective yield of the
Trust, including the credit risk swap agreement, is 6.72% and the principal
balance will accrete to $195 million in March 2004. In addition, in November
2001, the Company entered into an interest rate swap agreement with a notional
amount of approximately $175 million which has the effect of converting a like
amount of floating rate notes in the Company's investment portfolio to a
synthetic zero coupon investment due in March 2004 with a maturity value of
approximately $190 million. The Company believes that the combined proceeds of
these investment transactions will be sufficient to substantially fund the
redemption of the Debentures in 2004, if required.
In October 2000, the Board of Directors approved a program authorizing the
Company to repurchase up to $25 million of the Debentures in open market
purchases. As of December 31, 2001, 4,500 units of the Company's Debentures
representing $1.8 million in principal amount at maturity, had been repurchased
under
23
this program for $2.1 million. The Board of Directors' limited authorization to
repurchase the Debentures allows the Company to repurchase Debentures when
market conditions are favorable.
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). In January 2002, the Board of Directors authorized an additional $200
million of repurchase authority under the program, bringing the aggregate amount
authorized for repurchase to $600 million. The objective of the Company's stock
repurchase program is to minimize the dilutive effect of its stock option
programs.
Pursuant to the Company's stock repurchase program, the Company is
authorized to make open market purchases. Purchases will be made from time to
time in the open market and paid out of general corporate funds. During 2001 and
2000, the Company purchased 3,135,500 and 2,750,000 shares, respectively, of
outstanding Common Stock on the open market for approximately $90.7 million and
$57.9 million, respectively. These shares have been recorded as treasury stock.
Additionally, pursuant to the stock repurchase program, the Company entered
into two agreements, with a single counterparty in private transactions to
purchase approximately 7.3 million shares of the Company's Common Stock at
various times through December 2003. Pursuant to the terms of the agreements,
$100 million was paid to the counterparty in 2000 and $50 million was paid in
2001. The ultimate number of shares repurchased will depend on market
conditions. During 2001 and 2000, the Company repurchased 2,307,450 shares and
1,067,108 shares, respectively, under this agreement at a total cost of $50.3
million and $18.2 million, respectively. The shares have been recorded as
treasury stock.
In connection with the Company's stock repurchase program, in October 2000,
the Board of Directors approved a program authorizing the Company to sell put
warrants that entitle the holder of each warrant to sell to the Company,
generally by physical delivery, one share of the Company's Common Stock at a
specified price. During 2001, the Company sold 3,190,000 put warrants at an
average strike price of $28.95 and received premium proceeds of $12.0 million.
During 2001, the Company paid $69.5 million for the purchase of 2,190,000 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 December 31, 2001,
1,300,000 put warrants were outstanding, and expired or will expire on various
dates between January and March 2002, with exercise prices ranging from $20.75
to $26.42. As of December 31, 2001, the Company has a total potential repurchase
obligation of approximately $30.8 million associated with the outstanding put
warrants, of which $16.6 million is classified as a put warrant obligation on
the consolidated balance sheet. The remaining $14.2 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 consolidated balance sheet. The outstanding
put warrants classified as a put warrant obligation on the consolidated balance
sheet will be reclassified to stockholders' equity when the warrant is exercised
or when it expires. Under the terms of the put warrant agreements, the Company
must maintain certain levels of cash and investments balances. As of December
31, 2001, the Company had approximately $246.7 million of cash and investments
in excess of those required levels.
During 2001 and 2000, the Company expended an aggregate of $198.2 million
and $153.0 million, net of put warrant premiums received, respectively, under
all stock repurchase transactions.
On April 30, 2001, the Company completed the acquisition of Sequoia, a
provider of XML-pure portal software, for approximately $182.6 million in cash,
including approximately $2.7 million in transaction costs, all of which were
paid during 2001. The acquisition was accounted for as a purchase.
In February 2000, the Company acquired all of the operating assets of
Innovex for approximately $47.8 million. At the date of acquisition, the Company
paid approximately $28.9 million in consideration and closing costs. Pursuant to
the acquisition agreement, the remaining purchase consideration, plus interest,
was contingently payable based on future events. During 2001, these
contingencies were met, resulting in approximately $16.2 million of additional
purchase price and $2.9 million in compensation to the former
24
owners. Pursuant to the acquisition agreement, payment of the contingent amounts
and associated interest were made in August 2001 and February 2002 for $10.5
million and $10.7 million, respectively. There are no remaining contingent
obligations.
During 2001 and 2000, a significant portion of the Company's cash inflows
were generated by operations. Although 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 2002, there can
be no assurance that future operating results will not vary if the Company
experiences a decrease in customer demand or acceptance of future product
offerings. The Company may from time to time seek to raise additional funds
through public or private offerings of debt or equity securities. There can be
no guarantee that such financings will be available when needed or desired or
that, if available, such financings will be at terms favorable to the Company or
its stockholders. The Company continues to search for suitable acquisition
candidates and may 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.
From time to time, information provided by the Company or statements made by its
employees may contain "forward-looking" information that involves risks and
uncertainties. In particular, statements contained in this Form 10-K, and in the
documents incorporated by reference into this Form 10-K, that are not historical
facts, including, but not limited to statements concerning new prospects, goals,
products, product pricing, hiring and marketing plans, license revenues,
development of the MetaFrame enhancements and the contribution of MetaFrame to
license revenues, the Development Agreement, growth of international revenues,
investments in foreign operations and markets, reinvestment of foreign earnings,
gross margins, goodwill, intangible assets, impairment charges, amortization,
in-process research and development, obsolescence of acquired technologies,
anticipated operating and capital expenditure requirements, upgrading of
Company's systems, acquisitions, debt redemption obligations, stock repurchases,
and potential debt or equity financings constitute forward-looking statements
and are made under the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These statements are neither promises nor
guarantees. The Company's actual results of operations and financial condition
have varied and may in the future vary significantly from those stated in any
forward-looking statements. The following factors, among others, could cause
actual results to differ materially from those contained in forward-looking
statements made in this Form 10-K, in the documents incorporated by reference
into this Form 10-K or presented elsewhere by management from time to time. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
Reliance Upon Strategic Relationship with Microsoft
Microsoft is the leading provider of desktop operating systems. The Company
depends upon the license of key technology from Microsoft, including certain
source and object code licenses and technical support. The Company also depends
upon its strategic alliance agreement with Microsoft pursuant to which the
Company and Microsoft have agreed to cooperate to develop advanced operating
systems and promote Windows application program interfaces. The Company's
relationship with Microsoft is subject to the following risks and uncertainties,
which individually, or in the aggregate, could cause a material adverse effect
in the Company's business, results of operations and financial condition:
- 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 market or endorse
other
25
methods to provide multi-user Windows access to non-Windows client
devices, including Microsoft's Remote Desktop Protocol ("RDP").
- 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 Server Operating Systems to
render them inoperable with the Company's MetaFrame product offerings.
Further, upon termination of the Development Agreement, Microsoft may
help third parties compete with the Company's MetaFrame products.
Finally, future product offerings by Microsoft may not 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 on the Company's
business, results of operations and financial condition.
- Termination of the Development Agreement Revenues. Upon the expiration
of the Company's Development Agreement with Microsoft, the Company will
no longer recognize any royalty revenue from the Development Agreement.
There can be no assurances that the Company's agreements with Microsoft
will be extended or renewed by Microsoft upon their respective expirations or
that, if renewed or extended, such agreements will be on terms favorable to the
Company or its stockholders.
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, the spending levels and growth of
the Company's current and prospective customers 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. In addition, the impact of slower IT spending in the future, if any,
could impact the Company's 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 an adverse effect on the Company's results of operations and financial
condition.
New Products and Technological Change
The markets for the Company's products are relatively new and are
characterized by:
- rapid technological change;
- evolving industry standards;
- changes in end-customer 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-customer
requirements. As is common in the computer software industry, the Company may
experience
26
delays in the introduction of new products. Moreover, the Company may experience
delays in market acceptance of any new products or new releases of its current
products. 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. For example, there can be no guarantee
that the Company's development stage, channel-ready portal software product,
NFuse Elite, will be introduced when anticipated or desired by the Company, or
that upon introduction, NFuse Elite will be accepted by the Company's channel
and strategic partners, customers or prospective customers. There can be no
assurance that the Company will be able to respond effectively to technological
changes or new product announcements by others. If the Company experiences
material delays or sales shortfalls with respect to new products or new releases
of its current products, such delays and shortfalls could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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 and to fulfill the Company's
responsibilities under the terms of the Development Agreement. 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.
Charges in the Event of Impairment
In January 2002, the Company adopted SFAS No. 141, Business Combinations,
and No. 142, Goodwill and Other Intangible Assets. As a result, the Company no
longer amortizes goodwill and intangible assets deemed to have indefinite lives.
However, the Company will continue to have amortization related to certain
product and core technologies, trademarks, patents and other intangibles, and
the Company must evaluate its intangible assets, including goodwill, at least
annually for impairment. If the Company determines that any of its intangible
assets are impaired, the Company will be required to take a related charge to
earnings.
Furthermore, at January 1, 2002, the Company had unamortized identified
intangibles with estimable useful lives in the amount of $36.6 million, of which
$34.0 million consists of product and core technology purchased by the Company
in its acquisition of Sequoia. The Company currently intends to commercialize
such technology through its new access portal line of products that includes
NFuse Elite. If the Company's new access portal line of products is not accepted
by the Company's channel and strategic partners, customers or prospective
customers, the Company may determine that the value of such purchased technology
is impaired and may be required to take a related charge to earnings. Such a
charge to earnings could result in a material adverse effect on the Company's
results of operations and financial condition.
Competition
The markets in which the Company competes are intensely competitive.
Certain of its competitors and potential competitors, including Microsoft and
Novell, Inc., 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
27
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. Further, 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
current products and anticipated future product offerings. Existing or new
products that extend Internet software to provide database access or interactive
computing (including but not limited to, Microsoft products) can 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. Competitors in this market include Microsoft,
AOL Time Warner, ORACLE, Sun Microsystems and other makers of Web server
application and browser software. Finally, although the Company believes that
price has historically been a less significant competitive factor than product
performance, reliability and functionality, the Company believes that price
competition may become more significant in the future. The Company may not be
able to maintain its historic prices and margins, and any inability to do so
could adversely affect its business, results of operations and financial
condition.
Dependence 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.
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, trade name, 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
28
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.
Need to Attract and Penetrate Large Enterprise Customers
The Company intends to expand its ability to reach and penetrate large
enterprise customers by adding channel partners and expanding its offering of
consulting services. The Company's inability to attract and penetrate large
enterprise customers could have a material adverse effect on its business,
operating results and financial condition. Large enterprise customers usually
request special pricing and generally have longer sales cycles, which could
negatively impact the Company's revenues. Additionally, as the Company attempts
to attract and penetrate 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.
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.
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.
Further, the Company may maintain individually significant accounts
receivable balances with certain distributors. For example, one such distributor
accounted for approximately 14% of accounts receivable as of December 31, 2001.
In 2000, the same distributor accounted for 17% of accounts receivable. If the
financial condition of such distributors deteriorates and such distributors
significantly delay or default on their payment obligations, such delays or
defaults could result in a material adverse effect on the Company's business,
results of operations and financial condition.
Dependence Upon Broad-Based Acceptance of ICA Protocol
The Company believes that its success in the markets in which it competes
will depend upon its ability to make ICA protocol a widely accepted standard for
supporting Windows and UNIX applications. If another standard emerges or if the
Company otherwise fails to achieve wide acceptance of the ICA protocol as a
standard for supporting Windows or UNIX applications, the Company's business,
operating results and financial condition could be materially adversely
affected. Microsoft includes as a component of Windows Server Operating Systems
its Remote Desktop Protocol (RDP), which has certain of the capabilities of the
Company's ICA protocol, and may offer customers a competitive solution. The
Company believes that its success is dependent on its ability to enhance and
differentiate its ICA protocol, and foster broad acceptance of the ICA protocol
based on its performance, scalability, reliability and enhanced features. In
addition, the Company's ability to win broad market acceptance of its ICA
protocol will depend upon the degree of success achieved by its strategic
partners in marketing their respective platforms, product pricing and customers'
assessment of its technical, managerial service and support expertise. If
another standard emerges or if the Company fails to achieve wide acceptance of
the ICA protocol as a standard for supporting Windows and UNIX applications, the
Company's business, operating results and financial condition could be
materially adversely affected.
