================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________. COMMISSION FILE NUMBER 0-27084 CITRIX SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2275152 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 6400 N.W. 6TH WAY FORT LAUDERDALE, FLORIDA 33309 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 5, 2001 there were 187,717,774 shares of the registrant's Common Stock, $.001 par value per share, outstanding. ================================================================================
CITRIX SYSTEMS, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 CONTENTS <TABLE> <CAPTION> Page Number <S> <C> PART I: FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets: September 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Income: Three Months and Nine Months ended September 30, 2001 and 2000 5 Condensed Consolidated Statements of Cash Flows: Nine Months ended September 30, 2001 and 2000 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative & Qualitative Disclosures about Market Risk 34 PART II: OTHER INFORMATION Item 1. Legal Proceedings 34 Item 6. Exhibits and Reports on Form 8-K 34 Signature 35 </TABLE> 2
PART I: FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CITRIX SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 2001 2000 ---------------------------- (IN THOUSANDS) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents ...................................... $ 162,225 $ 375,025 Short-term investments ......................................... 53,680 91,612 Accounts receivable, net of allowances of $13,976 and $10,601 at September 30, 2001 and December 31, 2000, respectively ...... 79,203 37,299 Inventories .................................................... 3,733 4,622 Prepaid taxes .................................................. 5,986 26,715 Other prepaid and current assets ............................... 18,335 11,493 Current portion of deferred tax assets ......................... 29,969 39,965 ---------- ---------- Total current assets ........................................ 353,131 586,731 Long-term investments ............................................ 534,201 382,524 Property and equipment, net ...................................... 79,682 55,559 Intangible assets, net ........................................... 196,390 52,339 Long-term portion of deferred tax assets ......................... 18,984 18,977 Other assets, net ................................................ 29,546 16,443 ---------- ---------- $1,211,934 $1,112,573 ========== ========== </TABLE> Continued 3
CITRIX SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------------------------- (IN THOUSANDS, EXCEPT PAR VALUE) <S> <C> <C> LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ........................... $ 98,989 $ 78,739 Current portion of deferred revenues ............................ 88,820 80,648 ----------- ----------- Total current liabilities ......................................... 187,809 159,387 Long-term portion of deferred revenues ............................ 5,230 14,082 Convertible subordinated debentures ............................... 343,570 330,497 Commitments and contingencies Put warrants ...................................................... 19,284 15,732 Stockholders' equity: Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding........................................ -- -- Common stock at $.001 par value: 1,000,000 shares authorized; 195,524 and 187,872 issued at September 30, 2001 and December 31, 2000, respectively............................... 196 188 Additional paid-in capital ...................................... 471,325 351,053 Retained earnings ............................................... 400,236 320,617 Accumulated other comprehensive income (loss) ................... (740) (2,943) ----------- ----------- 871,017 668,915 Less -- common stock in treasury, at cost (8,874 and 3,817 shares at September 30, 2001 and December 31, 2000, respectively) (214,976) (76,040) ----------- ----------- Total stockholders' equity ................................... 656,041 592,875 ----------- ----------- $ 1,211,934 $ 1,112,573 =========== =========== </TABLE> See accompanying notes. 4
CITRIX SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ------------------------ 2001 2000 2001 2000 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) <S> <C> <C> <C> <C> Revenues: Revenues ..................................... $ 143,486 $ 103,482 $ 403,759 $ 317,202 Other revenues ............................... 10,009 10,009 29,822 29,890 --------- --------- --------- --------- Total net revenues ...................... 153,495 113,491 433,581 347,092 Cost of revenues (excluding amortization presented separately below) ............................. 7,573 8,854 22,107 22,387 --------- --------- --------- --------- Gross margin ..................................... 145,922 104,637 411,474 324,705 Operating expenses: Research and development ...................... 16,899 12,532 51,223 36,945 Sales, marketing and support .................. 59,067 43,999 165,318 130,613 General and administrative .................... 22,677 14,305 59,753 43,173 Amortization of intangible assets ............. 14,895 7,890 33,428 22,550 In-process research and development ........... -- -- 2,580 -- --------- --------- --------- --------- Total operating expenses .................. 113,538 78,726 312,302 233,281 --------- --------- --------- --------- Income from operations ........................... 32,384 25,911 99,172 91,424 Interest income .................................. 9,757 9,885 34,114 28,677 Interest expense ................................. (6,400) (4,281) (15,354) (12,665) Other income (expense), net ...................... 4,534 (634) (2,542) (100) --------- --------- --------- --------- Income before income taxes ....................... 40,275 30,881 115,390 107,336 Income taxes ..................................... 12,485 9,264 35,771 32,201 --------- --------- --------- --------- Net income ....................................... $ 27,790 $ 21,617 $ 79,619 $ 75,135 ========= ========= ========= ========= Earnings per common share: Basic earnings per share ...................... $ 0.15 $ 0.12 $ 0.43 $ 0.41 ========= ========= ========= ========= Weighted average shares outstanding ........... 186,308 185,627 185,215 184,749 ========= ========= ========= ========= Earnings per common share--assuming dilution: Diluted earnings per share .................... $ 0.14 $ 0.11 $ 0.41 $ 0.37 ========= ========= ========= ========= Weighted average shares outstanding ........... 196,835 192,879 195,648 201,536 ========= ========= ========= ========= </TABLE> See accompanying notes. 5
CITRIX SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 2001 2000 --------- --------- (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income .................................................................... $ 79,619 $ 75,135 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets .......................................... 33,428 22,550 Depreciation and amortization of property and equipment .................... 20,831 13,795 Other-than-temporary decline in market value of investments ................ 7,688 -- In-process research and development ........................................ 2,580 -- Provision for doubtful accounts ............................................ 2,367 1,167 Provision for product returns .............................................. 18,965 20,377 Provision for inventory reserves ........................................... 1,901 7,028 Tax benefit related to the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options .................. 22,532 72,026 Accretion of original issue discount and amortization of financing cost ................................................................... 13,302 12,560 Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable .................................................... (60,850) (17,721) Inventories ............................................................ (1,012) (4,343) Prepaid expenses and other current assets .............................. 17,224 (35,335) Other assets ........................................................... (13,332) (251) Deferred tax assets .................................................... 11,723 11,382 Accounts payable and accrued expenses .................................. 6,158 11,437 Deferred revenues ...................................................... (785) (20,025) Income taxes payable ................................................... 4,890 (5,742) --------- --------- Net cash provided by operating activities ..................................... 167,229 164,040 INVESTING ACTIVITIES Purchases of investments ...................................................... (520,760) (153,198) Proceeds from sales and maturities of investments ............................. 401,964 220,892 Cash paid for acquisitions, net of cash acquired .............................. (183,733) (30,102) Purchases of property and equipment ........................................... (39,857) (31,106) --------- --------- Net cash (used in) provided by investing activities ........................... (342,386) 6,486 FINANCING ACTIVITIES Net proceeds from issuance of common stock .................................... 106,299 57,727 Cash paid under stock repurchase programs ..................................... (151,462) (121,901) Proceeds from sale of put warrants ............................................ 7,528 -- Other ......................................................................... (8) (60) --------- --------- Net cash used in financing activities ......................................... (37,643) (64,234) --------- --------- Change in cash and cash equivalents ........................................... (212,800) 106,292 Cash and cash equivalents at beginning of period .............................. 375,025 216,116 --------- --------- Cash and cash equivalents at end of period .................................... $ 162,225 $ 322,408 ========= ========= </TABLE> See accompanying notes. 6
CITRIX SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 2001 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All adjustments which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full fiscal year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in this report and the consolidated financial statements and accompanying notes included in the Citrix Systems, Inc. (the "Company") Annual Report on Form 10-K for the year ended December 31, 2000. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amount of such estimates, when known, will vary from these estimates. INVESTMENTS The Company invests in marketable equity and corporate debt securities that are classified as either held-to-maturity or available-for-sale. The Company also makes strategic equity investments that are accounted for under the cost method. The Company does not recognize changes in the fair value of these investments in earnings unless a decline in the fair value of the investments is considered other than temporary. For the three and nine months ended September 30, 2001, the Company recorded $1.5 and $7.7 million, respectively, in investment write-downs, which are included in other income (expense), net on the condensed consolidated statements of income. In order to preserve the overall credit quality and rebalance the short- and long-term maturity of its available-for-sale investment portfolio, the Company sold corporate securities investments in September 2001 and purchased higher credit quality corporate securities with differing maturities. The sale of securities resulted in a realized gain of approximately $8.0 million for the three months ended September 30, 2001, which is included in other income (expense) on the accompanying statements of income. Amounts included in accumulated other comprehensive income (loss) in prior periods were reclassified to earnings using the specific identification method. 7
