Citrix Systems Annual Report 2001

Plain-text annual report

Making the virtual work place real. 995374_Citrix_Cover 3/28/02 05:05 PM Page 1 2001 Annual Report 995374_Citrix_Cover 3/28/02 05:05 PM Page 2 Financial highlights Net revenues $591.6 million (cid:2) 25.8% from previous year Net income $105.3 million 11.4% from previous year Adjusted net income(a) $151.0 million (cid:2) 21.9% from previous year Adjusted diluted earnings per share(a) $0.78 (cid:2) 25.2% from previous year Adjusted operating margin(a) 31.2% 1.0% from previous year Cash and investments $746.7 million (a) Adjusted to exclude the effects of in-process research and development of $2.6 million and the amortization of intangible assets of $48.8 million. (cid:2) (cid:3) 995374_Citrix_Mktg 3/28/02 04:58 PM Page 1 Table of contents Making the virtual workplace real Citrix at a glance President’s letter to shareholders Selected Consolidated Financial Data Management’s Discussion and Analysis Quantitative and Qualitative Disclosures About Market Risk Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Certified Public Accountants Quarterly Financial Information (Unaudited) Corporate Information 2 8 9 10 11 25 26 27 28 29 30 44 45 46 995374_Citrix_Mktg 3/28/02 04:58 PM Page 2 Making the virtual workplace real Every day, more information is born digital. And more business people go mobile. To successfully compete in this new world, companies need to provide a virtual workplace where users have easy access to applications, information, processes and people — on any device, over any network, anytime, anywhere. This is what Citrix provides. We are a leading company offering virtual workplace solutions that give users the freedom to get whatever they need, wherever they are, however they like. And we’re doing it today. Citrix is focused on software solutions that “virtualize” access to today’s digital ofﬁce. So, instead of having to go to the ofﬁce, your ofﬁce follows you. Work is no longer a place — work is something you do. Most ofﬁces today are digital, and most are also heterogeneous — different applications, operating systems and network infrastructures. End users are experiencing both an ongoing explosion in choice around device type and increasing demands to work from anywhere. The end result is that the basic need for access has become extremely critical for users, while at the same time more complex for the IT organizations that support them to deliver. Our focus on the virtual workplace meshes with real changes in business computing — including the need to simultaneously accommodate Windows® and Web-based applications and information, and the growing acceptance of the Microsoft® .NET initiative for Web-based computing platforms. Working on the go is a fact of life for today’s business. The company that can make the virtual workplace real can realize huge opportunities in a world where: a billion people are expected to be using the Internet within three years 1 nearly half a billion people worldwide use cell phones today 2 44 million people in the United States work in branch ofﬁces; of these, 68 percent access information over corporate networks3 25 million workers already telecommute in the United States alone 4 1 Angus Reid Group, May 2000; 2 Business Week, August 2000; 3 Cahers In-Stat Group, 2001; 4American Management Association 2 ➜ ➜ ➜ ➜ 995374_Citrix_Mktg 3/28/02 04:58 PM Page 3 Our customers choose Citrix for real business benefits All around the globe, companies are looking for a better way to conduct business — a virtual workplace where connections are easy and applications and information are always available. To get the most from the virtual workplace, more and more companies are turning to Citrix® solutions. We are already meeting market needs for virtual workplace solutions. In 2001, some of our larger customers like Sprint, Nationwide Insurance and Commonwealth Bank of Australia each licensed our products for over 10,000 users. Citrix’s efforts to grow our market are real, too — from Washington, D.C., where we created a new program focusing on the federal government, to Hong Kong, where we built on our existing efforts in the growing Chinese market. Why is Citrix growing? Because our solutions provide exactly the capabilities that many businesses need. Whether users are checking product inventory from the road, securely accessing human resources ﬁles from a home ofﬁce or checking centrally stored customer records from a branch ofﬁce, Citrix solutions enable them to access the business resources they need anywhere they happen to be. As a result, their companies — our customers — gain the enhanced user productivity, faster return on IT investment, improved communication, effective collaboration, tighter security, quicker disaster recovery and simpliﬁed IT administration they need to compete more effectively in today’s marketplace. The growth of our customer base during 2001 