29
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.
Maintenance of Growth Rate
The Company's revenue growth rate in 2002 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. There can
be no assurance that the markets in which the Company operates, including the
application server market and the Internet products 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, the Company's income from operations and cash flows from
operating and investing activities may decrease as a percentage of revenues in
2002.
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. Moreover, 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 in-process research and development when acquired. Ongoing
operations and financial results for acquired assets and licensed technology,
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.
Additionally, 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. In April
2001, the Company acquired Sequoia, of which $2.6 million of the purchase price
was allocated to in-process research and development. The Company's efforts with
respect to the acquired technologies currently consist of integration work and
any associated design, development or rework that may be required to support the
integration of the technology into the Company's anticipated future product
offerings. Failure to complete the development of the Company's anticipated
future product offerings in their entirety, or in a timely manner, could have a
material adverse impact on the Company's financial condition and results of
operations. 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 such projects or
that the Company will be successful in its efforts to integrate and further
develop these technologies.
Role of Mergers and Acquisitions
Mergers and 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;
- potential difficulties in completing projects associated with purchased
in process research and development;
30
- 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 are inherently risky,
and no assurance can be given that the Company's previous, including the
Company's acquisition of Sequoia, 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.
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 with the Company 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 may affect the Company's ability to successfully attract,
assimilate or retain sufficiently qualified personnel.
Product Returns and Price Reductions
The Company provides certain of its distributors with product return rights
for stock balancing or limited product evaluation. The Company also provides
certain of its distributors with price protection rights. To cover these product
returns and price protections, the Company has established reserves based on its
evaluation of historical trends and current circumstances. These reserves may
not be sufficient to cover product returns and price protections in the future,
in which case the Company's operating results may be adversely affected.
International Operations
The Company's continued growth and profitability will require further
expansion of its international operations. To successfully expand international
sales, the Company must establish additional foreign
31
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
in 2000 following a decline in the Company's stock price. Such 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.
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.
32
The Company plans to increase its professional staff during 2002 as it
expands sales, marketing and support and product development efforts, as well as
associated administrative systems, to support planned growth and business
objectives. 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 2002. 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 2002 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 2002.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements. The analysis methods used by the Company to assess and mitigate risk
discussed below should not be considered projections of future events, gains or
losses.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates which may adversely affect
its results of operations or financial condition. To mitigate foreign currency
and interest rate risk, the Company utilizes derivative financial instruments.
The Company does not use derivative financial instruments for speculative or
trading purposes. The counter-parties to the Company's derivative instruments
are major financial institutions. All of the potential changes noted below are
based on sensitivity analyses performed on the Company's financial position at
December 31, 2001. Actual results may differ materially.
Discussions of the Company's accounting policies for derivatives and
hedging activities are included in Notes 2 and 13 of "Notes to Consolidated
Financial Statements," which appears in Item 8 of this report.
Exposure to Exchange Rates
A substantial majority of the Company's overseas expense and capital
purchasing activities are transacted in local currencies, primarily British
pounds sterling, Euros, Swiss francs, and Australian dollars. To protect against
increases in expenses and the volatility of resulting future cash flows caused
by changes in currency exchange rates, the Company has established a hedging
program. The Company uses foreign currency forward contracts to hedge certain
forecasted foreign currency expenditures. The Company's hedging program reduces,
but does not entirely eliminate, the impact of currency exchange rate movements.
At December 31, 2001 and 2000, the Company had in place foreign currency
forward contracts with a notional amount of $47.9 million and $53.0 million,
respectively. The fair value of these contracts at December 31, 2001 and 2000
were $0.2 million and $1.1 million, respectively. Based on a hypothetical 10%
appreciation of the U.S. dollar from December 31, 2001 market rates the fair
value of the Company's foreign currency forward contracts would decrease by $4.8
million. Conversely, a hypothetical 10% depreciation of the U.S. dollar from
December 31, 2001 market rates would increase the fair value of the Company's
foreign currency forward contracts by $4.8 million. This calculation assumes
that each exchange rate would change in the same direction relative to the U.S.
dollar. In addition to the direct effects of changes in exchange rates
quantified above, changes in exchange rates may also change the dollar value of
sales and affect the volume of sales as competitors products become more or less
attractive. The Company's sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in levels
of local currency prices or sales reported in U.S. dollars. The Company does not
anticipate any material adverse impact to its consolidated financial position,
results of operations, or cash flows as a result of these forward foreign
exchange contracts.
Exposure to Interest Rates
In order to better manage its exposure to interest rate risk, in November
2001 the Company entered into an interest rate swap agreement. The swap
agreement, with a notional amount of $174.6 million converts the floating rate
return on the Company's non-trading investment portfolio, to a fixed rate. The
fair value of the interest rate swap at December 31, 2001 was $0.1 million.
Based upon a hypothetical 1% increase in the market interest rate as of December
31, 2001, the fair value of this asset would have decreased by approximately
$3.6 million. The Company also maintains a non-trading investment portfolio of
investment grade, highly liquid, debt securities, which limits the amount of
credit exposure to any one issue, issuer, or type of instrument. The securities
in the Company's investment portfolio are not leveraged. The securities
classified as available-for-sale are subject to interest rate risk. The modeling
technique used measures the change in fair values arising from an immediate
hypothetical shift in market interest rates and assumes that ending fair values
include principal plus accrued interest, dividends and reinvestment income. If
market interest rates
34
were to increase by 100 basis points from December 31, 2001 and 2000 levels, the
fair value of the portfolio would decline by approximately $1.1 million and
$10.4 million, respectively.
These amounts are determined by considering the impact of the hypothetical
interest rates on the Company's interest rate swap agreements and non-trading
investment portfolio. This analysis does not consider the effect of credit risk
as a result of the reduced level of overall economic activity that could exist
in such an environment.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The Company's Consolidated Financial Statements and related financial
statement schedule, together with the report of independent certified public
accountants, appear at pages F-1 through F-32, respectively, of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting or financial disclosure matters during the Company's two most recent
fiscal years.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, which proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal year
ended December 31, 2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, which proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal year
ended December 31, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, which proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal year
ended December 31, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the Company's definitive proxy statement pursuant to Regulation
14A, which proxy statement will be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal year
ended December 31, 2001.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS.
For a list of the consolidated financial information included herein, see
Index on Page F-1.
2. FINANCIAL STATEMENT SCHEDULES.
The following consolidated financial statement schedule is included in Item
8:
Valuation and Qualifying Accounts
3. LIST OF EXHIBITS.
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1(1) Agreement and Undertaking by and among the Non-Executive
Directors of APM Limited, the Executive Directors of APM
Limited, and Citrix Systems, Inc.
2.2(1) Recommended Offers by Citrix Systems, Inc. for APM Limited
2.3(2) Asset Purchase Agreement dated February 15, 2000 by and
among the Company, Innovex Group, Inc. and certain
stockholders of Innovex
2.4(10) Agreement and Plan of Merger, dated as of March 20, 2001, by
and among Citrix Systems, Inc., Soundgarden Acquisition
Corp. and Sequoia Software Corporation
3.1(3) Amended and Restated Certificate of Incorporation of the
Company
3.2(3) Amended and Restated By-laws of the Company
3.3(4) Certificate of Amendment of Amended and Restated Certificate
of Incorporation
4.1(3) Specimen certificate representing the Common Stock
4.2(5) Indenture by and between the Company and State Street Bank
and Trust Company as Trustee dated as of March 22, 1999,
including the form of Debenture.
4.3(5) Form of Debenture (included in Exhibit 4.2).
4.3(5) Registration Rights Agreement by and between the Company and
Credit Suisse First Boston Corporation dated as of March 22,
1999.
10.1(3)* 1989 Stock Option Plan
10.2* Third Amended and Restated 1995 Stock Plan
10.3* Second Amended and Restated 1995 Non-Employee Director Stock
Option Plan
10.4* Second Amended and Restated 1995 Employee Stock Purchase
Plan
10.5(6)* Amended and Restated 2000 Director and Officer Stock Option
and Incentive Plan
10.6(3) Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.7(3) Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.8(3) License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15, 1990
10.9(3) Amendment No. 1 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated May 6, 1991
10.10(3) Amendment No. 2 to License Agreement between the Company and
Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x,
dated October 1, 1992
10.11(3) Amendment No. 3 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated January 1, 1994
10.12(3) Amendment No. 4 to the License Agreement between the Company
and Microsoft dated August 15, 1990, dated January 31, 1995
10.13(3) Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.14(3) Form of Indemnification Agreement
10.15(7) License, Development and Marketing Agreement dated July 9,
1996 between the Company and Microsoft Corporation
</Table>
37
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.16(8) License, Development and Marketing Agreement dated May 9,
1997 between the Company and Microsoft Corporation
10.17(9) Amendment No. 1 to License, Development and Marketing
Agreement dated May 9, 1997 between The Company and
Microsoft Corporation
10.18 Employment Agreement dated as of August 1, 2001 by and
between the Company and Roger W. Roberts
10.19 Amendment to Employment Agreement with Roger W. Roberts as
of January 17, 2002
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (Included in signature page)
</Table>
- ---------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
(1) Incorporated herein by reference to the exhibits of the Company's Current
Report on Form 8-K dated as of June 30, 1998.
(2) Incorporated herein by reference to Exhibit 2.3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
(3) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(4) Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.
(5) Incorporated herein by reference to exhibits of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(6) Incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.
(7) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(8) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
(9) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(10) Incorporated by reference herein to Exhibit 2 of the Company's Schedule 13D
Report dated as of March 28, 2001.
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by the Company during the fourth
quarter of 2001.
(c) EXHIBITS.
The Company hereby files as part of this Form 10-K the exhibits listed in
Item 14(a)(3) above. Exhibits which are incorporated herein by reference can be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C., and at the Commission's regional offices at CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, IL 60661-2511 233 Broadway, 13th
floor, New York, NY 10279. Copies of such material can also be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 29549, at prescribed rates.
(d) FINANCIAL STATEMENT SCHEDULE.
The Company hereby files as part of this Form 10-K the consolidated
financial statement schedule listed in Item 14(a)(2) above, which is attached
hereto.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Fort Lauderdale,
Florida on the 27th day of March, 2002.
CITRIX SYSTEMS, INC.
By: /s/ MARK B. TEMPLETON
------------------------------------
Mark B. Templeton
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Citrix Systems, Inc., hereby
severally constitute and appoint Mark B. Templeton and John P. Cunningham, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly, to sign for us in our names in the capacities indicated
below, all amendments to this report, and generally to do all things in our
names and on our behalf in such capacities to enable Citrix Systems, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated below on the 27th day of March, 2002.
<Table>
<Caption>
SIGNATURE TITLE(S)
--------- --------
/s/ ROGER W. ROBERTS Chairman of the Board of Directors
------------------------------------------------
Roger W. Roberts
/s/ MARK B. TEMPLETON President, Chief Executive Officer and Director
------------------------------------------------ (Principal Executive Officer)
Mark B. Templeton
/s/ JOHN P. CUNNINGHAM Chief Financial Officer and Senior Vice President
------------------------------------------------ of Finance and Operations (Principal Financial
John P. Cunningham Officer)
/s/ DAVID URBANI Vice President, Finance (Principal Accounting
------------------------------------------------ Officer)
David Urbani
/s/ KEVIN R. COMPTON Director
------------------------------------------------
Kevin R. Compton
/s/ STEPHEN M. DOW Director
------------------------------------------------
Stephen M. Dow
/s/ ROBERT N. GOLDMAN Director
------------------------------------------------
Robert N. Goldman
</Table>
39
<Table>
<Caption>
SIGNATURE TITLE(S)
--------- --------
/s/ TYRONE F. PIKE Director
------------------------------------------------
Tyrone F. Pike
/s/ JOHN W. WHITE Director
------------------------------------------------
John W. White
/s/ MARVIN W. ADAMS Director
------------------------------------------------
Marvin W. Adams
/s/ KENNETH E. LONCHAR Director
------------------------------------------------
Kenneth E. Lonchar
</Table>
40
CITRIX SYSTEMS, INC.