REVENUE RECOGNITION Revenue is recognized when earned. The Company's revenue recognition policies are in compliance with the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations, SOFTWARE REVENUE RECOGNITION. Product revenues are recognized upon shipment of the software product only if no significant Company obligations remain, the fee is fixed or determinable, and collection of the resulting receivable is deemed probable. Revenue from packaged product sales to distributors and resellers is recorded when related products are shipped. The Company also distributes software through electronic licensing. These revenues are recognized when the customer is provided with the activation keys that allow the customer to take immediate possession of the software pursuant to an executed agreement and purchase order. In software arrangements that include rights to multiple software products, post-contract customer support ("PCS"), and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on vendor-specific objective evidence ("VSOE"). The Company sells software and PCS separately and VSOE is determined by the price charged when each element is sold separately. Product returns and sales allowances, including stock rotations, are estimated, based on an analysis of historical experience, and provided for at the time of sale. Non-recurring engineering fees are recognized ratably as the work is performed. Revenues from training and consulting are recognized when the services are performed. Service and subscription revenues from customer maintenance fees for ongoing customer support and product updates and upgrades are based on the price charged or derived value of the undelivered elements and are recognized ratably over the term of the contract, which is typically 12-24 months. Service revenues are included in net revenues on the face of the condensed consolidated statements of income. In May 1997, the Company entered into a five year joint license, development and marketing agreement with Microsoft Corporation ("Microsoft"), as amended (the "Development Agreement,") pursuant to which the Company licensed its multi-user Windows NT extensions to Microsoft for inclusion in future versions of Windows NT server software. The initial fee of $75 million relating to the Development Agreement is being recognized ratably over the five-year term of the contract, which began in May 1997. The additional $100 million received pursuant to the Development Agreement, as amended, is being recognized ratably over the remaining term of the contract, effective April 1998. 3. EARNINGS PER SHARE Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options (calculated using the treasury stock method), and put warrants (calculated using the reverse treasury stock method). The shares of Common Stock issuable upon conversion of the Company's convertible subordinated debentures were excluded from the computation of diluted earnings per share due to their anti-dilutive effect. The following table sets forth the computation of basic and diluted earnings per share: 8
<TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) <S> <C> <C> <C> <C> Numerator: Net income ......................... $ 27,790 $ 21,617 $ 79,619 $ 75,135 ======== ======== ======== ======== Denominator: Denominator for basic earnings per share - weighted-average shares 186,308 185,627 185,215 184,749 Effect of dilutive securities: Put warrants .................. 76 -- 198 -- Employee stock options ........ 10,451 7,252 10,235 16,787 -------- -------- -------- -------- Dilutive potential common shares ... 10,527 7,252 10,433 16,787 -------- -------- -------- -------- Denominator for diluted earnings per share - weighted-average shares 196,835 192,879 195,648 201,536 ======== ======== ======== ======== Basic earnings per share ............. $ 0.15 $ 0.12 $ 0.43 $ 0.41 ======== ======== ======== ======== Diluted earnings per share ........... $ 0.14 $ 0.11 $ 0.41 $ 0.37 ======== ======== ======== ======== </TABLE> 4. ACQUISITION On April 30, 2001, the Company completed the acquisition of Sequoia Software Corporation ("Sequoia"), a provider of XML-pure portal software, for approximately $187.1 million in cash, including approximately $2.7 million in transaction costs, all of which was paid in the second quarter of 2001. The acquisition was accounted for as a purchase. The cost in excess of net tangible assets acquired was approximately $171.8 million, of which $29.4 million was allocated to core technology, $17.2 million to other identified intangibles and $122.6 million to goodwill. The goodwill and intangible assets are being amortized on a straight line basis over periods ranging from three to five years. A portion of the purchase price was allocated to in-process research and development, which had not reached technological feasibility and had no alternative future use, for which the Company incurred a pre-tax charge of approximately $2.6 million in the second quarter of 2001. The results of operations of Sequoia are included in the Company's results of operations from the date of the acquisition. The allocation of the purchase price was based on an independent valuation report. The purchase price allocation is subject to finalization of pre-existing contingencies and other purchase accounting adjustments, none of which are expected to be material. In February 2000, the Company acquired all of the operating assets of the Innovex Group, Inc. ("Innovex") for approximately $47.8 million, of which $28.7 million, excluding $275,000 in transaction costs, was paid at the closing date, and the balance payable in equal installments 18 and 24 months after the closing date, contingent on future events, as set forth in the acquisition agreement. In August 2001, the Company made a contingent payment of approximately $10.5 million, of which $8.1 million was recorded as additional purchase price to be amortized over the remaining life of the intangible assets acquired. The remaining payment is due in February 2002. 5. SEGMENT INFORMATION The Company operates in a single market consisting of the design, development, marketing and support of application delivery and management software and services for enterprise applications. Design, development, marketing and support operations outside of the United States are conducted through subsidiaries located primarily in Europe and the Asia Pacific region. 9
The Company tracks revenue by geography and product category but does not track expenses or identifiable assets on a product category basis. The Company does not engage in intercompany transfers between segments. The Company's management evaluates performance based primarily on revenues in the geographic locations in which the Company operates. Segment profit for each segment includes cost of goods sold and operating expenses directly attributable to the segment and excludes certain expenses that are managed outside the reportable segments. Costs excluded from segment profit primarily consist of research and development costs, amortization of intangible assets, interest, corporate expenses, income taxes, and non-recurring charges for purchased in-process technology. Corporate expenses are comprised primarily of corporate marketing costs, operations and other corporate general and administrative expenses which are separately managed. Accounting policies of the segments are the same as the Company's consolidated accounting policies. During 1999 and 2000, wholly-owned subsidiaries were formed in various locations within Europe, the Middle East and Africa ("EMEA") and Asia Pacific, respectively. These subsidiaries are responsible for sales and distribution of the Company's products. Prior to this change, sales in these geographic segments were classified as export sales from the Americas segment. For purposes of the presentation of segment information, the sales previously reported as Americas export sales have been reclassified to the geographical segments where the sale was made for each of the periods presented. Net revenues and segment profit, classified by the major geographic areas in which the Company operates, are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (IN THOUSANDS) <S> <C> <C> <C> <C> Net revenues: Americas (1) .......................... $ 75,432 $ 64,128 $ 212,924 $ 184,391 EMEA .................................. 53,955 32,677 156,503 114,885 Asia Pacific .......................... 14,099 6,677 34,332 17,926 Other (2) ............................. 10,009 10,009 29,822 29,890 --------- --------- --------- --------- Consolidated .......................... $ 153,495 $ 113,491 $ 433,581 $ 347,092 ========= ========= ========= ========= Segment profit: Americas (1) .......................... $ 39,984 $ 37,365 $ 120,110 $ 110,862 EMEA .................................. 34,418 20,510 98,766 74,909 Asia Pacific .......................... 8,084 214 18,054 2,783 Other (2) ............................. 10,009 10,009 29,822 29,890 Unallocated expenses (3): Amortization of intangibles ....... (14,895) (7,890) (33,428) (22,550) In process research and development -- -- (2,580) -- Research and development........... (16,899) (12,532) (51,223) (36,945) Net interest ...................... 7,891 4,970 16,218 15,913 Other corporate expenses .......... (28,317) (21,765) (80,349) (67,526) --------- --------- --------- --------- Consolidated income before income taxes $ 40,275 $ 30,881 $ 115,390 $ 107,336 ========= ========= ========= ========= </TABLE> (1) The Americas segment is comprised of the United States, Canada and Latin America. (2) Represents royalty fees in connection with the Development Agreement. (3) Represents expenses presented to management on a consolidated basis only and not allocated to the geographic operating segments. 10
Additional information regarding revenue by products and services groups is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Revenue: License Revenue ............. $132,497 $ 95,894 $373,017 $295,346 Services Revenue ............ 10,989 7,588 30,742 21,856 Royalty Revenue ............. 10,009 10,009 29,822 29,890 -------- -------- -------- -------- Net Revenues ................ $153,495 $113,491 $433,581 $347,092 ======== ======== ======== ======== </TABLE> 6. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, and its corresponding amendments under SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, hedging activities, and exposure definition. SFAS No. 133 requires the Company to record all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Derivatives not designated as hedging instruments must be adjusted to fair value through earnings in the current period. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The application of the provisions of SFAS No. 133 may impact the volatility of other income and other comprehensive income. For derivative instruments that hedge the exposure of variability in expected future cash flows that is attributable to a particular risk and that are designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income in stockholders' equity and reclassified into earnings in the same period or periods during which the hedged transaction also affects earnings. The remaining net gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows on the hedged item, if any, is recognized in current earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes attributing all derivatives that are designated as cash flow hedges to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in cash flows of the hedged item. Fluctuations in the value of the derivative instruments are generally offset by changes in the cash flows being hedged; however, if it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the affected derivative. The Company does not use derivative financial instruments for speculative or trading purposes. A substantial portion of the Company's anticipated overseas expense and capital purchasing activities are transacted in local currencies. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a hedging program. The Company uses forward foreign exchange contracts and purchase currency options to reduce a portion of its exposure to these potential changes. The terms of such instruments, and the hedging transactions to which they relate, generally do not exceed 12 months. Principal currencies hedged are British Pounds Sterling, Euros, Swiss Francs, and Australian Dollars. The Company may choose not to hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and availability of appropriate hedging instruments. 11