demonstrates that in today’s complex, fast-moving business environment, the Citrix approach has strong appeal: 100 percent of Fortune 100 companies ➜ more than 120,000 customers 95 percent of the Financial Times FT European 100 70 percent — including the top 10 companies — of the Financial Times 500 sales successes in 2001 that included AT&T Wireless in the United States, Petrobras in Brazil, Ericsson and France Telecom in Europe and Commonwealth Bank of Australia 3 ➜ ➜ ➜ ➜ 995374_Citrix_Mktg 3/28/02 04:58 PM Page 4 In 2001 Citrix expanded its portfolio of technology solutions to include business solutions aimed at issues that make a difference in how smoothly — and proﬁtably — businesses run: ➜ Citrix Solution for Remote Ofﬁce Connectivity gets new and remote ofﬁces working together easily ➜ Citrix Solution for Workforce Mobility brings the ofﬁce anywhere ➜ Citrix Solution for Business Continuity helps keep business information ﬂowing, no matter what ➜ Citrix Solution for Application Deployment brings new applications on line in minutes, instead of months Citrix solutions meet real business needs At Citrix we bring together our vision of the virtual workplace and our industry-leading track record of delivering powerful and comprehensive solutions. The Citrix solutions for the virtual workplace extend our individual products to help businesses reduce costs, improve security and increase productivity. With 65 percent of the typical workforce outside headquarters*, companies need ways to extend their business-critical systems while controlling costs. Citrix solutions meet the critical connectivity requirements while delivering consistent and reliable performance, full-featured functionality and a no-compromise user experience. To ensure that all employees have access to the resources they need to increase productivity, revenue and competitiveness, enterprises everywhere are virtualizing the workplace. Citrix solutions give mobile and remote employees access to the same feature-rich software and reliability as their colleagues at headquarters. As a means of meeting and managing expectations as they branch out geographically, companies are turning to enterprise applications such as enterprise resource management (ERP), customer relationship management (CRM) and ofﬁce productivity software. Citrix solutions are designed to speed deployment and provide cost-effective management by Web-enabling any existing Windows or UNIX® application. To meet today’s need for continuous operation, businesses and governments worldwide are analyzing solutions that enable the entire organization to work from home or on the road. This is a crucial capability in the event of a disaster. Citrix solutions reduce the impact of planned or unplanned business interruptions by providing a virtual workplace that enables business to continue without interruption. *Cahers In-Stat Group, 2001 4 995374_Citrix_Mktg 3/28/02 04:58 PM Page 5 Citrix products bring real power to the virtual workplace In 2001, Citrix laid a ﬁrm groundwork for a transition to becoming a multi- product company — building on our industry-leading application serving products and extending the virtual workplace with our new portal products. Early in 2001, we launched our most powerful application serving solution to date, Citrix MetaFrame XP™ for Windows. This exciting software solution offers an entirely new dimension for leveraging the Internet and extending the capabilities of Microsoft platforms to organizations of all sizes. Later in the year, we followed up with enhanced security, new management tools and other features for Citrix MetaFrame XP. These releases make Citrix MetaFrame XP even more valuable. And they deliver on our promise to keep customers fully up to date with the tools they need for making the virtual workplace real. In 2001, we updated Citrix Extranet™, our virtual private network software. We also introduced Citrix Secure Gateway, which secures Citrix MetaFrame® trafﬁc across the Internet. These two products raise the bar for business information security, protecting critical information for organizations of all sizes. We also made signiﬁcant progress toward providing another key building In 2001, we further aligned our marketing and development efforts — including channel strategy, alliances, solutions marketing and product development — behind our suite of products that make the virtual workplace real: ➜ Citrix MetaFrame Application Serving Family – Citrix MetaFrame XPs, XPa, XPe – Citrix Extranet Virtual Private Network Software – Citrix Secure Gateway Network Access Software block of the virtual workplace — the access portal. We enhanced our Citrix ➜ Citrix NFuse Access NFuse™ application portal software (now known as Citrix NFuse™ Classic). And we worked to develop an entirely new portal solution. Our acquisition in April 2001 of Sequoia Software Corporation, a leading provider of XML-pure portal