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Citrix Systems, Inc. are
included in Item 8:
<Table>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets -- December 31, 2001 and 2000... F-3
Consolidated Statements of Income -- Years ended December
31, 2001, 2000 and 1999................................... F-4
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 2001, 2000 and 1999.................... F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 2001, 2000 and 1999.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
The following consolidated financial statement schedule
of Citrix Systems, Inc. is included in Item 14(a):
Schedule II Valuation and Qualifying Accounts............... F-32
</Table>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Citrix Systems, Inc.
We have audited the accompanying consolidated balance sheets of Citrix
Systems, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Citrix Systems,
Inc. at December 31, 2001 and 2000 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
West Palm Beach, Florida
January 17, 2002, except for the
second paragraph of Note 17, as
to which the date is February 22, 2002
F-2
CITRIX SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS, EXCEPT
PAR VALUE)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 139,693 $ 375,025
Short-term investments.................................... 77,078 91,612
Accounts receivable, net of allowances of $12,069 and
$10,601 at 2001 and 2000, respectively................. 65,032 37,299
Inventories............................................... 3,568 4,622
Prepaid taxes............................................. 6,069 26,715
Other prepaids and current assets......................... 21,444 11,493
Current portion of deferred tax assets.................... 33,171 39,965
---------- ----------
Total current assets................................... 346,055 586,731
Long-term investments....................................... 529,894 382,524
Property and equipment, net................................. 90,110 55,559
Intangible assets, net...................................... 188,977 52,339
Long-term portion of deferred tax assets, net............... 25,071 18,977
Other assets, net........................................... 28,123 16,443
---------- ----------
$1,208,230 $1,112,573
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 111,928 $ 78,739
Current portion of deferred revenues...................... 80,573 80,648
---------- ----------
Total current liabilities.............................. 192,501 159,387
Long-term portion of deferred revenues...................... 5,631 14,082
Convertible subordinated debentures......................... 346,214 330,497
Commitments and contingencies
Put warrants................................................ 16,554 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; 196,627 and 187,872 issued at 2001 and
2000, respectively..................................... 197 188
Additional paid-in capital................................ 507,857 351,053
Retained earnings......................................... 425,877 320,617
Accumulated other comprehensive loss...................... (84) (2,943)
---------- ----------
933,847 668,915
Less -- common stock in treasury, at cost (11,450 and
3,817 shares in 2001 and 2000, respectively)........... (286,517) (76,040)
---------- ----------
Total stockholders' equity............................. 647,330 592,875
---------- ----------
$1,208,230 $1,112,573
========== ==========
</Table>
See accompanying notes.
F-3
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Revenues:
Revenues.................................................. $551,799 $430,548 $363,455
Other revenues............................................ 39,830 39,898 39,830
-------- -------- --------
Total net revenues..................................... 591,629 470,446 403,285
-------- -------- --------
Cost of revenues:
Cost of revenues (excluding amortization, presented
separately below)...................................... 29,848 28,483 13,745
Cost of other revenues.................................... -- 571 834
-------- -------- --------
Total cost of revenues................................. 29,848 29,054 14,579
-------- -------- --------
Gross margin................................................ 561,781 441,392 388,706
Operating expenses:
Research and development.................................. 67,699 50,622 37,363
Sales, marketing and support.............................. 224,108 180,384 121,302
General and administrative................................ 85,212 58,685 37,757
Amortization of intangible assets......................... 48,831 30,395 18,480
In-process research and development....................... 2,580 -- 2,300
Write-down of technology.................................. -- 9,081 --
-------- -------- --------
Total operating expenses............................... 428,430 329,167 217,202
-------- -------- --------
Income from operations...................................... 133,351 112,225 171,504
Interest income............................................. 42,006 41,313 25,302
Interest expense............................................ (20,553) (17,099) (12,532)
Other expense, net.......................................... (2,253) (1,422) (1,549)
-------- -------- --------
Income before income taxes.................................. 152,551 135,017 182,725
Income taxes................................................ 47,291 40,505 65,781
-------- -------- --------
Net income.................................................. $105,260 $ 94,512 $116,944
======== ======== ========
Earnings per common share:
Basic earnings per share.................................. $ 0.57 $ 0.51 $ 0.66
======== ======== ========
Weighted average shares outstanding....................... 185,460 184,804 176,260
======== ======== ========
Earnings per common share -- assuming dilution:
Diluted earnings per share................................ $ 0.54 $ 0.47 $ 0.61
======== ======== ========
Weighted average shares outstanding....................... 194,498 199,731 192,566
======== ======== ========
</Table>
See accompanying notes.
F-4
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED COMMON
COMMON STOCK ADDITIONAL OTHER STOCK IN TOTAL
---------------- PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS AT COST EQUITY
------- ------ ---------- -------- ------------- --------- --------------
(IN THOUSANDS)
Balance at December 31, 1998........ 171,846 $172 $188,121 $109,161 $ -- $ -- $297,454
Exercise of stock options........... 9,220 9 69,753 -- -- -- 69,762
Common stock issued under employee
stock purchase plan............... 27 -- 604 -- -- -- 604
Tax benefit from employer stock
plans............................. -- -- 50,843 -- -- -- 50,843
Unrealized loss on
available-for-sale securities, net
of related taxes.................. -- -- -- -- (2,537) -- (2,537)
Net income.......................... -- -- -- 116,944 -- -- 116,944
------- ---- -------- -------- ------- --------- --------
Balance at December 31, 1999........ 181,093 181 309,321 226,105 (2,537) -- 533,070
Exercise of stock options........... 6,698 7 69,146 -- -- -- 69,153
Common stock issued under employee
stock purchase plan............... 78 -- 1,262 -- -- -- 1,262
Common stock issued upon debt
conversion........................ 3 -- 73 -- -- -- 73
Tax benefit from employer stock
plans............................. -- -- 63,923 -- -- -- 63,923
Proceeds from sale of put
warrants.......................... -- -- 4,870 -- -- -- 4,870
Put warrant obligations............. -- -- (15,732) -- -- -- (15,732)
Repurchase of common stock.......... -- -- -- -- -- (76,040) (76,040)
Cash paid in advance for share
repurchase contract, net of shares
received.......................... -- -- (81,810) -- -- -- (81,810)
Unrealized loss on
available-for-sale securities, net
of related taxes.................. -- -- -- -- (406) -- (406)
Net income.......................... -- -- -- 94,512 -- -- 94,512
------- ---- -------- -------- ------- --------- --------
Balance at December 31, 2000........ 187,872 188 351,053 320,617 (2,943) (76,040) 592,875
Exercise of stock options........... 8,541 9 113,331 -- -- -- 113,340
Common stock issued under employee
stock purchase plan............... 214 -- 4,008 -- -- -- 4,008
Common stock issued upon debt
conversion........................ -- -- 2 -- -- -- 2
Tax benefit from employer stock
plans............................. -- -- 28,011 -- -- -- 28,011
Proceeds from sale of put
warrants.......................... -- -- 12,019 -- -- -- 12,019
Put warrant obligations, net of
expired put warrants.............. -- -- (822) -- -- -- (822)
Repurchase of common stock.......... -- -- -- -- -- (210,477) (210,477)
Cash paid in advance for share
repurchase contract, net of shares
received.......................... -- -- 255 -- -- -- 255
Unrealized gain on forward contracts
and interest rate swap, net of
reclassification adjustments and
net of related taxes.............. -- -- -- -- 84 -- 84
Unrealized gain on
available-for-sale securities, net
of related taxes.................. -- -- -- -- 2,775 -- 2,775
Net income.......................... -- -- -- 105,260 -- -- 105,260
------- ---- -------- -------- ------- --------- --------
Balance at December 31, 2001........ 196,627 $197 $507,857 $425,877 $ (84) $(286,517) $647,330
======= ==== ======== ======== ======= ========= ========
</Table>
See accompanying notes.
F-5
CITRIX SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $ 105,260 $ 94,512 $ 116,944
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangible assets......................... 48,831 30,395 18,480
Depreciation and amortization of property and equipment... 30,757 19,853 9,083
Other-than-temporary decline in fair value of
investments............................................. 7,689 -- --
In-process research and development....................... 2,580 -- 2,300
Write-down of technology.................................. -- 9,081 --
Provision for doubtful accounts receivable................ 2,784 377 584
Provision for product returns............................. 22,533 27,883 20,879
Provision for inventory obsolescence...................... 2,292 6,932 1,982
Tax benefit related to the exercise of non-statutory stock
options and disqualified dispositions of incentive stock
options................................................. 28,011 63,923 50,843
Accretion of original issue discount and amortization of
financing cost.......................................... 17,853 16,911 12,592
Other non-cash items...................................... 607 -- --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable..................................... (50,665) (8,625) (43,993)
Inventories............................................. (1,238) (3,762) (5,641)
Prepaid expenses and other current assets............... 12,648 4,614 (32,762)
Other assets............................................ (12,034) (2) (7,277)
Deferred tax assets..................................... 2,471 (2,200) (14,674)
Accounts payable and accrued expenses................... 5,523 18,799 25,062
Deferred revenues....................................... (8,630) (26,987) 22,970
Income taxes payable.................................... 12,571 (8,467) 6,649
--------- --------- ---------
Net cash provided by operating activities................... 229,843 243,237 184,021
INVESTING ACTIVITIES
Purchases of investments.................................... (553,490) (569,795) (547,510)
Proceeds from sales and maturities of investments........... 415,633 642,986 151,284
Purchases of property and equipment......................... (60,557) (43,532) (26,313)
Cash paid for acquisitions, net of cash acquired............ (183,754) (30,102) (32,673)
Cash paid for licensing agreement........................... -- (1,333) (2,333)
--------- --------- ---------
Net cash used in investing activities....................... (382,168) (1,776) (457,545)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock.................. 117,350 70,488 70,366
Net proceeds from issuance of convertible subordinated
debentures................................................ -- -- 291,920
Cash paid to repurchase convertible subordinated
debentures................................................ (2,141) -- --
Cash paid under stock repurchase programs................... (210,222) (157,850) --
Proceeds from sale of put warrants.......................... 12,019 4,870 --
Other....................................................... (13) (60) (192)
--------- --------- ---------
Net cash (used in) provided by financing activities......... (83,007) (82,552) 362,094
--------- --------- ---------
Change in cash and cash equivalents......................... (235,332) 158,909 88,570
Cash and cash equivalents at beginning of year.............. 375,025 216,116 127,546
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 139,693 $ 375,025 $ 216,116
========= ========= =========
</Table>
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of approximately $7,991, $9,277 and, $40,894
in 2001, 2000 and 1999, respectively. Additionally, the Company paid interest of
approximately $1,221, $23, and $7 during the years ended December 31, 2001, 2000
and 1999, respectively.
See accompanying notes.
F-6
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Citrix Systems, Inc. ("Citrix" or the "Company"), a Delaware corporation
founded on April 17, 1989, is a leading supplier of corporate application and
information infrastructure software and services that enable the effective and
efficient enterprise-wide deployment and management of applications and
information, including those designed for Microsoft Windows(R) operating
systems, UNIX(R) operating systems and for Web-based information systems. The
Company's MetaFrame(R) products permit organizations to provide virtual access
to Windows-based and UNIX applications without regard to location, network
connection, or type of client hardware platforms. The Company also provides
portal software and services that are designed to provide personalized, secure
Web-based access to a wide variety of business information from any location,
device or connection. The Company markets its products through multiple direct
and indirect channels such as distributors, value-added resellers and original
equipment manufacturers worldwide. The Company also promotes its products
through strategic alliance agreements with a wide variety of industry partners,
including Microsoft Corporation ("Microsoft").
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements of the Company include the accounts
of its wholly-owned subsidiaries, primarily in Europe and Asia-Pacific. All
significant transactions and balances between the Company and its subsidiaries
have been eliminated in consolidation.
Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, cash and
cash equivalents include marketable securities which are primarily commercial
paper, money market funds, municipal securities, government securities and
corporate securities with initial or remaining contractual maturities when
purchased of three months or less. The Company minimizes its credit risk
associated with cash and cash equivalents by investing in high quality,
investment grade instruments and periodically evaluating the credit quality of
its primary financial institutions.
Investments
Short-term investments at December 31, 2001 primarily consist of municipal
securities, corporate securities, and commercial paper. Long-term investments at
December 31, 2001 primarily consist of commercial paper, municipal securities
and corporate securities. Investments classified as available-for-sale are
stated at fair value with unrealized gains and losses, net of taxes, reported in
other comprehensive loss. Investments classified as held-to-maturity are stated
at amortized cost. The Company does not recognize changes in the fair value of
these investments in income currently unless a decline in value is considered
other-than-temporary. From time to time, the Company makes equity investments
that are accounted for under the cost method due to the limited extent of the
Company's ownership interest and the lack of the Company's ability to exert
significant influence over the investees. As of December 31, 2001 and 2000, such
investments were recorded at the lower of cost or estimated net realizable
value. The Company periodically evaluates the carrying value of its investments
to determine if there has been any impairment of value that is other-than-
temporary. During 2001, the Company recorded $7.7 million of losses resulting
from other-than-temporary declines in fair value of certain of the Company's
equity investments. At December 31, 2001, the Company's remaining equity
investments were not material.
The Company minimizes its credit risk associated with investments by
investing primarily in high quality investment grade securities. The Company
maintains investments with various financial institutions. The Company's policy
is designed to limit exposure to any one institution depending on credit quality
and periodic
F-7
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
evaluations of the relative credit standing of those financial institutions are
considered in the Company's investment strategy.
Accounts Receivable
Substantially all of the Company's accounts receivable are due from
distributors and value-added resellers of computer software. Collateral is not
required. Credit losses and expected product returns are provided for in the
consolidated financial statements and have been within management's
expectations. If the financial condition of a significant distributor or
customer were to deteriorate, the Company's operating results could be adversely
affected. One distributor accounted for approximately 14% and 17% of accounts
receivable at December 31, 2001 and 2000, respectively. No other distributor or
customer accounted for more than 10% of accounts receivable.
Inventories
Inventories, consisting primarily of finished goods, are stated at the
lower of cost (determined by the first-in, first-out method) or market. When
necessary, a provision has been made to reduce obsolete or excess inventories to
market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which is
generally three years for computer equipment, software, office equipment and
furniture, the lesser of the lease term or five years for leasehold improvements
and seven years for the enterprise resource planning system. Assets under
capital leases are amortized over the shorter of the asset life or the remaining
lease term. Amortization of assets under capital leases is included in
depreciation expense. Accumulated amortization of equipment under capital leases
approximated $0.4 million at December 31, 2001 and 2000, respectively.
Property and equipment consist of the following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Computer equipment.......................................... $ 50,561 $ 37,834
Software.................................................... 38,028 21,836
Property, equipment and furniture........................... 30,833 10,937
Leasehold improvements...................................... 25,930 19,915
Land........................................................ 9,062 --
Equipment under capital leases.............................. 451 406
-------- --------
154,865 90,928
Less accumulated depreciation and amortization.............. (64,755) (35,369)
-------- --------
$ 90,110 $ 55,559
======== ========
</Table>
Intangible Assets
Goodwill and other intangible assets are amortized using the straight-line
method over periods ranging from two to five years.
F-8
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible assets consist of the following:
<Table>
<Caption>
DECEMBER 31,
--------------------
2001 2000
--------- --------
(IN THOUSANDS)
Goodwill.................................................... $ 192,713 $ 53,400
Core technology............................................. 65,706 37,650
Other intangibles........................................... 38,600 20,500
--------- --------
297,019 111,550
Less accumulated amortization............................... (108,042) (59,211)
--------- --------
$ 188,977 $ 52,339
========= ========
</Table>
Long-Lived Assets
The Company reviews long-lived assets and goodwill for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable. If this review indicates that such assets
will not be recoverable, as generally determined based on estimated undiscounted
cash flows over the remaining amortization period, the carrying amount of such
assets would be adjusted to fair value.
Revenue Recognition
The Company markets software products through indirect channels such as
distributors and value-added resellers. Product configurations consist of
traditional packaged products and enterprise and corporate licensing programs.
Packaged products are typically purchased by medium and small-sized businesses
with fewer locations and the actual software license is delivered with the
packaged product. Enterprise and corporate license arrangements consist of
multi-server environments typically found in large business enterprises that
want to deploy the Company's products on a department or enterprise-wide basis
and which may require differences in product features and functionality at
various customer locations. The end-customer license agreement with enterprise
customers is typically customized based on these factors. Once the Company
receives a purchase order and configuration parameters from the channel partner,
the licenses are electronically delivered to the customer and serves as keys to
activate the configuration ordered by the customer. Depending on the size of the
enterprise, software may be delivered by the indirect channel partner or
directly from the Company pursuant to the purchase order from the channel
partner.
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 at the outset of the
arrangement. In the case of non-cancelable product licensing arrangements under
which certain original equipment manufacturers ("OEMs") have software
reproduction rights, initial recognition of revenue also requires delivery and
customer acceptance of the product master or first copy. Subsequent recognition
of revenues is based upon reported royalties from the OEMs. Revenue from
packaged product sales to distributors and resellers is recorded when related
products are shipped. Revenues from enterprise and corporate licensing
arrangements are recognized when related products are shipped and the customer
has been electronically provided with licenses that include the activation keys
that allow the customer to take immediate possession of the software pursuant to
an agreement or 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
F-9
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of each of the deliverables determined based on vendor-specific objective
evidence ("VSOE"). The Company sells software and PCS separately, and VSOE is
determined by the price charged when each element is sold separately. Product
returns and sales allowances, including stock rotations, are estimated and
provided for at the time of sale. Non-recurring engineering fees are recognized
ratably as the work is performed. Revenues from training and consulting are
recognized when the services are performed. Service and PCS 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 to 24 months. Service revenues are included in net revenues on the
face of the consolidated statements of income.
The Company provides most of its distributors with product return rights
for stock balancing and price protection rights. Stock balancing rights permit
distributors to return products to the Company for credit within specified
limits and subject to ordering an equal amount of the Company's products. Price
protection rights require that the Company grant retroactive price adjustments
for inventories of the Company's products held by distributors if the Company
lowers its prices for such products. The Company provides for estimated returns
and rotation at the time of the sale. These estimates are based on the Company's
experience considering, among other things, historical return rates for both
specific products and customers. Allowances for estimated product returns
amounted to approximately $8.3 million and $9.2 million at December 31, 2001 and
2000, respectively. The Company has not and has no plans to reduce its prices
for inventory currently held by distributors or resellers; accordingly, there
were no reserves for price protection at December 31, 2001 and 2000.
As indicated above, the Company provides consulting services to certain
license customers. The services consist of network configuration and
optimization and are typically performed prior to the customers' purchase and
implementation of the Company's software products. Services are not essential to
the functionality of the Company's software and do not constitute modifications
to the Company's software. Revenue from services, support arrangements and
training programs and materials, which totaled $40.7 million, $30.4 million, and
$15.8 million for the years ended December 31, 2001, 2000 and 1999,
respectively, is recognized when the services are provided. Such items are
included in net revenues. The costs for providing consulting services are
included in cost of sales. The costs of providing training and services are
included in sales, marketing and support expenses.
In May 1997, the Company entered into a five year joint license,
development and marketing agreement with 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.
The Company received an additional $100 million in connection with the April
1998 amendment to the Development Agreement, which is being recognized ratably
over the remaining term.
The Company adopted Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements ("SAB 101") in October 2000. SAB 101 did not supersede
the software industry specific revenue recognition guidance, but provides
current interpretations of revenue recognition requirements. The adoption of SAB
101 did not have a significant effect on the Company's financial position or
results of operations.
Cost of Revenues
Cost of revenues consist 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. The Company is a party to licensing agreements with various
entities, which give the Company the right to use certain software object code
in its products or in the development of future products in exchange for the
payment of a fixed fee or certain amounts based upon the sales of the related
product. The
F-10
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
licensing agreements have terms ranging from one to five years, and generally
include renewal options. Royalties and other costs related to these agreements
are included in cost of revenues. All development costs incurred in connection
with the Development Agreement, if any, are expensed as incurred as cost of
other revenues. The Company's cost of revenues excludes amortization of acquired
core technology.
Foreign Currency
The functional currency of each of the Company's wholly-owned foreign
subsidiaries is the U.S. dollar. Assets and liabilities of the subsidiaries are
remeasured into U.S. dollars at year-end exchange rates, and revenues and
expenses are remeasured at average rates prevailing during the year. Translation
adjustments and foreign currency transaction losses of approximately $2.4
million, $0.1 million and, $0.7 million for the years ended December 31, 2001,
2000, and 1999, respectively, are included in other expense, net in the
accompanying consolidated statements of income.
Derivatives and Hedging Activities
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. This guidance
establishes accounting and reporting standards for derivative instruments,
hedging activities, and exposure definition. Pursuant to the new standard, the
Company records all derivatives as either assets or liabilities on the balance
sheet and measure those instruments at fair value. Derivatives not designated as
hedging instruments, if any, are 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 be 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 accumulated other comprehensive loss.
The Company utilizes 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
accumulated 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 floating
rate assets or liabilities 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.
Advertising Expense
The Company expenses advertising costs as incurred. The Company has
cooperative advertising agreements with certain distributors and resellers
whereby the Company will reimburse distributors and resellers for qualified
advertising of Citrix products. Reimbursement is made once the distributor or
reseller
F-11
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provides substantiation of qualified expenditures. The Company estimates the
impact of this program and recognizes it at the time of product sale. The
Company recognized advertising expenses of approximately $23.4 million, $15.4
million and $13.0 million, during the years ended December 31, 2001, 2000 and
1999, respectively. These amounts are included in sales, marketing and support
expenses in the accompanying consolidated statements of income.
Income Taxes
Deferred income tax assets and liabilities are determined based upon
differences between the financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The realization of deferred tax assets is
based on historical tax positions and expectations about future taxable income.
Valuation allowances are recorded related to deferred tax assets if their
realization does not meet the "not more likely than not" criteria of SFAS 109,
Accounting for Income Taxes.
In July 1999, the Company changed its organizational structure whereby it
moved certain operational and administrative processes to overseas subsidiaries.
The repositioning resulted in foreign earnings being taxed at lower foreign tax
rates. These earnings will be permanently reinvested overseas in order to fund
the Company's growth in overseas markets.
Software Development Costs
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, requires certain software development costs to be
capitalized upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management with
respect to certain external factors such as anticipated future revenue,
estimated economic life, and changes in software and hardware technologies.
Capitalizable software development costs have not been significant and have been
expensed as incurred.
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 consolidated
financial statements and accompanying notes. Such estimates made by management
include a provision for doubtful accounts receivables, provision for sales
returns and stock rotation, and the amortization and depreciation periods for
intangible and fixed assets. While the Company believes that such estimates are
fair when considered in conjunction with the consolidated financial position and
results of operations taken as a whole, the actual amounts of such estimates,
when known, will vary from these estimates.
Product Concentration
The Company derives a substantial portion of its revenues from one software
product and anticipates that this product and future derivative products and
product lines based upon this technology, if any, will constitute a majority of
its revenue for the foreseeable future. The Company may experience declines in
demand for products, whether as a result of general economic conditions, new
competitive product releases, price competition, lack of success of its
strategic partners, technological change or other factors.
Accounting for Stock-Based Compensation
SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value
method of accounting for issuance of stock options and other equity instruments.
Under the fair value method, compensation cost is
F-12
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are not required to adopt the fair value
method of accounting for employee stock-based transactions. Companies are
permitted to continue to account for such transactions under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB
Opinion 25"), but are required to disclose in a note to the consolidated
financial statements pro forma net income and per share amounts as if the
Company had applied the methods prescribed by SFAS No. 123.
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans and has complied with the disclosure requirements of
SFAS No. 123.