In connection with the efforts to manage the credit quality and maturities of its available-for-sale investment portfolio, during the third quarter of 2001 the Company terminated a forward bond purchase agreement previously designated as a hedge of forecasted purchases of corporate security investments. As a result, the Company recorded a realized gain of $1.4 million, which is included in other income (expense) on the 2001 condensed consolidated statements of income. In accordance with SFAS No. 133, hedges related to anticipated or forecasted transactions are designated and documented at hedge inception as cash flow hedges and evaluated for hedge effectiveness quarterly. The effective portions of the net gains or losses on forward contracts and currency options are reported as components of other comprehensive income in stockholders' equity and reclassified into earnings during the period in which the hedged transactions affect earnings. Any residual changes in fair value of the instruments, including ineffectiveness or time value of the option contracts, are recognized in current earnings in interest and other income. There was no transition adjustment impact recorded in earnings or accumulated other comprehensive income as a result of recognizing derivatives designated as cash flow hedging instruments at fair value. For the three and nine months ended September 30, 2001, the Company recorded net losses in operating expenses of approximately $955,000 and $1,688,000, respectively, representing the effective net loss on derivative instruments that settled in the respective periods. The hedge ineffectiveness and changes in the time value of option contracts on existing derivative instruments for the three and nine months ended September 30, 2001, was not material. In addition, there were no gains or losses resulting from the discontinuance of cash flow hedges, as all originally forecasted transactions are expected to occur. As of September 30, 2001, the Company recorded $0.5 million of derivative assets and $0.9 million of derivative liabilities, representing the fair values of the Company's outstanding derivative instruments. DERIVATIVE ACTIVITY IN ACCUMULATED OTHER COMPREHENSIVE INCOME As of September 30, 2001, the Company had a net deferred loss associated with cash flow hedges of approximately $0.4 million, net of taxes, all of which are expected to be reclassified to earnings by the end of the current year. The following table summarizes activity in other comprehensive income ("OCI") related to derivatives, net of taxes, during the three and nine months ended September 30, 2001: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 ------------------ ------------------ (IN THOUSANDS) <S> <C> <C> Cumulative effect of adopting SFAS No. 133 ...... $ -- $ -- Changes in fair value of derivatives ............ 365 (308) Losses (gains) reclassified from OCI ............ 328 (128) ---- ----- Change in unrealized derivative loss ....... $693 $(436) ==== ===== </TABLE> 12
7. COMPREHENSIVE INCOME Comprehensive income is comprised of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under accounting principles generally accepted in the United States are recorded as an element of stockholders' equity, but are excluded from net income. The Company's other comprehensive income is comprised of changes in fair value of derivatives designated as and effective as cash flow hedges and unrealized gains and losses, net of taxes, on marketable securities categorized as available-for-sale. The components of comprehensive income, net of tax, are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 ------- ------- ------- ------- (IN THOUSANDS) <S> <C> <C> <C> <C> Net income ........................................... $27,790 $21,617 $79,619 $75,135 Other comprehensive income: Change in unrealized gain (loss) on available-for-sale securities ................ (3,218) (4,730) 2,639 182 Change in unrealized loss on derivative instruments 693 -- (436) -- ------- ------- ------- ------- Comprehensive income ................................. $25,265 $16,887 $81,822 $75,317 ======= ======= ======= ======= </TABLE> The components of accumulated other comprehensive income, net of tax, are as follows: <TABLE> <CAPTION> SEPTEMBER 30, 2001 DECEMBER 31, 2000 ------------------ ----------------- (IN THOUSANDS) <S> <C> <C> Unrealized loss on investments .............. $(304) $(2,943) Unrealized loss on derivative instruments ... (436) -- ----- ------- Accumulated other comprehensive income (loss) $(740) $(2,943) ===== ======= </TABLE> 8. INCOME TAXES The Company maintains certain operational and administrative processes in overseas subsidiaries. As a result, foreign earnings are taxed at lower foreign tax rates. These earnings are permanently reinvested overseas in order to fund the Company's growth in overseas markets. The Company's estimated annual effective tax rate is 31% for 2001, up from 30% in 2000 as a result of the non-tax deductible goodwill and intangible amortization associated with the Sequoia acquisition, offset primarily by higher revenue and profits in foreign entities with lower tax rates in the current year. 9. OTHER REVENUES In May 1997, the Company entered into the Development Agreement with Microsoft, which provides for the licensing of certain of the Company's multi-user software enhancements and for the cooperation between the parties for the development of certain future software. At the time of the agreement, Microsoft held in excess of 5% of the Company's outstanding common stock and also had a representative on the Company's Board of Directors. Microsoft is no longer a significant stockholder and no longer has Board representation. Amounts arising from the Development Agreement are designated as other revenue. Development costs incurred in connection with the Development Agreement are immaterial and are expensed as incurred in cost of revenues. Deferred revenue at September 30, 2001 and December 31, 2000 includes $24.1 million and $53.9 million, respectively, related to this agreement which is being recognized ratably over the five year term of the Development Agreement, which began in May 1997. 13
10. STOCK REPURCHASE PROGRAMS On April 15, 1999, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $200 million of the Company's Common Stock. On April 26, 2001, the Board of Directors increased the scope of the repurchase program by authorizing the Company to repurchase up to $400 million of the Company's Common Stock (inclusive of the $200 million approved in April 1999). Purchases will be made from time to time in the open market and paid out of general corporate funds. During the nine months ended September 30, 2001, the Company purchased 2,436,000 shares of outstanding Common Stock on the open market at a total cost of $74.6 million. These shares have been recorded as treasury stock. On August 8, 2000, the Company entered into an agreement, as amended, with a counterparty in a private transaction to purchase up to approximately 4.8 million shares of the Company's Common Stock at various times through the third quarter of 2002. Pursuant to the terms of the agreement, $100 million was paid to the counterparty in the third quarter of 2000. The ultimate number of shares repurchased will depend on market conditions. During the nine months ended September 30, 2001, the Company received 1,731,000 shares under this agreement at a total cost of $37.5 million. These shares have been recorded as treasury stock. In September 2001, the Company entered into a second agreement with the same counterparty in a private transaction to purchase up to approximately 2.5 million shares of the Company's Common Stock at various times from January 2002 through December 2003. Pursuant to the terms of the agreement, $50 million was paid to the counterparty in the third quarter of 2001. The ultimate number of shares repurchased will depend on market conditions. In connection with the Company's stock repurchase program, in October 2000, the Board of Directors approved a program authorizing the Company to sell put warrants that entitle the holder of each warrant to sell to the Company, generally by physical delivery, one share of the Company's Common Stock at a specified price. During the nine months ended September 30, 2001, the Company sold 1,890,000 put warrants at an average strike price of $32.55 and received premium proceeds of $7.5 million. In the first nine months of 2001, the Company paid $26.9 million for the purchase of 890,000 shares upon the exercise of outstanding put warrants, while 1,000,000 put warrants expired unexercised. The common shares purchased upon exercise of these put warrants have been recorded as treasury stock. As of September 30, 2001, 1,300,000 put warrants were outstanding, expiring on various dates from October through December 2001, with exercise prices ranging from $30.84 to $35.96. As of September 30, 2001, the Company has a total potential repurchase obligation of approximately $42.7 million associated with the outstanding put warrants, of which $19.3 million is classified as a put warrants obligation on the condensed consolidated balance sheets. The remaining $23.4 million of outstanding put warrants permit a net-share settlement at the Company's option and do not result in a put warrant obligation on the balance sheet. The outstanding put warrants classified as a put warrants obligation on the condensed consolidated balance sheets will be reclassified to stockholders' equity when the warrant is exercised or expires. Under the terms of the put warrant agreements, the Company must maintain certain levels of cash and investments balances. As of September 30, 2001, the Company has approximately $250.1 million of cash and investments in excess of those required levels. 14