software, paved the way for the 2002 release of Citrix NFuse™ Elite. This unique access portal will provide our customers with a fast, wizard-driven solution — with no need for long and expensive consultant-driven projects — that gives users easy access to applications and information resources on the Web. Portal Family – Citrix NFuse Classic – Citrix NFuse Elite (scheduled for 2002 release) 5 995374_Citrix_Mktg 3/28/02 04:58 PM Page 6 Partnerships help us coordinate our offerings with technologies from other vendors, ensure that our products meet industry standards and speed our product development and delivery. In addition to strengthening its partnership with Microsoft Corporation, Citrix broadened its partner base in 2001 to include: ➜ Computer Associates ➜ Documentum ➜ Business Objects SAP ➜ EMC Sierra Wireless ScreamingMedia ➜ Ericsson ➜ Cyberbank Corp. Partnerships enable us to see real progress, faster In the virtual workplace, access is easy and applications and information are always available. The work that goes into making the virtual workplace real, however, is quite a bit more complex. No one can do it alone. So at Citrix, we maintain key relationships with other industry-leading technology companies who are also hard at work creating solutions for the virtual workplace. In 2001, we increased our partnerships with a wide range of companies — system integrators, networking suppliers, enterprise portal companies, hardware suppliers, telecommunications companies, independent software vendors and device manufacturers — to bring together solutions that make the virtual workplace real. These partnerships enable Citrix to deliver enterprise-ready solutions to today’s business challenges. They enhance our years of experience and expertise. And they help make our customers’ digital ofﬁces into completely virtual workplaces. Central to our partner activities in 2001 was strengthening our relationship with Microsoft Corporation (Microsoft), our longtime partner in solution development. With Microsoft, we provide remote access solutions that enable users of Windows-based devices to access Windows solutions. Citrix also extends the Microsoft platform to enable access from devices running non-Windows operating systems over any network connection. In addition, Citrix adds IT management capabilities to Microsoft solutions. In 2001, both Citrix and Microsoft continued to recognize the beneﬁts the companies provide for each other. Citrix asserted its comprehensive support for the Microsoft platform with technologies that enhance portal access, ﬂexibility, manageability and security for remote connections using Windows XP. In addition, Microsoft joined the Citrix Business Alliance™, laying the groundwork for further collaboration on solutions that use Windows 2000, Windows XP and the Microsoft .NET platform. 6 ➜ ➜ ➜ 995374_Citrix_Mktg 3/28/02 04:58 PM Page 7 Today and in the future, the opportunities are real You’re visiting a customer or working late at home. You’re immobilized by a snowstorm or moving fast to capture a new business opportunity. You’re using a wireless hand-held, a PC desktop or a Macintosh® PowerBook®. Your applications and information, however, are back at the ofﬁce. With Citrix, none of this presents a problem — it’s an opportunity. Our model for the virtual workplace enables businesses to constantly expand the access solutions they provide for their employees, partners and customers, enhance the manageability and efﬁciency they deliver to their IT professionals and reduce costs and complexity for the entire organization. In short, the Citrix model makes the virtual workplace real. Ongoing changes in the way IT provides services to business demonstrate that Citrix is well positioned to meet business needs — today and into the future. 2001 taught us, for example, that now more than ever before, businesses face a critical need to keep information safe. Unauthorized access to resources, lack of resilience following downtime or disaster, and inability to continue working in the face of disruptions or distance can threaten a company’s very existence. Citrix solutions can provide answers. Citrix has always been about providing access. And we continue to focus on delivering business access to applications, content, people and processes. The more we expand our application and information access offerings, the more opportunities we see. We remain 100 percent committed to expanding our heritage in access to serve the entire virtual workplace. Through the virtual workplace, the growing business need for access continues to present opportunities for our customers, our partners and our company. 