Earnings Per Share
Dilutive common stock equivalents consist of stock options (calculated
using the treasury stock method) and put warrants (calculated using the reverse
treasury stock method). All common share and per share data, except par value
per share, have been retroactively adjusted to reflect the two-for-one stock
split of the Company's Common Stock effective March 25, 1999 and the two-for-one
stock split of the Company's Common Stock effective February 16, 2000, which are
further discussed in Note 7.
Software Developed or Obtained for Internal Use
The Company accounts for internal use software pursuant to SOP 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use. Pursuant to the SOP, the Company capitalizes external direct costs of
materials and services used in the project and internal costs such as payroll
and benefits of those employees directly associated with the development of the
software. The amount of costs capitalized in 2001 and 2000 relating to internal
use software were $16.2 million and $11.3 million, respectively, consisting
principally of purchased software and services provided by external vendors.
These costs are being amortized over the estimated useful life of the software
developed, which is generally three to seven years and are included in property
and equipment in the accompanying consolidated balance sheets.
Reclassifications
Certain reclassifications of the prior years' financial statements have
been made to conform to the current year's presentation.
3. ACQUISITIONS
In July 1999 and April 2001, the Company completed the acquisitions of
ViewSoft, Inc. ("Viewsoft") and Sequoia Software Corporation ("Sequoia") for
approximately $33.5 million and $182.6 million, respectively. A portion of the
purchase price for each of these acquisitions was allocated to in-process
research and development ("IPR&D"), for which the Company concluded that the
respective in-process technologies had not reached technological feasibility and
for which there was no alternative future use after taking into consideration
the potential use of technologies in different products, the stage of
development and life cycle of each project, resale of the software and internal
use. The value of the respective purchased IPR&D was expensed at the time of
each of the transactions and resulted in pre-tax charges to the Company's
operations of approximately $2.3 million in 1999 and $2.6 million in 2001
associated with these acquisitions, respectively.
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex") for approximately $47.8 million. At the date of
acquisition, the Company paid approximately $28.7 million in consideration and
$0.2 million in transaction costs, respectively. Pursuant to the acquisition
agreement, the remaining purchase consideration, plus interest, was contingently
payable based on future events. During 2001, these contingencies were met,
resulting in approximately $16.2 million of additional
F-13
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase price and $2.9 million in compensation to the former owners. Pursuant
to the acquisition agreement, payment of $10.5 million of the contingent amounts
and associated interest were made in August 2001 and $10.7 million was paid in
2002. There are no remaining contingent obligations.
Each of the acquisitions was accounted for under the purchase method of
accounting. The consolidated financial statements reflect the operations of the
acquired businesses for the periods after their respective dates of acquisition.
The purchase consideration was allocated to the acquired assets and
liabilities based on fair values as follows:
<Table>
<Caption>
VIEWSOFT INNOVEX SEQUOIA
-------- ------- --------
(IN THOUSANDS)
Net assets acquired.................................... $ 128 $ 2,259 $ 10,058
Purchased identifiable intangibles..................... 2,200 9,908 46,775
Purchased in-process research and development.......... 2,300 -- 2,580
Goodwill............................................... 28,904 32,944 123,157
------- ------- --------
Total purchase consideration...................... $33,532 $45,111 $182,570
======= ======= ========
</Table>
During the fourth quarter of 2000, the Company did not believe that there
were sufficient projected cash flows or alternative future uses to support the
net book value of core technology associated with certain previous acquisitions.
As a result, the Company wrote off $9.1 million of certain core technology as of
December 31, 2000.
4. CASH AND INVESTMENTS
The summary of cash and cash equivalents and investments consists of the
following:
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Cash and cash equivalents:
Cash...................................................... $ 55,209 $114,570
Commercial paper.......................................... 3,950 131,248
Money market funds........................................ 20,515 44,157
Municipal securities...................................... 16,855 --
Government securities..................................... 3,682 85,050
Corporate securities...................................... 39,482 --
-------- --------
Cash and cash equivalents.............................. $139,693 $375,025
======== ========
Short-term investments:
Commercial paper.......................................... $ 3,990 $ 14,078
Corporate securities...................................... 68,912 37,062
Government securities..................................... -- 40,472
Municipal securities...................................... 4,176 --
-------- --------
Short-term investments................................. $ 77,078 $ 91,612
======== ========
</Table>
F-14
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
Long-term investments:
Commercial paper.......................................... $ 22,063 $ --
Municipal securities...................................... 3,132 --
Corporate securities...................................... 503,138 334,961
Government securities..................................... -- 42,945
Other..................................................... 1,561 4,618
-------- --------
Long-term investments.................................. $529,894 $382,524
======== ========
</Table>
The Company's cash and cash equivalents have an initial or remaining
maturity of three months or less when purchased. The unrealized gain (loss)
associated with each individual category of cash and investments is not
significant.
In December 2000, the Company invested $158.1 million in a trust ("Trust")
managed by an investment advisor. The Trust assets primarily consist of
AAA-rated zero-coupon corporate securities that mature on March 22, 2004. The
Trust entered into a credit risk swap agreement with the investment advisor,
which effectively increased the yield on the Trust assets and for which value
the Trust assumed the credit risk of ten investment-grade companies. The
effective yield of the Trust, including the credit risk swap agreement, is 6.72%
and the principal balance will accrete to $195 million in March 2004. The
Company records the investment as held-to-maturity zero-coupon corporate
securities. The Company does not recognize changes in the fair value of these
investments unless a decline in the fair value of the Trust assets is
other-than-temporary, in which case a loss would be recognized in earnings. At
December 31, 2001 and 2000, the amortized cost of the Company's investments were
$169.0 million and $158.5 million, respectively, which are classified above as
long-term corporate securities.
Other than the Trust investments described above, the Company's short and
long-term investments are classified as available-for-sale and are recorded at
fair value. At December 31, 2001, the unrealized gain (loss) associated with
each individual category of investments is not significant. Amounts included in
accumulated other comprehensive loss in prior periods are reclassified to
earnings using the specific identification method. At December 31, 2001, the
average contractual and remaining maturity of the Company's short-term
investments was approximately 15 and seven months, respectively. The Company's
long-term available-for-sale investments at December 31, 2001 include $202.2
million of investments with contractual maturities of one to 30 years and $157.1
million of investments in mortgage backed securities not due at a single
maturity date.
As discussed in Note 3, the Company purchased Sequoia for approximately
$182.6 million in cash. In order to improve the overall credit quality and
rebalance the short and long-term maturity of its investment portfolio
subsequent to the cash expenditure, the Company sold corporate debt securities
that were previously designated as held-to-maturity and purchased higher credit
quality corporate debt securities with interest rates that reset quarterly.
Additionally, during 2001, the Company terminated a forward bond purchase
agreement previously designated as a hedge of forecasted purchases of corporate
security investments. The sale of securities and the termination of the forward
bond purchase agreement resulted in a realized gain of approximately $8.0
million, which is included in other expense, net on the 2001 consolidated
statement of income.
F-15
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<Table>
<Caption>
DECEMBER 31,
------------------
2001 2000
-------- -------
(IN THOUSANDS)
Accounts payable............................................ $ 10,635 $ 7,123
Accrued compensation and employee benefits.................. 17,510 11,857
Accrued cooperative advertising and marketing programs...... 20,368 21,034
Accrued taxes............................................... 35,885 19,627
Other....................................................... 27,530 19,098
-------- -------
$111,928 $78,739
======== =======
</Table>
6. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS
Stock Compensation Plans
As of December 31, 2001, the Company has five stock-based compensation
plans, which are described below. The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. As mentioned in Note 2, the Company applies APB
Opinion 25 and related interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its fixed stock plans and its stock
purchase plan. Had compensation cost for the Company's five stock-based
compensation plans been determined based on the fair value at the grant dates
for grants under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Net income (loss)
As reported...................................... $105,260 $ 94,512 $116,944
======== ======== ========
Pro forma........................................ $(41,188) $(38,036) $ 64,069
======== ======== ========
Basic earnings (loss) per share
As reported...................................... $ 0.57 $ 0.51 $ 0.66
======== ======== ========
Pro forma........................................ $ (0.22) $ (0.21) $ 0.36
======== ======== ========
Diluted earnings (loss) per share
As reported...................................... $ 0.54 $ 0.47 $ 0.61
======== ======== ========
Pro forma........................................ $ (0.22) $ (0.21) $ 0.33
======== ======== ========
</Table>
For purposes of the proforma calculations, the fair value of each option is
estimated on the date of the grant using the Black-Scholes option-pricing model
with the following assumptions used:
<Table>
<Caption>
2001 GRANTS 2000 GRANTS 1999 GRANTS
----------- ----------- -----------
Dividend yield..................................... none none none
Expected volatility factor......................... 0.6 0.8 0.6
Approximate risk free interest rate................ 5.0% 6.0% 5.5%
Expected lives..................................... 4.68 years 4.64 years 4.50 years
</Table>
The determination of the fair value of all options is based on the
assumptions described in the preceding paragraph, and because additional option
grants are expected to be made each year, the above pro forma disclosures are
not representative of pro forma effects on reported net income or loss for
future years.
F-16
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fixed Stock Option Plans
The Company's amended and restated 1995 Stock Plan (the "1995 Plan") was
originally adopted by the Board on September 28, 1995 and approved by the
Company's stockholders in October 1995. Under the terms of the 1995 Plan the
Company is authorized to grant incentive stock options ("ISOs") and nonqualified
stock options ("NSOs"), make stock awards and provide the opportunity to
purchase stock to employees, directors and officers and consultants of the
Company. The 1995 Plan, as amended, provides for the issuance of a maximum of
69,945,623 (as adjusted for stock splits) shares of Common Stock, plus,
effective January 1, 2001 and each year thereafter, a number of shares of Common
Stock equal to 5% of the total number of shares of Common Stock issued and
outstanding as of December 31 of the preceding year. Under the 1995 Plan, a
maximum of 60,000,000 ISOs may be granted and ISOs must be granted at exercise
prices no less than market value at the date of grant, except for ISOs granted
to employees who own more than 10% of the Company's combined voting power, for
which the exercise prices will be no less than 110% of the market value at the
date of grant. NSOs, stock awards or stock purchases may be granted or
authorized, as applicable, at prices no less than the minimum legal
consideration required. Under the 1995 Plan, as amended, ISOs must be granted at
exercise prices no less than market value at the date of grant, provided
however, that if an NSO is expressly granted in lieu of a reasonable amount of
salary or cash bonus, the exercise price may be equal to or greater than 85% of
the fair market value at the date of such grant. ISOs and NSOs expire ten years
from the date of grant. All options are exercisable upon vesting. The options
typically vest over four years at a rate of 25.00% of the shares underlying the
option one year from the date of grant and at a rate of 2.08% monthly
thereafter.
The Company's amended and restated 2000 Director and Officer Stock Option
and Incentive Plan (the "2000 Plan") was originally adopted by the Board of
Directors and approved by the Company's stockholders on May 18, 2000. Under the
terms of the 2000 Plan, the Company is authorized to make stock awards, provide
eligible individuals with the opportunity to purchase stock, grant ISOs and
grant NSOs to officers and directors of the Company. The 2000 Plan provides for
the issuance of up to 4,000,000 shares, plus, effective on January 1, 2001, on
January 1 of each year, a number of shares of Common Stock equal to one-half of
one percent (0.5%) of the total number of shares of Common Stock issued and
outstanding as of December 31 of the preceding year. Notwithstanding the
foregoing, no more than 3,000,000 shares of Common Stock may be issued pursuant
to the exercise of incentive stock options granted under the 2000 Plan. Under
the 2000 Plan, ISOs must be granted at exercise prices no less than market value
at the date of grant, provided however, that if an NSO is expressly granted in
lieu of a reasonable amount of salary or cash bonus, the exercise price may be
equal to or greater than 85% of the fair market value at the date of such grant.
ISOs and NSOs expire ten years from date of grant. All options are exercisable
upon vesting. The options typically vest over four years at a rate of 25% of the
shares underlying the option one year from date of grant and at a rate of 2.08%
monthly thereafter.
The amended and restated 1995 Non-Employee Director Stock Option Plan (the
"Director Option Plan") was adopted by the Board of Directors on September 28,
1995 and approved by the Company's stockholders in October 1995. The Director
Option Plan provides for the grant of options to purchase a maximum of 3,600,000
(as adjusted for stock splits) shares of Common Stock of the Company to non-
employee directors of the Company.