11. LEGAL PROCEEDINGS In June 2000, the Company and certain of its officers and directors were named as defendants in several securities class action lawsuits filed in the United States District Court for the Southern District of Florida on behalf of purchasers of the Company's Common Stock during the period October 20, 1999 to June 9, 2000 (the "Class Period"). These actions were consolidated as In Re Citrix Systems, Inc. Securities Litigation. The lawsuits allege that, during the Class Period, the defendants made misstatements to the investing public about the Company's financial condition and prospects. In September 2001, the Court granted the Company's motion to dismiss the complaint without prejudice. The plaintiffs were given until October 22, 2001 to file an amended complaint. The plaintiffs chose not to file an amended complaint and the court dismissed the action with prejudice on October 30, 2001. In September 2000, a stockholder filed a claim in the Court of Chancery of the State of Delaware against the Company and nine of its officers and directors alleging breach of fiduciary duty by failing to disclose all material information concerning the Company's financial condition at the time of the proxy solicitation. The complaint sought unspecified damages. In January 2001, a portion of the action was stayed by the court and later dismissed by the plaintiff without prejudice to refiling the action at a later date. In February 2001, the plaintiff filed a motion with the court for award of attorney's fees and litigation costs in the amount of $2,000,000 and $60,000, respectively. In September 2001, the court awarded plaintiff $140,000 and $8,250, respectively. 12. RECLASSIFICATION Certain reclassifications have been made for consistent presentation. 13. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, BUSINESS COMBINATIONS. SFAS No. 141 eliminates the use of the pooling of interests method for all business combinations initiated after June 30, 2001. SFAS No. 141 also provides new criteria to determine whether an acquired intangible asset should be recognized separately from goodwill, and requires expanded disclosure requirements. All business combinations completed after June 30, 2001 will be subject to the provisions of the statement. The Company adopted SFAS No. 141 in the third quarter of 2001, and the impact was not material to its consolidated financial statements. In July 2001, the FASB issued SFAS No. 142, GOODWILL AND INTANGIBLE ASSETS. SFAS No. 142 eliminates amortization of goodwill, and requires an impairment-only model to recording the value of goodwill. SFAS No. 142 requires that impairment be tested at least annually at the reporting unit level, using a two-step impairment test. The first step determines if goodwill is impaired by comparing the fair value of the reporting unit as a whole to the book value. If a deficiency exists, the second step measures the amount of the impairment loss as the difference between the implied fair value of goodwill and its carrying amount. Other purchased intangibles with indefinite economic lives are required to be tested for impairment annually using a lower of cost or fair value approach. Intangible assets with estimable useful lives are required to be amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The provisions of the statement will be effective for fiscal years beginning after December 15, 2001. Upon adoption, goodwill related to acquisitions completed before the date of adoption would be subject to the provisions of the statement. Amortization of the remaining book value of goodwill would cease and the new impairment-only approach would apply. Impairment charges within the first six months of adoption would be reported as a cumulative effect of a change in accounting principle in the income statement. 15
Impairment charges thereafter would be reported in operating income. The Company plans to adopt SFAS No. 142 in the first quarter of 2002. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $145.0 million and unamortized identified intangibles with estimable useful lives in the amount of $36.1 million, all of which will be subject to the provisions of Statements 141 and 142. In the first quarter of adoption, the Company expects a pre-tax reduction in amortization expense of approximately $11 million. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate whether the Company will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, markets, sells and supports comprehensive delivery and management software that enables effective and efficient deployment and management of enterprise applications, including those designed for Microsoft Windows(R) operating systems and UNIX(R) operating systems. The Company's largest source of revenue consists of the MetaFrame(R) products and related options. The MetaFrame products, which began shipping in the second quarter of 1998, permit organizations to deploy and manage applications without regard to location, network connection or type of client hardware platforms. On May 9, 1997, the Company and Microsoft entered into a License, Development and Marketing Agreement, as amended (the "Development Agreement"), which provides for the licensing to Microsoft of certain of the Company's multi-user software enhancements to Microsoft's Windows NT Server and for the cooperation between the parties for the development of certain future multi-user versions of Microsoft Windows NT Server, Terminal Server Edition and Microsoft Windows 2000. As a result of the Development Agreement, the Company continues to support the Microsoft Windows NT platform, but the MetaFrame products and later releases no longer directly incorporate Windows NT technology. The Company plans to continue developing enhancements to its MetaFrame product line and expects that these products and associated options will constitute a majority of its revenues for the foreseeable future. The Company's revenue recognition policies are in compliance with the American Institute of Certified Public Accountants Statement of Position ("SOP") 97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations, SOFTWARE REVENUE RECOGNITION as described in Note 2 of the Notes to Condensed Consolidated Financial Statements included in this report. On April 30, 2001, the Company completed the acquisition of Sequoia Software Corporation ("Sequoia") for approximately $187.1 million in cash, including $2.7 million in acquisition costs. Sequoia is a provider of XML-pure portal software. The acquisition was accounted for as a purchase. The following discussion relating to the individual financial statement captions, the Company's overall financial performance, operations and financial position should be read in conjunction with the factors and events described in "-OVERVIEW" and "-CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS" which may impact the Company's future performance and financial position. 17
RESULTS OF OPERATIONS The following table sets forth statement of income data of the Company expressed as a percentage of net revenues and as a percentage of change from period-to-period for the periods indicated. <TABLE> <CAPTION> INCREASE/(DECREASE) FOR THE --------------------------------------- THREE MONTHS NINE MONTHS THREE MONTHS ENDED NINE MONTHS ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 -------------- -------------- VS. VS. 2001 2000 2001 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ----- ----- ----- ----- ------------------ ------------------ <S> <C> <C> <C> <C> <C> <C> Net revenues ............................ 100.0% 100.0% 100.0% 100.0% 35.2% 24.9% Cost of revenues (excluding amortization presented separately below) .......... 4.9 7.8 5.1 6.5 (14.5) (1.3) ----- ----- ----- ----- Gross margin ............................ 95.1 92.2 94.9 93.5 39.5 26.7 Operating expenses: Research and development ............. 11.0 11.0 11.8 10.6 34.8 38.6 Sales, marketing and support ......... 38.5 38.8 38.1 37.6 34.2 26.6 General and administrative ........... 14.8 12.6 13.8 12.5 58.5 38.4 Amortization of intangible assets .... 9.7 7.0 7.7 6.5 88.8 48.2 In-process research and development ........................ -- -- 0.6 -- * * ----- ----- ----- ----- Total operating expenses ........... 74.0 69.4 72.0 67.2 44.2 33.9 ----- ----- ----- ----- Income from operations .................. 21.1 22.8 22.9 26.3 25.0 8.5 Interest income ......................... 6.4 8.7 7.9 8.2 (1.3) 19.0 Interest expense ........................ (4.2) (3.7) (3.5) (3.6) 49.5 21.2 Other income (expense), net ............. 2.9 (0.6) (0.6) -- * * ----- ----- ----- ----- Income before income taxes .............. 26.2 27.2 26.7 30.9 30.4 7.5 Income taxes ............................ 8.1 8.2 8.3 9.3 34.8 11.1 ----- ----- ----- ----- Net income .............................. 18.1% 19.0% 18.4% 21.6% 28.6% (6.0)% ===== ===== ===== ===== </TABLE> * Not meaningful. Net Revenues. Previously, the Company presented revenues in the following five categories: Application Servers, Management Products, Computing Appliances Products, Microsoft Royalties and Services and Other Revenue. Application Servers revenue primarily represented fees related to the licensing of the Company's MetaFrame products, subscriptions for product support, updates and upgrades and additional user licenses. Management Products consisted of Load Balancing Services, Resource Management Services and other options. Computing Appliances Products revenue consisted of license fees and royalties from OEMs who are granted a license to incorporate and/or market the Company's multi-user technologies in their own product offerings. Microsoft Royalties represented fees recognized in connection with the Development Agreement. Services and Other Revenue consisted primarily of customer support, as well as consulting in the delivery of implementation services and systems integration solutions. Some of the management capabilities such as Load Balancing Services and Resource Management Services, traditionally included in Management Products, have been bundled into the MetaFrame XP products introduced in the first quarter of 2001. As a result, the Company has reclassified net revenues into the following three categories as presented below: License Revenue, Services Revenue, and Royalty Revenue. License Revenue primarily represents fees related to the licensing of the Company's MetaFrame products, subscriptions for product support, updates and upgrades, additional user licenses, management options such as Load Balancing Services and Resource 18
Management Services, and license fees from OEMs who are granted a license to incorporate and/or market the Company's multi-user technologies in their own product offerings. Services Revenue consists primarily of customer support and consulting in the delivery of implementation services and systems integration solutions. Royalty Revenue represents the fees recognized in connection with the Development Agreement. With respect to product mix, the increase in net revenues for the three and nine months ended September 30, 2001 compared to the three and nine months ended September 30, 2000 was primarily attributable to an increase in License Revenue resulting from an increase in the number of licenses sold of MetaFrame for Windows operating systems. The Company expects that License Revenues will continue to make up a large percentage of net revenues. An analysis of the Company's net revenues is presented below: <TABLE> <CAPTION> INCREASE FOR THE ---------------------------------------- THREE MONTHS NINE MONTHS THREE MONTHS ENDED NINE MONTHS ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 ------------------ ------------------ VS. VS. 2001 2000 2001 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ---- ---- ---- ---- ------------------ ------------------ <S> <C> <C> <C> <C> <C> <C> License Revenue........ 86% 84% 86% 85% 38% 26% Services Revenue....... 7 7 7 6 45 41 Royalty Revenue........ 7 9 7 9 -- -- --- --- --- --- Net Revenues........... 100% 100% 100% 100% 35% 25% </TABLE> International and Geographic Segment Revenues. International revenues (sales outside of the United States) accounted for approximately 47% and 37% of net revenues for the three months ended September 30, 2001 and 2000, respectively, and approximately 48% and 40% of net revenues for the nine months ended September 30, 2001 and 2000, respectively. The increase in international revenues as a percentage of net revenues was primarily due to the Company's increased sales and marketing efforts and continued demand for the Company's products in Europe and Asia. For detailed information on international revenues, please refer to Note 5 to the Company's Condensed Consolidated Financial Statements appearing in this report. An analysis of geographic segment net revenue is presented below: <TABLE> <CAPTION> INCREASE FOR THE ---------------------------------------- THREE MONTHS NINE MONTHS THREE MONTHS ENDED NINE MONTHS ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 SEPTEMBER 30, 2001 ------------------ ----------------- VS. VS. 2001 2000 2001 2000 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ---- ---- ---- ---- ------------------ ------------------ <S> <C> <C> <C> <C> <C> <C> Americas (1)....... 49% 56% 49% 53% 18% 15% EMEA............... 35 29 36 33 65 36 Asia Pacific....... 9 6 8 5 111 92 Other (2).......... 7 9 7 9 -- -- --- --- --- --- Net Revenues....... 100% 100% 100% 100% 35% 25% </TABLE> (1) The Americas segment is comprised of the United States, Canada and Latin America. (2) Primarily represents royalty fees earned in connection with the Development Agreement. 19