7 Our acquisition of Sequoia Software Corporation in April 2001 and the introduction of our new access portal family of products puts us on top of evolving business and communications trends — and enables us to achieve several of our corporate goals: establish Citrix as a multi- product family company extend our product offer- ings into the Web space continue to demonstrate our commitment to delivering a wide range of products and solutions ➜ ➜ ➜ 995374_Citrix_Mktg 3/28/02 04:58 PM Page 8 Citrix at a glance Citrix Systems, Inc. (Nasdaq: CTXS) is positioned to make the virtual workplace real. Citrix is a global leader in virtual workplace software and services that provide access to applications, information, processes and people on any device, over any network. Corporate Background ➜ Founded 1989 Citrix Software Solutions ➜ Citrix MetaFrame Application Serving Family – Citrix MetaFrame XPs, XPa, XPe Employees – Citrix Extranet Virtual Private Network Software ➜ 1,878 as of December 31, 2001 – Citrix Secure Gateway Network Access Software Nasdaq ➜ CTXS ➜ Citrix NFuse Access Portal Family – Citrix NFuse Classic – Citrix NFuse Elite (scheduled for 2002 release) Standard & Poor’s 500 Index Sales Channel ➜ Listed since December 21, 2000 Indirect channel, more than 7,000 distributors, Citrix Customers value-added resellers, system integrators, independent software vendors and original ➜ More than 120,000 customers equipment manufacturers ➜ 95 percent of the Fortune 500® ➜ 100 percent of the Fortune 100 Worldwide Presence ➜ 95 percent of the Financial Times FT European 100 ➜ More than 60 countries ➜ 70 percent — including the top 10 companies — ➜ Approximately 48 percent of Citrix revenue of the Financial Times 500 is generated outside the United States ➜ Enterprise customers include AT&T Wireless Services, Credit Suisse, DaimlerChrysler, Shell and Virgin Megastores 8 ➜ From the office of the President and CEO I’ve never been more proud of Citrix than I am today. IT spending may have been down worldwide during 2001. The economy may have struggled. But there’s only one way to describe our performance for the year: “Rock Solid.” Citrix made great strides in 2001 toward accomplishing our vision of making the virtual workplace real. Companies looking for a better way to conduct business are increasingly turning to Citrix solutions. Our strong results for 2001 show it. In the year just completed, we experienced revenue growth of more than 25 percent — despite a worldwide economic downturn. These gains are the result of hard work which penetrated more accounts and signed larger deals, expanded services such as our eLicensing program, and product innovation such as the phenomenally successful launch of Citrix MetaFrame XP. We invested in our future with the acquisition of Sequoia Software, the introduction of a new account management program and the expansion of our partner program. In 2001, we grew both our core business and expanded our product line. We began our effort to establish ourselves as a leader in the access portal market. In 2001 we broadened beyond technology solutions to offer business solutions to customers as part of our strategy to more deeply penetrate the customer base and add more value to their businesses. In all our efforts, we built upon what we do best — giving customers the ability to access any application and information from any device over any network. The journey that Citrix began in 2001 positions us right where we need to be in 2002 and beyond. We are well situated to give our customers ﬂexible, manageable Windows and Web-based solutions to real-world challenges. And we are in the right spot to achieve our business goals for 2002 of further enabling the virtual workplace market and owning the leadership position in the access portal category. For 2002, we look forward to several new initiatives — including providing more solutions to installed-base customers, establishing our new Citrix NFuse Elite access portal product in the marketplace and focusing on speciﬁc market opportunities that will help us to grow our business. I want to thank all the people who helped us achieve the strong ﬁnancial footing and industry-leading position we enjoy today; everyone from the investment community to our customers, business partners and employees. I invite all of you to stay with us as we move ahead. The vision is clear. The opportunities are waiting. At Citrix, we can’t wait to take advantage of them as we continue to make the virtual workplace real. Sincerely, Mark B. Templeton President and CEO Citrix Systems, Inc. 851 West Cypress Creek Road Fort Lauderdale, FL 33309 www.citrix.com 954-267-3000 Selected Consolidated Financial Data Selected Consolidated Financial Data Year Ended December 31, 2001 2000 1999 1998 1997 (in thousands, except per share data) Consolidated Statements of Income Data: Net revenues $ 591,629 $ 470,446 $ 403,285 $ 248,636 $ 123,933 Cost of revenues (excluding amortization, presented separately below) Gross margin Operating expenses: Research and development Sales, marketing and support General and administrative Amortization of intangible assets In-process research and development