Under the original terms of the Director Option Plan, each director who was
not also an employee of the Company and who is first elected as a director would
receive, upon the date of his or her initial election, an option to purchase
180,000 shares of Common Stock. Options granted under the Director Option Plan
vest at a rate of 33.33% one year from the date of grant and vest at a rate of
2.78% monthly thereafter. In addition, on each three-year anniversary of such
director's first election to the Board of Directors, such director will receive
an additional option to purchase 180,000 shares of Common Stock, vesting in
accordance with the aforementioned schedule, provided that such director
continues to serve on the Board of Directors at the time
F-17
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of grant. In July 2001, the Director Option Plan was amended so that each
director who is not also an employee of the Company and who is first elected as
a director will receive, upon the date of his or her initial election, an option
to purchase 60,000 shares of Common Stock. Such options will vest at a rate of
33.33% per year from the date of the grant and vest at a rate of 2.78% monthly
thereafter. In addition, on each one-year anniversary of such director's first
election to the Board of directors, such director would receive an additional
option to purchase 20,000 shares of Common Stock, which shall vest at a rate of
8.33% per month, provided such director continues to serve on the Board of
Directors at the time of grant. All options granted under the Director Option
Plan have an exercise price equal to the fair market value of the Common Stock
on the date of grant and a term of ten years from the date of grant. In January
2002, the Company amended the Director Option Plan to, among other things,
change the date of the annual grant of options to the first day of the month
following the Annual Stockholders' Meeting. Options are exercisable to the
extent vested only while the optionee is serving as a director of the Company or
within 90 days after the optionee ceases to serve as a director of the Company.
The Company's 1989 Stock Option Plan (the "1989 Plan") as amended,
permitted the Company to grant ISOs and NSOs to purchase up to 25,256,544 (as
adjusted for stock splits) shares of the Company's Common Stock. Under the 1989
Plan, options may be granted at exercise prices no less than market value at the
date of grant. All options are fully exercisable from the date of grant and are
subject to a repurchase option in favor of the Company which lapses as to 25.00%
of the shares underlying the option one year from the date of grant and as to
2.08% monthly thereafter. If the purchaser of stock pursuant to the 1989 Plan is
terminated from employment with the Company, the Company has the right and
option to purchase from the employee, at the price paid for the shares by the
employee, the number of unvested shares at the date of termination. No shares
have been repurchased under this Plan. Effective November 1999 no further
options may be granted under this Plan.
A summary of the status and activity of the Company's stock option plans is
as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of
year........................... 43,288,840 $25.67 42,358,350 $18.28 32,279,324 $ 9.50
Granted........................ 8,351,092 30.68 12,671,582 42.38 21,157,900 26.80
Exercised...................... (8,545,575) 13.27 (6,692,488) 10.32 (9,221,440) 7.57
Forfeited...................... (3,498,079) 31.06 (5,048,604) 25.65 (1,857,434) 15.99
---------- ---------- ----------
Outstanding at end of year....... 39,596,278 28.92 43,288,840 25.67 42,358,350 18.28
========== ========== ==========
Options exercisable at end of
year........................... 18,140,094 26.02 14,364,325 16.49 7,062,760 7.86
========== ========== ==========
Weighted-average fair value of
options granted during the
year........................... $20.92 $28.07 $14.37
</Table>
F-18
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information about stock options outstanding as of December 31, 2001 is as
follows:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED
OPTIONS AVERAGE WEIGHTED OPTIONS WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 31, 2001 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2001 EXERCISE PRICE
--------------- ----------------- ---------------- -------------- ----------------- --------------
$ .13 to $ 15.69 10,703,849 6.94 $12.25 6,662,017 $10.48
$15.84 to $ 23.87 8,047,806 7.78 $20.47 3,705,371 $19.92
$24.38 to $ 29.31 7,960,956 7.65 $25.68 4,158,869 $25.70
$29.69 to $ 48.44 8,241,710 9.02 $35.18 1,477,363 $38.51
$53.38 to $104.00 4,641,957 8.14 $76.44 2,136,474 $76.99
---------- ----------
39,596,278 7.83 $28.92 18,140,094 $26.02
========== ==========
</Table>
Stock Purchase Plan
The amended and restated 1995 Employee Stock Purchase Plan (the "1995
Purchase Plan") was originally adopted by the Board of Directors on September
28, 1995 and approved by the Company's stockholders in October 1995. The 1995
Purchase Plan provides for the issuance of a maximum of 9,000,000 shares of
Common Stock upon the exercise of nontransferable options granted to
participating employees. All U.S.-based employees of the Company, whose
customary employment is 20 hours or more per week and more than five months in
any calendar year, and employees of certain international subsidiaries, are
eligible to participate in the 1995 Purchase Plan. In June 2000, the 1995
Purchase Plan was amended to allow employees to deduct up to 10% of their total
cash compensation, up from 5% previously, and to remove the requirement that
employees complete at least one year of employment to be eligible to participate
in the plan. Employees who would immediately after the grant own 5% or more of
the Company's Common Stock, and directors who are not employees of the Company,
may not participate in the 1995 Purchase Plan. To participate in the 1995
Purchase Plan, an employee must authorize the Company to deduct an amount (not
less than 1% nor more than 10% of a participant's total cash compensation) from
his or her pay during six-month periods (each a Plan Period).
The maximum number of shares of Common Stock an employee may purchase in
any Plan Period is 6,000 shares subject to certain other limitations. The
exercise price for the option for each Plan Period is 85% of the lesser of the
market price of the Common Stock on the first or last business day of the Plan
Period. If an employee is not a participant on the last day of the Plan Period,
such employee is not entitled to exercise his or her option, and the amount of
his or her accumulated payroll deductions are refunded. An employee's rights
under the 1995 Purchase Plan terminate upon his or her voluntary withdrawal from
the 1995 Purchase Plan at any time or upon termination of employment. In January
2002, the Company amended the 1995 Purchase Plan to change the payment periods.
Under the 1995 Purchase Plan, the Company issued 213,907, 77,781 and 27,004
shares in 2001, 2000, and 1999, respectively.
Benefit Plan
The Company maintains a 401(k) benefit plan (the "Plan") allowing eligible
U.S.-based employees to contribute up to 15% of their annual compensation,
limited to an annual maximum amount as set periodically by the Internal Revenue
Service. The Company, at its discretion, may contribute up to $0.50 on each
dollar of employee contribution, limited to a maximum of 6% of the employee's
annual contribution. The Company's matching contributions for 2001, 2000 and
1999 were $1.8 million, $1.2 million and $0.6 million, respectively. The
Company's contributions vest over a four-year period at 25% per year.
F-19
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. CAPITAL STOCK
Common Stock
The Company has reserved for future issuance 61,587,699 shares of Common
Stock for the exercise of stock options outstanding or available for grant and
11,885,862 shares for the conversion of the zero coupon convertible debentures
into Common Stock.
On May 13, 1999, the stockholders approved an increase of authorized Common
Stock from 150,000,000 shares, $0.001 par value per share to 400,000,000 shares,
$0.001 par value per share.
On May 18, 2000, the stockholders approved an increase of authorized Common
Stock from 400,000,000 shares, $0.001 par value per share to 1,000,000,000
shares, $0.001 par value per share.
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). In January 2002, the Board of Directors authorized an additional $200
million of repurchase authority under the program, bringing the aggregate amount
authorized for repurchase to $600 million.
Pursuant to the Company's stock repurchase program, the Company is
authorized to make open market purchases. Purchases will be made from time to
time in the open market and paid out of general corporate funds. During 2001 and
2000, the Company purchased 3,135,500 shares and 2,750,000 shares, respectively,
of outstanding Common Stock on the open market for approximately $90.7 million
and $57.9 million (at an average price of $28.92 and $21.04 per share),
respectively. These shares have been recorded as treasury stock.
Additionally, pursuant to the stock repurchase program, the Company entered
into two agreements, with a single counterparty in private transactions to
purchase approximately 7.3 million shares of the Company's Common Stock at
various times through December 2003. Pursuant to the terms of the agreements,
$100 million was paid to the counterparty in 2000 and $50 million was paid in
2001. The ultimate number of shares repurchased will depend on market
conditions. During 2001 and 2000, the Company repurchased 2,307,450 shares and
1,067,108 shares, respectively, under this agreement at a total cost of $50.3
million and $18.2 million, respectively. The shares have been recorded as
treasury stock.
In connection with the Company's stock repurchase program, in October 2000,
the Board of Directors approved a program authorizing the Company to sell put
warrants that entitle the holder of each warrant to sell to the Company,
generally by physical delivery, one share of the Company's Common Stock at a
specified price. During 2001, the Company sold 3,190,000 put warrants at an
average strike price of $28.95 and received premium proceeds of $12.0 million.
During 2001, the Company paid $69.5 million for the purchase of 2,190,000 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 December 31, 2001,
1,300,000 put warrants were outstanding, with exercise prices ranging from
$20.75 to $26.42 which mature on various dates between January and March 2002.
As of December 31, 2001, the Company has a total potential repurchase obligation
of approximately $30.8 million associated with the outstanding put warrants, of
which $16.6 million is classified as a put warrant obligation on the
consolidated balance sheet. The remaining $14.2 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 consolidated balance sheet. The outstanding
put warrants classified as a put warrant obligation on the consolidated balance
sheet will be reclassified to equity when the warrant is exercised or when it
expires. Under the terms of certain of the put warrant agreements, the Company
must maintain certain levels of cash and investments balances. As of
F-20
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2001, the Company has approximately $246.7 million of cash and
investments in excess of required levels.
Stock Splits
On March 1, 1999, the Company announced a two-for-one stock split in the
form of a stock dividend paid on March 25, 1999, to stockholders of record as of
March 17, 1999.
On January 19, 2000, the Company announced a two-for-one stock split in the
form of a stock dividend paid on February 16, 2000, to stockholders of record as
of January 31, 2000.
The number of options issuable and previously granted and their respective
exercise prices under the Company's stock option plans have been proportionately
adjusted to reflect stock splits. The accompanying consolidated financial
statements have been retroactively restated to reflect stock splits.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
$0.01 par value per share. The Company has no present plans to issue such
shares.
8. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1999, the Company sold $850 million principal amount at maturity
of its zero coupon convertible subordinated debentures (the "Debentures") due
March 22, 2019, in a private placement. The Debentures were priced with a yield
to maturity of 5.25% and resulted in net proceeds to the Company of
approximately $291.9 million, net of original issue discount and net of debt
issuance costs of $9.6 million. Except under limited circumstances, no interest
will be paid on the Debentures prior to maturity. The Debentures are convertible
at the option of the security holder at any time on or before the maturity date
at a conversion rate of 14.0612 shares of the Company's Common Stock for each
$1,000 principal amount at maturity of Debentures, subject to adjustment in
certain events. The Company may redeem the Debentures on or after March 22,
2004. Holders may require the Company to repurchase the Debentures, on fixed
dates and at set redemption prices (equal to the issue price plus accrued
original issue discount), beginning on March 22, 2004. In October 2000, the
Board of Directors approved a program authorizing the Company to repurchase up
to $25 million of the Debentures in open market purchases. As of December 31,
2001, 4,500 units of the Company's Debentures, representing $1.8 million in
principal amount at maturity, had been repurchased under this program for $2.1
million. Interest expense related to the Debentures was $17.9 million, $17.0
million and $12.6 million in 2001, 2000 and 1999, respectively.
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their fair value due to the
short maturity of these items. The Company's investments classified as
available-for-sale securities are carried at fair value on the accompanying
consolidated balance sheets, based primarily on quoted market prices for such
financial instruments. The Company's held-to-maturity investments had a carrying
value of $169.0 million and $158.1 million at December 31, 2001 and 2000,
respectively, and an aggregate fair value of $170.7 million and $158.4 million
at December 31, 2001 and 2000, respectively, based on dealer quotation. The
carrying amount of the Company's Debentures at December 31, 2001 and 2000 were
approximately $346.2 and $330.5 million, respectively. The fair value of the
Debentures, based on the quoted market price as of December 31, 2001 and 2000
were approximately $388.0 million and $352.7 million, respectively.