In terms of geographic segments, the increase in net revenues for the three and nine months ended September 30, 2001 compared to the same periods in 2000 was primarily due to the Company's increased sales and marketing efforts and continued demand for the Company's products across all geographic segments. Revenues have notably increased in the Asia Pacific segment, particularly due to increased market acceptance in Japan, and in the EMEA segment, particularly due to increased market acceptance in Europe. Revenue by geographic segment as a percentage of net revenues for the three and nine month periods ended September 30, 2001 compared to the same periods in 2000 reflects a decrease in the Americas as revenues in the EMEA and Asia Pacific segments have increased. The Company expects to continue investing in international markets and expanding its international operations by establishing additional foreign operations, hiring personnel, expanding its international sales force and adding new third party channel partners. Cost of Revenues. Cost of revenues consisted primarily of compensation and other personnel-related costs for consulting services, as well as the cost of royalties, product media and duplication, manuals, packaging materials and shipping expense. All development costs incurred in connection with the Development Agreement are immaterial and are expensed as incurred in cost of revenues. The Company's cost of revenues exclude amortization of core technology. Gross Margin. Gross margin as a percentage of net revenue increased for the three and nine months ended September 30, 2001 compared to the three and nine months ended September 30, 2000 primarily due to reserves for obsolete inventory recorded in the second and third quarters of 2000. The Company anticipates gross margin as a percentage of net revenues will remain relatively stable as compared with current levels. Research and Development Expenses. Research and development expenses consisted primarily of personnel-related costs. All development costs included in the research and development of software products and enhancements to existing products have been expensed as incurred except for certain intangible assets related to acquisitions described herein. The increase in research and development expenses for the three months ended September 30, 2001 as compared to the same period in the prior year resulted primarily from increased staffing, associated salaries and related expenses required to expand the Company's product lines. The increase in research and development expenses for the nine months ended September 30, 2001 as compared to the same period in the prior year was primarily due to increased staffing and associated costs, as well as costs incurred for third party software and external consultants and developers to expand and enhance the Company's product lines. Sales, Marketing and Support Expenses. The increase in sales, marketing and support expenses for the three and nine months ended September 30, 2001 resulted primarily from increased headcount levels and associated salaries, commissions and related expenses. The increase was also due to a higher level of marketing programs directed at customer and business partner acquisition and retention, and additional promotional activities related to specific products, such as MetaFrame XP introduced in February 2001. 20
General and Administrative Expenses. The increase in general and administrative expenses for the three and nine months ended September 30, 2001 as compared to the comparable periods in 2000 resulted primarily from increased staff, associated salaries and related expenses necessary to support overall increases in the scope of the Company's operations. The increase was also due to a reallocation of certain overhead costs from other departments into certain general and administrative costs centers. Additionally, the increase for the nine months ended September 30, 2001 as compared to the comparable period in 2000 was due to an increase in legal fees relating to litigation matters and accounting fees. Amortization of Intangible Assets. The amortization of goodwill and identifiable intangible assets increased for the three and nine months ended September 30, 2001 as compared to the comparable periods in 2000 due to the acquisition of Sequoia in the second quarter of 2001, and payment of the first installment in August 2001 of the contingent payments associated with the Innovex acquisition, resulting in an additional $8.1 million of goodwill. As of September 30, 2001, the Company had net goodwill and identifiable intangible assets of $196.4 million with remaining useful lives of one to five years. The Company anticipates that amortization of goodwill and identifiable intangible assets will increase for the remainder of 2001 primarily due to the full quarter effect of the Innovex contingent payment made in the third quarter of 2001 and as the Company continues to search for suitable acquisition candidates. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with these statements. Other intangibles will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $145.0 million and unamortized identified intangibles with estimable useful lives in the amount of $36.1 million, all of which will be subject to the provisions of Statements 141 and 142. In the first quarter of adoption, the Company expects a pre-tax reduction in amortization expense of approximately $11 million as a result of applying the nonamortization provisions of the statement. During 2002, the Company will complete the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle, or what the effect of these tests will be on the earnings and financial position of the Company. Interest Income. Interest income for the three months ended September 30, 2001 remained relatively flat while the nine months ended September 30, 2001 as compared to the same period in 2000 increased as the Company changed the composition of its investment portfolio in the fourth quarter of 2000 from tax-exempt and taxable to predominantly taxable securities. The Company may acquire or make investments in companies it believes are related to its strategic objectives. Such investments will reduce the Company's cash and/or investment balances and therefore may reduce interest income. Interest Expense. The increase in interest expense for the three and nine months ended September 30, 2001 as compared to the same periods in 2000 was primarily due to interest on contingent payments associated with the Innovex acquisition, as well as the accretion of the original issue discount related to the zero coupon convertible subordinated debentures. 21
Other Income (Expense), Net. The increase in other income (expense), net for the three months ended September 30, 2001 compared to the same period in 2000 was primarily due to realized gains of $8.0 million associated with purchases and sales of available-for-sale securities and associated contracts, partially offset by a $1.5 million loss in the third quarter of 2001 resulting from an other-than-temporary decline in fair value of certain of the Company's equity investments. The decrease in other income (expense), net for the nine months ended September 30, 2001 compared to the same period in 2000 was primarily due to $7.7 million of losses recorded in the first nine months of 2001 resulting from other-than-temporary declines in fair value of certain of the Company's equity investments. The Company may acquire or make investments in companies it believes are related to its strategic objectives. The Company periodically evaluates the carrying value of its investments to determine if there has been any impairment of value that is other-than-temporary. Income Taxes. The Company's estimated annual effective tax rate is 31% for 2001, up from 30% in 2000 as a result of the non-tax deductible goodwill and intangible amortization associated with the Sequoia acquisition, offset primarily by higher revenue and profits in foreign entities with lower tax rates in the current year. IN-PROCESS RESEARCH AND DEVELOPMENT In 1999, the Company completed the acquisition of certain in-process software technologies from ViewSoft, in which it allocated $2.3 million of the purchase price to in-process research and development. The in-process research and development acquired in the ViewSoft acquisition consisted primarily of one significant research and development project, ViewSoft Internet 4.0. This project enables multi-tier, web-based application development and deployment. At the date of the valuation, ViewSoft was in development with this product. The product was intended to operate in the multi-tier web application market and was not intended to operate in a MetaFrame environment. Since the date of acquisition, the Company has used some of the acquired in-process technology to develop new product offerings and enhancements, which will become part of the Company's suite of products when completed. The Company currently expects to complete the development of the project associated with the Viewsoft acquisition in the third quarter of 2002. Upon completion, the Company intends to embed this technology into portal technology offerings. The nature of the efforts required to develop and integrate the acquired in-process technology into commercially viable products or features and functionalities within the Company's suite of existing products principally relate to the completion of all planning, designing and testing activities that are necessary to establish that the products can be produced to meet design requirements, including functions, features and technical performance requirements. The Company currently expects that products utilizing the acquired in-process technology will be successfully developed, but there can be no assurance that commercial viability of any of these products will be achieved. Furthermore, future developments in the software industry, particularly the server-based computing environment, changes in technology, changes in other products and offerings or other developments may cause the Company to alter or abandon product plans. 22
Failure to complete the development of this project in its entirety, or in a timely manner, could have a material adverse impact on the Company's financial condition and results of operations. No assurance can be given that actual revenues and operating profit attributable to acquired in-process research and development will not deviate from the projections used to initially value such technology when acquired. Ongoing operations and financial results for acquired assets, and the Company as a whole, are subject to a variety of factors, which may not have been known or estimable at the date of such transactions. The remaining efforts to complete the project relate primarily to integration work and any associated design, development or rework that may be required to support this integration. The research and development risks associated with this project relate primarily to potential product limitations and any rework that will be required for integration with the Company's portal software. The actual and estimated costs to complete and completion dates of the in-process and core technology acquired are as follows: <TABLE> <CAPTION> VIEWSOFT -------------- (IN THOUSANDS) <S> <C> Date acquired................................................................ July 1999 Cost incurred to date........................................................ $5,900 Estimated cost to complete................................................... 310 ------ Total estimated project cost................................................. $6,210 ====== Estimated cost to complete at date of valuation.............................. $ 660 ====== Estimated completion date at date of valuation............................... Fourth Quarter of 1999 Estimated completion date.................................................... Third Quarter of 2002 </TABLE> The estimated completion date of the ViewSoft project has been delayed from the originally anticipated completion date due to increases in project scope, a longer testing period, transition of the development team, and design, development and rework required to integrate the technology with the Company's portal offerings. The Company is currently unable to determine the impact of such delays on its business, future results of operations and financial condition. There can be no assurance that the Company will not incur additional charges in subsequent periods to reflect costs associated with completing this project or that the Company will be successful in its efforts to integrate and further develop this technology. In April 2001, the Company completed the acquisition of Sequoia Software Corporation. A portion of the purchase price was allocated to in-process research and development, which had not reached technological feasibility and had no alternative future use, for which the Company incurred a pre-tax charge of approximately $2.6 million in the second quarter of 2001. 23
LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2001, the Company generated positive operating cash flows of $167.2 million, related primarily to net income of $79.6 million, adjusted for, among other things, tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of $22.5 million, non-cash charges including depreciation and amortization expense of $54.3 million, and provisions for product returns of $19.0 million primarily due to stock rotations. These cash inflows were partially offset by an aggregate decrease in cash flow from operating assets and liabilities of $36.0 million. Cash used in investing activities of $342.4 million related primarily to net cash paid for acquisitions, primarily Sequoia, of $183.7 million, the net purchase of investments of $118.8 million and the expenditure of $39.9 million for the purchase of property and buildings and costs associated with the Company's enterprise resource planning implementation. Cash used in financing activities of $37.6 million related to the expenditure of $151.5 million for stock repurchase programs, partially offset by the proceeds from the issuance of common stock under the Company's stock option plans of $106.3 million. As of September 30, 2001, the Company had $750.1 million in cash and investments, including $162.2 million in cash and cash equivalents, and $165.3 million of working capital. The Company's cash and cash equivalents are invested in investment grade, highly liquid securities to minimize interest rate risk and allow for flexibility in the event of immediate cash needs. The Company's short- and long-term investments consist primarily of corporate securities, government securities, commercial paper, and strategic equity investments. The Company's investments are classified as available for sale or as held-to-maturity, therefore, the Company does not recognize changes in the fair value of these investments in earnings unless a decline in the fair value of the investments is other than temporary. The Company regularly evaluates interest rate sensitivity as well as the scheduled maturity dates of its underlying cash and investments portfolio. From time-to-time, the Company may execute transactions to preserve the overall credit quality of its investments and to rebalance the short and long-term maturity of the overall portfolio to match planned sources and uses of such funds. To the extent that such transactions result in the liquidation of securities classified as available for sale, gains and losses will be reclassified from other comprehensive income (loss) and be realized in the period of such transaction. At September 30, 2001, the Company had approximately $79.2 million in accounts receivable, net of allowances, and $94.1 million of deferred revenues, of which the Company anticipates $88.8 million will be earned over the next twelve months. On April 15, 1999, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $200 million of the Company's Common Stock. On April 26, 2001, the Board of Directors increased the scope of the repurchase program by authorizing the Company to repurchase up to $400 million of the Company's Common Stock (inclusive of the $200 million approved in April 1999). Purchases will be made from time to time in the open market and paid out of general corporate funds. During the nine months ended September 30, 2001, the Company purchased 2,436,000 shares of outstanding Common Stock on the open market at an average price of $30.62 per share, for an aggregate cost of $74.6 million. These shares have been recorded as treasury stock. On August 8, 2000, the Company entered into an agreement, as amended, with a counterparty in a private transaction to purchase up to approximately 4.8 million shares of the Company's Common Stock at various times through the third quarter of 2002. Pursuant to the terms of the agreement, $100 million was paid to the counterparty 24
in the third quarter of 2000. The ultimate number of shares repurchased will depend on market conditions. During the nine months ended September 30, 2001, the Company received 1,731,000 shares under this agreement at an average price of $21.65 per share, for an aggregate cost of $37.5 million. These shares have been recorded as treasury stock. In September 2001, the Company entered into a second agreement with the same counterparty in a private transaction to purchase up to approximately 2.5 million shares of the Company's Common Stock at various times from January 2002 through December 2003. Pursuant to the terms of the agreement, $50 million was paid to the counterparty in the third quarter of 2001. The ultimate number of shares repurchased will depend on market conditions. In connection with the Company's stock repurchase program, in October 2000, the Board of Directors approved a program authorizing the Company to sell put warrants that entitle the holder of each warrant to sell to the Company, generally by physical delivery, one share of the Company's Common Stock at a specified price. During the nine months ended September 30, 2001, the Company sold 1,890,000 put warrants at an average strike price of $32.55 and received premium proceeds of $7.5 million. In the first nine months of 2001, the Company paid $26.9 million for the purchase of 890,000 shares upon the exercise of outstanding put warrants, while 1,000,000 put warrants expired unexercised. The common shares purchased upon exercise of these put warrants have been recorded as treasury stock. As of September 30, 2001, 1,300,000 put warrants were outstanding, expiring on various dates from October through December 2001 with exercise prices ranging from $30.84 to $35.96. As of September 30, 2001, the Company has a total potential repurchase obligation of approximately $42.7 million associated with the outstanding put warrants. Under the terms of the put warrant agreements, the Company must maintain certain levels of cash and investments balances. As of September 30, 2001, the Company has approximately $250.1 million of cash and investments in excess of those required levels. In October 2000, the Board of Directors approved a program authorizing the Company to repurchase up to $25 million of the zero coupon convertible subordinated debentures in open market purchases. As of September 30, 2001, none of the Company's debentures had been repurchased under this program. On April 30, 2001, the Company completed the acquisition of Sequoia Software Corporation for approximately $187.1 million in cash, including approximately $2.7 million in transaction costs, all of which was paid in the second quarter of 2001. The Company believes existing cash and investments together with cash flow expected from operations will be sufficient to meet operating and capital expenditures requirements through 2001. The Company may from time to time seek to raise additional funds through public or private financing. The Company may also acquire or make investments in companies it believes are related to its strategic objectives. Such investments may reduce the Company's available working capital. CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS The Company's operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. Except for the historical information in this report, the matters contained in this report include forward-looking statements that involve risks and uncertainties. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management from time to time. Such factors, among others, may have a material adverse effect upon the Company's business, results of operations and financial condition. 25
Reliance Upon Strategic Relationship with Microsoft Microsoft is the leading provider of desktop operating systems. The Company depends upon the license of key technology from Microsoft, including certain source and object code licenses and technical support. The Company also depends upon its strategic alliance agreement with Microsoft pursuant to which the Company and Microsoft have agreed to cooperate to develop advanced operating systems and promote Windows application program interfaces. The Company's relationship with Microsoft is subject to the following risks and uncertainties, which individually, or in the aggregate, could cause a material adverse effect in the Company's business, results of operations and financial condition: - Competition with Microsoft. Microsoft Windows NT Server, Terminal Server Edition and Microsoft Windows 2000 (collectively, "Windows Server Operating Systems") are, and future product offerings by Microsoft may be, competitive with the Company's current MetaFrame products, and any future product offerings by the Company. - Expiration of Microsoft's Endorsement of the ICA Protocol. Microsoft's obligation to endorse only the Company's ICA protocol as the preferred method to provide multi-user Windows access for devices other than Windows clients expired in November 1999. Microsoft may now market or endorse other methods to provide multi-user Windows access to non-Windows client devices. - Dependence on Microsoft for Commercialization. The Company's ability to successfully commercialize certain of its MetaFrame products depends on Microsoft's ability to market Windows Server Operating Systems products. The Company does not have control over Microsoft's distributors and resellers and, to the Company's knowledge, Microsoft's distributors and resellers are not obligated to purchase products from Microsoft. - Product Release Delays. There may be delays in the release and shipment of future versions of Windows Server Operating Systems. - Termination of Development Agreement Obligations. The Company's Development Agreement with Microsoft expires in May 2002. Upon expiration, Microsoft may change its Windows NT, Terminal Server Edition or Windows 2000 products to render them inoperable with the Company's MetaFrame product offerings. Further, upon termination of the Development Agreement, Microsoft may facilitate the ability of third parties to compete with the Company's MetaFrame products. Finally, future product offerings by Microsoft do not need to provide for interoperability with the Company's products. The lack of interoperability between present or future Microsoft products and the Company's products could cause a material adverse effect in the Company's business, results of operations and financial condition. Dependence Upon Broad-Based Acceptance of ICA Protocol The Company believes that its success in the markets in which it competes will depend upon its ability to make ICA protocol a widely accepted standard for supporting Windows and UNIX applications. If another standard emerges or if the Company otherwise fails to achieve wide acceptance of the ICA protocol as a standard for supporting Windows or UNIX applications, the Company's business, operating results and financial condition could be materially adversely affected. Microsoft includes as a component of Windows Server Operating Systems 26