F-21
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS
The Company leases certain office space and equipment under various
operating leases. Certain of these leases contain stated escalation clauses
while others contain renewal options.
Rental expense for the years ended December 31, 2001, 2000 and 1999 totaled
approximately $17.1 million, $8.7 million and $5.0 million, respectively. Lease
commitments under non-cancelable operating leases with initial or remaining
terms in excess of one year are as follows:
<Table>
<Caption>
(IN THOUSANDS)
Years ending December 31,
2002...................................................... $ 20,792
2003...................................................... 18,364
2004...................................................... 14,702
2005...................................................... 13,392
2006...................................................... 11,645
Thereafter................................................ 76,606
--------
$155,501
========
</Table>
To consolidate certain of the Company's corporate offices and to
accommodate the Company's projected growth, the Company entered into a lease
agreement for office space at its corporate headquarters beginning in the second
quarter of 2001. Lease commitments under this lease agreement are included in
the table above. Upon occupancy of this new facility, the Company plans to
sublease the space in certain existing buildings for the remainder of their
respective lease terms.
11. INCOME TAXES
The United States and foreign components of income before income taxes are
as follows:
<Table>
<Caption>
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
United States........................................ $ 57,096 $ 80,465 $122,131
Foreign.............................................. 95,455 54,552 60,594
-------- -------- --------
Total........................................... $152,551 $135,017 $182,725
======== ======== ========
</Table>
The components of the provision for income taxes are as follows:
<Table>
<Caption>
2001 2000 1999
------- ------- --------
(IN THOUSANDS)
Current:
Federal.............................................. $38,469 $29,252 $ 53,060
Foreign.............................................. 6,319 3,428 16,782
State................................................ 3,566 1,585 9,256
------- ------- --------
Total current..................................... 48,354 34,265 79,098
Deferred............................................... (1,063) 6,240 (13,317)
------- ------- --------
Total provision for income taxes.................. $47,291 $40,505 $ 65,781
======= ======= ========
</Table>
F-22
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of the Company's deferred tax assets and
liabilities consisted of the following:
<Table>
<Caption>
DECEMBER 31,
-----------------
2001 2000
------- -------
(IN THOUSANDS)
Deferred tax assets:
Acquired technology....................................... $16,726 $18,362
Deferred revenue.......................................... 5,833 21,549
Accounts receivable allowances............................ 2,901 1,915
Depreciation and amortization............................. 4,597 4,458
Tax credits............................................... 13,264 12,047
Net operating losses...................................... 17,346 --
Other..................................................... 6,328 9,364
------- -------
Total deferred tax assets.............................. 66,995 67,695
Deferred tax liabilities:
Foreign earnings.......................................... (8,753) (8,753)
------- -------
Total deferred tax liabilities......................... (8,753) (8,753)
------- -------
Total net deferred tax assets.......................... $58,242 $58,942
======= =======
</Table>
During the years ended December 31, 2001, 2000, and 1999, the Company
recognized tax benefits related to the exercise of employee stock options in the
amount of $28.0 million, $63.9 million and $50.8 million, respectively. This
benefit was recorded to additional paid-in capital. At December 31, 2001, the
Company had approximately $64.5 million of U.S. net operating loss
carryforwards, a substantial portion of which begins to expire in 2020. The
Company will record the benefit of the net operating loss carryforwards
generated from the exercise of employee stock options, through additional
paid-in capital when the net operating loss carryforwards are utilized.
During 2001, the Company acquired an entity with approximately $37.9
million of net operating loss carryforwards. Additionally, the Company had
approximately $6.8 million of net operating loss carryforwards from prior
acquisitions. These net operating loss carryforwards are limited in any one year
pursuant to Internal Revenue Code Section 382 and begin to expire in 2010.
At December 31, 2001, the Company had research and development tax credit
carryforwards of approximately $7.0 million that expire beginning in 2018.
Additionally, the Company had foreign tax credit carryforwards of approximately
$6.3 million at December 31, 2001 that expire beginning in 2003.
The Company does not expect to remit earnings from its foreign
subsidiaries. Accordingly, the Company did not provide for deferred taxes on
foreign earnings.
F-23
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the Company's income taxes to amounts calculated at the
statutory federal rate is as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Federal statutory taxes.............................. $ 53,393 $ 47,256 $ 63,954
State income taxes, net of federal tax benefit....... 5,771 5,134 5,378
Foreign sales corporation benefits................... -- -- (2,556)
Foreign operations................................... (30,701) (19,634) --
Interest income...................................... -- (5,979) (4,555)
Intangible assets.................................... 11,236 3,047 8,260
Other permanent differences.......................... 2,780 3,143 5,220
Tax credits.......................................... (1,217) 632 (10,981)
Other................................................ 6,029 6,906 1,061
-------- -------- --------
$ 47,291 $ 40,505 $ 65,781
======== ======== ========
</Table>
12. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in a single market consisting of the design,
development, marketing and support of application delivery and management
software and services for enterprise applications. Design, development,
marketing and support operations outside of the United States are conducted
through subsidiaries located primarily in Europe and the Asia-Pacific region.
The Company tracks revenues 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 that the Company operates. Segment profit for each segment includes
costs 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 and
technology write downs. 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, 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 time, sales in these geographic segments
were classified as export sales from the Americas segment (see below). For
purposes of the presentation of segment information, the sales previously
reported as Americas export sales have been reclassified to the geographical
segments where the sale was made for each of the periods presented.
In July 2001, the Company implemented a new enterprise resource planning
system. The new system was designed to provide a structure that would meet the
growing demands of the Company and to provide management improved focus on the
results of operations and the Company's financial resources. The features and
functionality of the new system allowed the Company to summarize and classify
information included in the results of operations differently than that provided
by the Company's legacy information systems. The Company began planning for the
new information system in 2000, and as a result, detailed transaction
information for 2001 and 2000, prior to the implementation of the new system,
was retained and converted to
F-24
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the new system. Detailed transaction information for 1999 is not available and
therefore, it is impracticable for the Company to present 1999 information in
the same fashion as 2001 and 2000.
Net revenues and segment profit for 2001 and 2000, classified by the major
geographic area in which the Company operates, are presented below.
<Table>
<Caption>
2001 2000
--------- --------
(IN THOUSANDS)
Net revenues:
Americas.................................................. $ 289,017 $248,398
EMEA...................................................... 216,766 158,645
Asia-Pacific.............................................. 46,016 23,505
Other(1).................................................. 39,830 39,898
--------- --------
Consolidated.............................................. $ 591,629 $470,446
========= ========
Segment profit:
Americas.................................................. $ 163,621 $149,856
EMEA...................................................... 134,096 102,356
Asia-Pacific.............................................. 22,880 2,610
Other(1).................................................. 39,830 39,898
Unallocated expenses(2):
Amortization of intangibles............................ (48,831) (30,395)
In-process research and development.................... (2,580) --
Research and development............................... (67,699) (50,622)
Write-down of technology............................... -- (9,081)
Net interest and other income.......................... 19,200 22,792
Other corporate expenses............................... (107,966) (92,397)
--------- --------
Consolidated income before income taxes................ $ 152,551 $135,017
========= ========
</Table>
- ---------------
(1) Represents royalty fees in connection with the Development Agreement.
(2) Represents expenses presented to management only on a consolidated basis and
not allocated to the geographic operating segments.
F-25
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net revenues and segment profit for 2000 and 1999, classified by major
geographic area in which the Company operates is included below as previously
presented:
<Table>
<Caption>
2000 1999
-------- --------
(IN THOUSANDS)
Net revenues:
Americas.................................................. $248,398 $213,575
EMEA...................................................... 158,645 129,649
Asia-Pacific.............................................. 23,505 20,231
Other(1).................................................. 39,898 39,830
-------- --------
Consolidated.............................................. $470,446 $403,285
======== ========
Segment profit:
Americas.................................................. $206,984 $174,829
EMEA...................................................... 123,056 103,811
Asia-Pacific.............................................. 10,238 10,834
Other(1).................................................. 39,898 39,830
Unallocated expenses(2):
Cost of revenues....................................... (29,054) (14,579)
Overhead costs......................................... (84,129) (51,721)
Research and development............................... (50,622) (37,363)
In-process research and development.................... -- (2,300)
Write-down of technology............................... (9,081) --
Net interest........................................... 22,792 11,221
Other corporate expenses............................... (95,065) (51,837)
-------- --------
Consolidated income before income taxes................ $135,017 $182,725
======== ========
</Table>
- ---------------
(1) Represents royalty fees in connection with the Development Agreement.
(2) Represents expenses presented to management only on a consolidated basis and
not allocated to the geographic operating segments.
Identifiable assets classified by major geographic area in which the
Company operates are shown below. Long-lived assets consist of property, plant
and equipment, net at December 31:
<Table>
<Caption>
2001 2000
---------- ----------
(IN THOUSANDS)
Identifiable assets:
Americas.................................................. $ 945,299 $ 964,205
EMEA...................................................... 241,943 132,440
Asia-Pacific.............................................. 20,988 15,928
---------- ----------
Total identifiable assets................................. $1,208,230 $1,112,573
========== ==========
</Table>
F-26
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
2001 2000
---------- ----------
(IN THOUSANDS)
Long-lived assets:
United States............................................. $ 50,601 $ 43,775
United Kingdom............................................ 33,029 6,078
Other foreign countries................................... 6,480 5,706
---------- ----------
Total long-lived assets................................... $ 90,110 $ 55,559
========== ==========
</Table>
Export revenue represents shipments of finished goods and services from the
United States to international customers. As of July 1, 1999 and July 1, 2000,
the Company began shipping finished goods to European and Asia-Pacific
customers, respectively, from its warehouse location in Europe. Shipments from
the United States were as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)
EMEA.................................................... $ -- $ -- $60,590
Asia-Pacific............................................ -- 11,249 20,202
Other................................................... 21,392 7,274 6,289
------- ------- -------
$21,392 $18,523 $87,081
======= ======= =======
</Table>
The Company had net revenue attributed to individual customers in excess of
10% of total net sales as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------
2001 2000 1999
---- ---- ----
Customer A................................................. 13% 13% 13%
Customer B................................................. 10% 12% 10%
Customer C................................................. 9% 10% 9%
</Table>
Additional information regarding revenue by products and services groups is
as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Revenues:
License Revenue.................................... $511,147 $400,156 $347,705
Services Revenue................................... 40,652 30,392 15,750
Royalty Revenue.................................... 39,830 39,898 39,830
-------- -------- --------
Net Revenues....................................... $591,629 $470,446 $403,285
======== ======== ========
</Table>
13. DERIVATIVE FINANCIAL INSTRUMENTS
Forward Foreign Currency Contracts. A substantial portion of the Company's
anticipated overseas expense and capital purchasing activities are transacted in
local currencies. To protect against reductions in value and the volatility of
future cash flows caused by changes in currency exchange rates, the Company has
established a hedging program. The Company uses forward foreign exchange
contracts to reduce a portion of its exposure to these potential changes. The
terms of such instruments, and the hedging transactions to which they relate,
generally do not exceed 12 months. Principal currencies hedged are British
pounds sterling, Euros,
F-27
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Interest Rate Agreement. In order to manage its exposure to interest rate
risk, in November 2001, the Company entered into an interest rate swap agreement
with a notional amount of $174.6 million that expires in March 2004. The swap
converts the floating rate return on certain of the Company's available for sale
investment securities to a fixed interest rate. At December 31, 2001, the fair
value of the swap is not material and is recorded in accrued expenses in the
accompanying consolidated financial statements.
In connection with the efforts to manage the credit quality and maturities
of its available-for-sale investment portfolio, during 2001 the Company
terminated a forward bond purchase agreement previously designated as a hedge of
forecasted purchases of corporate security investments. As a result, the Company
recorded a realized gain of $1.4 million, which is included in other expense,
net on the 2001 consolidated statements of income. At the time of the sale, the
Company realized approximately $0.5 million of amounts previously classified in
accumulated other comprehensive loss.