its Remote Desktop Protocol (RDP), which has certain of the capabilities of the Company's ICA protocol, and may offer customers a competitive solution. The Company believes that its success is dependent on its ability to enhance and differentiate its ICA protocol, and foster broad acceptance of the ICA protocol based on its performance, scalability, reliability and enhanced features. In addition, the Company's ability to win broad market acceptance of its ICA protocol will depend upon the degree of success achieved by its strategic partners in marketing their respective platforms, product pricing and customers' assessment of its technical, managerial service and support expertise. If another standard emerges or if the Company fails to achieve wide acceptance of the ICA protocol as a standard for supporting Windows and UNIX applications, the Company's business, operating results and financial condition could be materially adversely affected. Dependence Upon Strategic Relationships In addition to its relationship with Microsoft, the Company has strategic relationships with IBM, Compaq, Hewlett Packard and others. The Company depends upon its strategic partners to successfully incorporate the Company's technology into their products and to market and sell such products. If the Company is unable to maintain its current strategic relationships or develop additional strategic relationships, or if any of its key strategic partners are unsuccessful at incorporating the Company's technology into their products or marketing or selling such products, the Company's business, operating results and financial condition could be materially adversely affected. Competition The markets in which the Company competes, including the application server market and the portal market, are intensely competitive. Most of its competitors and potential competitors, including Microsoft, have significantly greater financial, technical, sales and marketing and other resources than the Company. The announcement of the release and the actual release of products competitive with the Company's existing and future product lines, such as Windows Server Operating Systems and related enhancements, could cause existing and potential customers of the Company to postpone or cancel plans to license the Company's products. This would adversely impact the Company's business, operating results and financial condition. Furthermore, the Company's ability to market ICA, MetaFrame and other future product offerings may be affected by Microsoft's licensing and pricing scheme for client devices implementing the Company's product offerings, which attach to Windows Server Operating Systems. In addition, alternative products exist for web applications in the internet software market that directly or indirectly compete with the Company's products. Existing or new products that extend internet software to provide database access or interactive computing may materially impact the Company's ability to sell its products in this market. As markets for the Company's products continue to develop, additional companies, including companies with significant market presence in the computer hardware, software and networking industries, may enter the markets in which the Company competes and further intensify competition. Finally, although the Company believes that price has historically been a less significant competitive factor than product performance, reliability and functionality, the Company believes that price competition may become more significant in the future. The Company may not be able to maintain its historic prices and margins, and any inability to do so could adversely affect its business, results of operations and financial condition. 27
Dependence on Proprietary Technology The Company relies primarily on a combination of copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual provisions, to protect its proprietary rights. The Company's efforts to protect its proprietary technology rights may not be successful. The loss of any material trade secret, trademark, tradename, or copyright could have a material adverse effect on the Company. Despite the Company's precautions, it may be possible for unauthorized third parties to copy certain portions of the Company's products or to obtain and use information regarded as proprietary. A significant portion of the Company's sales are derived from the licensing of its packaged products under "shrink wrap" license agreements that are not signed by licensees and electronic licensing agreements that may be unenforceable under the laws of certain foreign jurisdictions. In addition, the Company's ability to protect its proprietary rights may be affected by the following: - Differences in International Law. The laws of some foreign countries do not protect the Company's intellectual property to the same extent as do the laws of the United States and Canada. - Third Party Infringement Claims. Third parties may assert infringement claims against the Company in the future. This may result in costly litigation or require the Company to obtain a license to intellectual property rights of such third parties. Such licenses may not be available on reasonable terms or at all. Product Concentration The Company anticipates that its MetaFrame product line and related enhancements will constitute the majority of its revenue for the foreseeable future. The Company's ability to generate revenue from its MetaFrame product will depend upon market acceptance of Windows Server Operating Systems and/or UNIX Operating Systems. Declines in demand for products based on MetaFrame technology may occur as a result of new competitive product releases, price competition, new products or updates to existing products, lack of success of the Company's strategic partners, technological change or other factors. Dependence on Key Personnel The Company's success will depend, in large part, upon the services of a number of key employees. The Company does not have long-term employment agreements with any of its key personnel. Any officer or employee can terminate his or her relationship at any time. The effective management of the Company's anticipated growth will depend, in a large part, upon the Company's ability to (i) retain its highly skilled technical, managerial and marketing personnel; and (ii) to attract and maintain replacements for and additions to such personnel in the future. Competition for such personnel is intense and may affect the Company's ability to successfully attract, assimilate or retain sufficiently qualified personnel. New Products and Technological Change The markets for the Company's products are relatively new and are characterized by: - rapid technological change; - evolving industry standards; 28
- changes in end-user requirements; and - frequent new product introductions and enhancements. These market characteristics will require the Company to continually enhance its current products and develop and introduce new products to keep pace with technological developments and respond to evolving end-user requirements. Additionally, the Company and others may announce new product enhancements or technologies that could replace or shorten the life cycle of the Company's existing product offerings. The Company believes it will incur additional costs and royalties associated with the development, licensing or acquisition of new technologies or enhancements to existing products. This will increase the Company's cost of revenues and operating expenses. The Company cannot currently quantify such increase with respect to transactions that have not occurred. The Company may use a substantial portion of its cash and investments to fund these additional costs. The Company believes that it will continue to rely, in part, on third party licensing arrangements to enhance and differentiate the Company's products. Such licensing arrangements are subject to a number of risks and uncertainties such as undetected errors in third party software, disagreement over the scope of the license and other key terms, such as royalties payable, and infringement actions brought by third party licensees. In addition, the loss or inability to maintain any of these third party licenses could result in delays in the shipment or release of the Company products, which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company may need to hire additional personnel to develop new products, product enhancements and technologies. If the Company is unable to add the necessary staff and resources, future enhancement and additional features to its existing or future products may be delayed, which may have a material adverse effect on the Company's business, results of operations and financial condition. Potential for Undetected Errors Despite significant testing by the Company and by current and potential customers, new products may contain errors after commencement of commercial shipments. Additionally, the Company's products depend upon certain third party products, which may contain defects and could reduce the performance of the Company's products or render them useless. Since the Company's products are often used in mission-critical applications, errors in the Company's products or the products of third parties upon which the Company's products rely could give rise to warranty or other claims by the Company's customers. Reliance Upon Indirect Distribution Channels and Major Distributors The Company relies significantly on independent distributors and resellers for the marketing and distribution of its products. The Company does not control its distributors and resellers. Additionally, the Company's distributors and resellers are not obligated to purchase products from the Company and may also represent other lines of products. 29
Need to Expand Channels of Distribution The Company intends to leverage its relationships with hardware and software vendors and systems integrators to encourage them to recommend or distribute the Company's products. In addition, an integral part of the Company's strategy is to expand its ability to reach large enterprise customers by adding channel partners and expanding its offering of consulting services. The Company is currently investing, and intends to continue to invest, significant resources to develop these channels, which could reduce the Company's profits. Need to Attract Large Enterprise Customers The Company intends to expand its ability to reach large enterprise customers by adding channel partners and expanding its offering of consulting services. The Company's inability to attract large enterprise customers could have a material adverse effect on its business, operating results and financial condition. Additionally, large enterprise customers usually request special pricing and generally have longer sales cycles, which could negatively impact the Company's revenues. Further, as the Company attempts to attract large enterprise customers, it may need to increase corporate branding activities, which will increase the Company's operating expenses, but may not proportionally increase its operating revenues. Maintenance of Growth Rate The Company's revenue growth rate in 2001 may not approach the levels attained in recent years. The Company's growth during recent years is largely attributable to the introduction of MetaFrame for Windows in mid-1998 and WinFrame in late 1995. There can be no assurance that the markets in which the Company operates, including the application server market, the ASP market and the portal market, will grow in the manner predicted by independent third parties. In addition, to the extent revenue growth continues, the Company believes that its cost of revenues and certain operating expenses will also increase. Due to the fixed nature of a significant portion of such expenses, together with the possibility of slower revenue growth, its income from operations and cash flows from operating and investing activities may decrease as a percentage of revenues in 2001. In-Process Research and Development Valuation The Company has in the past re-evaluated the amounts charged to in-process research and development in connection with certain acquisitions and licensing arrangements. The amount and rate of amortization of such amounts are subject to a number of risks and uncertainties, including, without limitation, the effects of any changes in accounting standards or guidance adopted by the staff of the Securities and Exchange Commission or the accounting profession. Any changes in accounting standards or guidance adopted by the staff of the Securities and Exchange Commission, may materially adversely affect future results of operations through increased amortization expense. Role of Mergers and Acquisitions Acquisitions involve numerous risks, including the following: - difficulties in integration of the operations, technologies, and products of the acquired companies; - the risk of diverting management's attention from normal daily operations of the business; 30
- potential difficulties in completing projects associated with purchased in process research and development; - risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions; - the potential loss of key employees of the acquired company; and - an uncertain sales and earnings stream from the acquired entity, which may result in unexpected dilution to the Company's earnings. Mergers and acquisitions of high-technology companies, including the Company's recent acquisition of Sequoia Software Corporation, are inherently risky, and no assurance can be given that the Company's previous or future acquisitions will be successful and will not have a material adverse affect on the Company's business, operating results or financial condition. In addition, there can be no assurance that the combined company resulting from any such acquisition can continue to support the growth achieved by the companies separately. The Company must also focus on its ability to manage and integrate any such acquisition. Failure to manage growth effectively and successfully integrate acquired companies could adversely affect the Company's business and operating results. Revenue Recognition Process The Company continually re-evaluates its programs, including specific license terms and conditions, to market its current and future products and services. The Company may implement new programs, including offering specified and unspecified enhancements to its current and future product lines. The Company may recognize revenues associated with such enhancements after the initial shipment or licensing of the software product or over the product's life cycle. The Company has implemented a new licensing model associated with the release of MetaFrame XP in February 2001. The Company may implement a different licensing model, in certain circumstances, which would result in the recognition of licensing fees over a longer period, which may result in decreasing revenue. The timing of the implementation of such programs, the timing of the release of such enhancements and other factors may impact the timing of the Company's recognition of revenues and related expenses associated with its products, related enhancements and services and could adversely affect the Company's business and operating results. Product Returns and Price Reductions The Company provides certain of its distributors with product return rights for stock balancing or limited product evaluation. The Company also provides certain of its distributors with price protection rights. To cover these product returns and price protections, the Company has established reserves based on its evaluation of historical trends and current circumstances. These reserves may not be sufficient to cover product returns and price protections in the future, in which case the Company's operating results may be adversely affected. 31
International Operations The Company's continued growth and profitability will require further expansion of its international operations. To successfully expand international sales, the Company must establish additional foreign operations, hire additional personnel and recruit additional international resellers. Such international operations are subject to certain risks, such as: - difficulties in staffing and managing foreign operations; - dependence on independent distributors and resellers; - fluctuations in foreign currency exchange rates; - compliance with foreign regulatory and market requirements; - variability of foreign economic and political conditions; - changing restrictions imposed by regulatory requirements, tariffs or other trade barriers or by United States export laws; - costs of localizing products and marketing such products in foreign countries; - longer accounts receivable payment cycles; - potentially adverse tax consequences, including restrictions on repatriation of earnings; - difficulties in protecting intellectual property; and - burdens of complying with a wide variety of foreign laws. Volatility of Stock Price The market price for the Company's Common Stock has been volatile and has fluctuated significantly to date. The trading price of the Common Stock is likely to continue to be highly volatile and subject to wide fluctuations in response to factors such as actual or anticipated variations in operating and financial results, anticipated revenue or earnings growth, analyst reports or recommendations and other events or factors, many of which are beyond the Company's control. In addition, the stock market in general, and The Nasdaq National Market and the market for software companies and technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors may materially and adversely affect the market price of the Common Stock, regardless of the Company's actual operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against such companies. For example, several class-action lawsuits were instituted against the Company, its directors, and certain of its officers last year following a decline in the Company's stock price. Such litigation, and other future litigation, could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, financial condition and results of operations. 32
Fluctuations in Economic and Market Conditions The demand for the Company's products depends in part upon the general demand for computer hardware and software, which fluctuates based on numerous factors, including capital spending levels and general economic conditions. Fluctuations in the demand for the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's short and long-term investments with various financial institutions are subject to risks inherent with fluctuations in general economic and market conditions. Such fluctuations could cause an adverse effect in the value of such investments and could even result in a total loss of certain of the Company's investments. A total loss of one or more investments could result in a material adverse effect in the Company's financial position. Management of Growth and Higher Operating Expenses The Company has recently experienced rapid growth in the scope of its operations, the number of its employees and the geographic area of its operations. In addition, the Company has completed certain domestic and international acquisitions. Such growth and assimilation of acquired operations and personnel of such acquired companies has placed and may continue to place a significant strain on the Company's managerial, operational and financial resources. To manage its growth effectively, the Company must continue to implement and improve additional management and financial systems and controls. The Company believes that it has made adequate allowances for the costs and risks associated with these expansions. However, its systems, procedures or controls may not be adequate to support its current or future operations. In addition, the Company may not be able to effectively manage this expansion and still achieve the rapid execution necessary to fully exploit the market opportunity for its products and services in a timely and cost-effective manner. The Company's future operating results will also depend on its ability to manage its expanding product line, expand its sales and marketing organizations and expand its support organization commensurate with the increasing base of its installed product. The Company plans to increase its professional staff during 2001 as it expands sales, marketing and support and product development efforts, as well as associated administrative systems, to support planned growth. As a result of this planned growth in the size of its staff, the Company believes that it may require additional domestic and international facilities during 2001. Although the Company believes that the cost of such additional facilities will not significantly impact its financial position or results of operations, the Company anticipates that operating expenses will increase during 2001 as a result of its planned growth in staff. Such an increase in operating expenses may reduce its income from operations and cash flows from operating activities in 2001. 33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risks at September 30, 2001 are not significantly different from those discussed in "Part II, Item 7A - Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Also, refer to "Note 6 - Derivative Financial Instruments," of this Form 10-Q for additional discussion regarding the Company's market risks, its accounting for derivatives, and the impact of adoption of SFAS No. 133. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In June 2000, the Company and certain of its officers and directors were named as defendants in several securities class action lawsuits filed in the United States District Court for the Southern District of Florida on behalf of purchasers of the Company's Common Stock during the period October 20, 1999 to June 9, 2000 (the "Class Period"). These actions were consolidated as In Re Citrix Systems, Inc. Securities Litigation. The lawsuits allege that, during the Class Period, the defendants made misstatements to the investing public about the Company's financial condition and prospects. In September 2001, the Court granted the Company's motion to dismiss the complaint without prejudice. The plaintiffs were given until October 22, 2001 to file an amended complaint. The plaintiffs chose not to file an amended complaint and the court dismissed the action with prejudice on October 30, 2001. In September 2000, a stockholder filed a claim in the Court of Chancery of the State of Delaware against the Company and nine of its officers and directors alleging breach of fiduciary duty by failing to disclose all material information concerning the Company's financial condition at the time of the proxy solicitation. The complaint sought unspecified damages. In January 2001, a portion of the action was stayed by the court and later dismissed by the plaintiff without prejudice to refiling the action at a later date. In February 2001, the plaintiff filed a motion with the court for award of attorney's fees and litigation costs in the amount of $2,000,000 and $60,000, respectively. In September 2001, the court awarded plaintiff $140,000 and $8,250, respectively. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) There are no exhibits to be filed with this report. (b) There were no reports on Form 8-K filed by the Company during the third quarter of 2001. 34
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on this 14 day of November, 2001. CITRIX SYSTEMS, INC. By: /s/ JOHN P. CUNNINGHAM -------------------------------------- John P. Cunningham Chief Financial Officer and Senior Vice-President of Finance and Operations, Treasurer and Assistant Secretary (Authorized Officer and Principal Financial Officer) 35