The ineffectiveness of hedges on existing derivative instruments for the
year ended December 31, 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. The income tax expense
(benefit) associated with any individual item of comprehensive income (loss) is
not significant. As of December 31, 2001, the Company recorded $0.6 million of
derivative assets and $0.5 million of derivative liabilities, representing the
fair values of the Company's outstanding derivative instruments.
Derivative Activity in Accumulated Other Comprehensive Income
As of December 31, 2001, the Company had a net deferred gain associated
with cash flow hedges and the interest rate swap of approximately $84,000, net
of taxes, a substantial portion of which are expected to be reclassified to
earnings by the end of 2002. The following table summarizes activity in other
comprehensive income ("OCI") related to derivatives, net of taxes, during the
year ended December 31, 2001 (in thousands):
<Table>
Cumulative effect of adopting SFAS No....................... $ --
Net changes in fair value of derivative..................... (224)
Net unrealized losses (gains) reclassified into earnings.... 308
-----
Change in net unrealized losses on derivative
instruments........................................... $ 84
=====
</Table>
14. RELATED PARTY TRANSACTIONS
Microsoft, which held a greater than 5% equity interest in the Company at
December 31, 1999, is a party to one of the licensing agreements discussed in
Note 2. The Company recognized $0.2 million, $0.3 million and $1.9 million of
royalty expense in cost of revenues in the years ended December 31, 2001, 2000
and 1999, respectively, and accrued royalties and other accounts payable of
$100,000 at December 31, 2000 in connection with this agreement. The Company has
recognized revenue of approximately $39.8 million, $39.9 million and $39.8
million in 2001, 2000 and 1999, respectively, in connection with the Development
Agreement, as amended, discussed in Note 2.
F-28
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
INFORMATION)
Numerator:
Net income......................................... $105,260 $ 94,512 $116,944
======== ======== ========
Denominator:
Denominator for basic earnings per
share -- weighted average shares................ 185,460 184,804 176,260
Effect of dilutive securities:
Put warrants....................................... -- 41 --
Employee stock options............................. 9,038 14,886 16,306
-------- -------- --------
Denominator for diluted earnings per share --adjusted
weighted-average shares............................ 194,498 199,731 192,566
======== ======== ========
Basic earnings per share............................. $ 0.57 $ 0.51 $ 0.66
======== ======== ========
Diluted earnings per share........................... $ 0.54 $ 0.47 $ 0.61
======== ======== ========
Antidilutive weighted shares......................... 43,789 41,612 38,002
======== ======== ========
</Table>
The above antidilutive weighted shares to purchase shares of Common Stock
includes certain shares under the Company's stock option program and Common
Stock potentially issuable on the conversion of the Debentures and on the
exercise of outstanding put warrants and were not included in computing diluted
earnings per share because their effects were antidilutive for the respective
periods.
16. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, which were adopted by the Company on
July 1, 2001 and January 1, 2002, respectively. Under the new rules, goodwill
(and intangible assets deemed to have indefinite lives) will no longer be
amortized but will be subject to an annual impairment test. 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. At the date of adoption, the Company had
unamortized goodwill, including acquired work force, in the amount of $152.4
million, which will not be amortized in the future and which will be subject to
the annual impairment test of SFAS 142. At January 1, 2002, the Company had
unamortized identified intangibles with estimable useful lives in the amount of
$36.6 million, which will continue to be amortized in accordance with the
provisions of SFAS 141 and 142. For the quarter ended March 31, 2002, the
Company expects to record amortization expense of approximately $3.5 million
related to these assets. The Company has completed the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002 and
does not anticipate an impairment charge as a result of the adoption of this
statement.
SFAS 143, Accounting for Asset Retirement Obligations, establishes
accounting standards for the recognition and measurement of an asset retirement
obligation and its associated asset retirement cost. It also provides accounting
guidance for legal obligations associated with the retirement of tangible
long-lived assets. SFAS 143 is effective in fiscal years beginning after June
15, 2002, with early adoption permitted. The Company expects that the provisions
of SFAS 143 will not have a material impact on its consolidated results
F-29
CITRIX SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of operations and financial position upon adoption. The Company plans to adopt
SFAS 143 effective January 1, 2003.
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
establishes a single accounting model for the impairment or disposal of
long-lived assets, including discontinued operations. SFAS 144 supersedes SFAS
Statement No. 121 and APB Opinion No. 30, Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions. The provisions of
SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
early adoption permitted, and in general are to be applied prospectively. The
Company plans to adopt SFAS 144 effective January 1, 2002 and does not expect
that the adoption will have a material impact on its consolidated results of
operations and financial position.
17. LEGAL MATTERS
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 generally alleged that,
during the Class Period, the defendants made misstatements to the investing
public about the Company's financial condition and prospects. The Court
dismissed the action with prejudice on October 30, 2001.
In September 2000, a shareholder 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 attorneys' fees
and litigation costs in the amount of $2,000,000 and $60,000, respectively. In
September 2001, the Court awarded the plaintiff $140,000 and $8,250 for
attorneys' fees and litigation costs, respectively. On February 22, 2002,
plantiffs refiled the remaining portion of the action. The Company believes the
plantiffs' claim lacks merit, however, the Company is unable to determine the
ultimate outcome of this matter and intends to vigorously defend it.
In addition, the Company is a defendant in various matters of litigation
generally arising out of the normal course of business. Although it is difficult
to predict the ultimate outcome of these cases, management believes, based on
discussions with counsel, that any ultimate liability would not materially
affect the Company's financial position, results of operations, or liquidity.
F-30
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(A) TOTAL YEAR
-------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001
Net revenues.......................... $132,812 $147,274 $153,495 $158,048 $591,629
Gross margin.......................... 125,500 140,051 145,922 150,308 561,781
Income from operations................ 35,596 31,192 32,384 34,179 133,351
Net income............................ 28,935 22,894 27,790 25,641 105,260
Basic earnings per common share....... 0.16 0.12 0.15 0.14 0.57
Diluted earnings per common share..... 0.15 0.12 0.14 0.13 0.54
2000
Net revenues.......................... $127,515 $106,086 $113,491 $123,354 $470,446
Gross margin.......................... 122,386 97,682 104,637 116,687 441,392
Income from operations................ 49,611 15,902 25,911 20,801 112,225
Net income............................ 38,545 14,973 21,617 19,377 94,512
Basic earnings per common share....... 0.21 0.08 0.12 0.10 0.51
Diluted earnings per common share..... 0.19 0.07 0.11 0.10 0.47
</Table>
- ---------------
(a) In the fourth quarter of 2000, the Company recorded impairment write-downs
of previously acquired core technology of $9.1 million, as discussed in Note
3.
F-31
SCHEDULE II
CITRIX SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<Table>
<Caption>
CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
--------- ---------- ---------- ---------- -------------
(IN THOUSANDS)
2001
Deducted from asset accounts:
Allowance for doubtful accounts..... $ 1,431 $2,784 $ 2,483(3) $ 2,972(2) $ 3,726
Allowance for returns............... 9,170 -- 22,533(1) 23,360 8,343
Allowance for inventory
obsolescence..................... 722 2,292 -- 1,444 1,570
------- ------ ------- ------- -------
$11,323 $5,076 $25,016 $27,776 $13,639
======= ====== ======= ======= =======
2000
Deducted from asset accounts:
Allowance for doubtful accounts..... $ 1,545 $ 377 $ -- $ 491(2) $ 1,431
Allowance for returns............... 6,696 -- 27,883(1) 25,409 9,170
Allowance for inventory
obsolescence..................... 912 6,932 -- 7,122 722
------- ------ ------- ------- -------
$ 9,153 $7,309 $27,883 $33,022 $11,323
======= ====== ======= ======= =======
1999
Deducted from asset accounts:
Allowance for doubtful accounts..... $ 1,593 $ 584 $ -- $ 632(2) $ 1,545
Allowance for returns............... 4,641 -- 20,879(1) 18,824 6,696
Allowance for inventory
obsolescence..................... 402 1,982 -- 1,472 912
------- ------ ------- ------- -------
$ 6,636 $2,566 $20,879 $20,928 $ 9,153
======= ====== ======= ======= =======
</Table>
- ---------------
(1) Netted against revenues.
(2) Uncollectible accounts written off, net of recoveries.
(3) Addition from the Sequoia acquisition.
F-32
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1(1) Agreement and Undertaking by and among the Non-Executive
Directors of APM Limited, the Executive Directors of APM
Limited, and Citrix Systems, Inc.
2.2(1) Recommended Offers by Citrix Systems, Inc. for APM Limited
2.3(2) Asset Purchase Agreement dated February 15, 2000 by and
among the Company, Innovex Group, Inc. and certain
stockholders of Innovex
2.4(10) Agreement and Plan of Merger, dated as of March 20, 2001, by
and among Citrix Systems, Inc., Soundgarden Acquisition
Corp. and Sequoia Software Corporation
3.1(3) Amended and Restated Certificate of Incorporation of the
Company
3.2(3) Amended and Restated By-laws of the Company
3.3(4) Certificate of Amendment of Amended and Restated Certificate
of Incorporation
4.1(3) Specimen certificate representing the Common Stock
4.2(5) Indenture by and between the Company and State Street Bank
and Trust Company as Trustee dated as of March 22, 1999,
including the form of Debenture.
4.3(5) Form of Debenture (included in Exhibit 4.2).
4.3(5) Registration Rights Agreement by and between the Company and
Credit Suisse First Boston Corporation dated as of March 22,
1999.
10.1(3)* 1989 Stock Option Plan
10.2* Third Amended and Restated 1995 Stock Plan
10.3* Second Amended and Restated 1995 Non-Employee Director Stock
Option Plan
10.4* Second Amended and Restated 1995 Employee Stock Purchase
Plan
10.5(6)* Amended and Restated 2000 Director and Officer Stock Option
and Incentive Plan
10.6(3) Microsoft Corporation Source Code Agreement between the
Company and Microsoft Corporation ("Microsoft") dated
November 15, 1989
10.7(3) Amendment No. 1 to the Source Code Agreement between the
Company and Microsoft dated October 1, 1992
10.8(3) License Agreement for Microsoft OS/2 Version Releases 1.x,
2.x between the Company and Microsoft dated August 15, 1990
10.9(3) Amendment No. 1 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated May 6, 1991
10.10(3) Amendment No. 2 to License Agreement between the Company and
Microsoft for Microsoft OS/2 Version Releases 1.x, 2.x,
dated October 1, 1992
10.11(3) Amendment No. 3 to the License Agreement between the Company
and Microsoft dated August 15, 1990, Contract No. 5198-0228
dated January 1, 1994
10.12(3) Amendment No. 4 to the License Agreement between the Company
and Microsoft dated August 15, 1990, dated January 31, 1995
10.13(3) Strategic Alliance Agreement between the Company and
Microsoft dated December 12, 1991
10.14(3) Form of Indemnification Agreement
10.15(7) License, Development and Marketing Agreement dated July 9,
1996 between the Company and Microsoft Corporation
10.16(8) License, Development and Marketing Agreement dated May 9,
1997 between the Company and Microsoft Corporation
10.17(9) Amendment No. 1 to License, Development and Marketing
Agreement dated May 9, 1997 between The Company and
Microsoft Corporation
10.18 Employment Agreement dated as of August 1, 2001 by and
between the Company and Roger W. Roberts
</Table>
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.19 Amendment to Employment Agreement with Roger W. Roberts as
of January 17, 2002
21.1 List of Subsidiaries
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (Included in signature page)
</Table>
- ---------------
* Indicates a management contract or any compensatory plan, contract or
arrangement.
(1) Incorporated herein by reference to the exhibits of the Company's Current
Report on Form 8-K dated as of June 30, 1998.
(2) Incorporated herein by reference to Exhibit 2.3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
(3) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-98542), as amended.
(4) Incorporated herein by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.
(5) Incorporated herein by reference to exhibits of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
(6) Incorporated herein by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000.
(7) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996.
(8) Incorporated herein by reference to Exhibit 10 of the Company's Current
Report on Form 8-K dated as of May 9, 1997.
(9) Incorporated herein by reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998.
(10) Incorporated by reference herein to Exhibit 2 of the Company's Schedule 13D
Report dated as of March 28, 2001.