Write-down of technology (a) Total operating expenses Income from operations Interest income Interest expense Other expense, net Income before income taxes Income taxes Net income Diluted earnings per share (b) Diluted weighted-average shares outstanding (b) 29,848 561,781 67,699 224,108 85,212 48,831 2,580 — 428,430 133,351 42,006 (20,553) (2,253) 152,551 47,291 29,054 441,392 50,622 180,384 58,685 30,395 — 9,081 329,167 112,225 41,313 (17,099) (1,422) 135,017 40,505 14,579 388,706 37,363 121,302 37,757 18,480 2,300 — 217,202 171,504 25,302 (12,532) (1,549) 182,725 65,781 16,682 231,954 22,858 74,855 20,131 10,190 18,416 — 146,450 85,504 10,878 (133) (777) 95,472 34,370 12,304 111,629 6,948 35,352 10,651 — 3,950 — 56,901 54,728 10,447 — (553) 64,622 23,264 $ 105,260 $ 94,512 $ 116,944 $ 61,102 $ 41,358 $ 0.54 $ 0.47 $ 0.61 $ 0.33 $ 0.24 194,498 199,731 192,566 182,594 174,524 December 31, 2001 2000 1999 1998 1997 (in thousands) Consolidated Balance Sheet Data: Working capital Total assets Long term debt, capital lease obligations and put warrants Stockholders’ equity $ 153,554 $ 427,344 $ 433,249 $ 158,900 $ 222,916 1,208,230 1,112,573 1,037,857 431,380 282,668 362,768 647,330 346,229 592,875 313,940 533,070 48 8 297,454 196,848 (a) In the fourth quarter of 2000, the Company recorded impairment write-downs of previously acquired core technology of $9.1 million, as further discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.” (b) Diluted earnings per share and diluted weighted-average shares outstanding have been adjusted to reﬂect the two-for-one stock split in the form of a stock dividend declared on May 17, 1996 and paid on June 4, 1996 to holders of record of the Company’s Common Stock on May 28, 1996; the three-for-two stock split in the form of a stock dividend declared on January 25, 1998 and paid on February 20, 1998 to holders of record of the Company’s Common Stock on February 12, 1998; the two-for-one stock split in the form of a stock dividend declared on March 1, 1999 and paid on March 25, 1999 to holders of record of the Company’s Common Stock on March 17, 1999; and the two-for-one stock split in the form of a stock dividend declared on January 19, 2000 and paid on February 16, 2000 to holders of record of the Company’s Common Stock on January 31, 2000. 10 Management’s Discussion and Analysis Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview products and later releases no longer directly incorporate Windows NT technology. The Company currently plans to continue developing enhancements to its MetaFrame products and currently expects that these products and associated options will constitute a majority of its revenues for the foreseeable future. The term of the Development Agreement expires in May 2002. The Company develops, markets, sells and supports comprehensive corporate application and information infrastructure software and Acquisitions services that enable effective and efﬁcient enterprise-wide deployment and management of applications and information, including those designed for Microsoft™ Windows® operating systems, UNIX® operating systems and for Web-based information systems. The Company’s largest source of revenue consists of the MetaFrame® products and related options. The Company has acquired technology related to its strategic objectives. In July 1999 and April 2001, the Company completed the acquisitions of ViewSoft, Inc. (“ViewSoft”) and Sequoia Software Corporation (“Sequoia”) for approximately $33.5 million and $182.6 million, The MetaFrame products, which began shipping in the second quarter respectively. of 1998, permit organizations to provide virtual access to Windows-based and UNIX applications without regard to location, network connection or type of client hardware platforms. The Company also provides portal software and services that are designed to provide personalized, secure Web-based access to a wide variety of business information from any location, device or connection. The Company markets its products through multiple direct and indirect channels such as distributors, value-added resellers and original equipment manufacturers worldwide. On May 9, 1997, the Company and Microsoft entered into a License, Development and Marketing Agreement (as amended, the “Development Agreement”), which provides for the licensing to Microsoft of certain of the Company’s multi-user software enhancements to Microsoft’s Windows NT® Server and for the Windows NT Server, Terminal Server Edition and Microsoft Windows 2000 (collectively, “Windows Server Operating Systems”). The Development Agreement also provides for each party to develop its own enhancements to the jointly developed products, which may provide access to Windows Server Operating Systems base platforms from a wide variety of computing devices. In June 1998, the Company released its MetaFrame product, a Company-developed enhancement that implements the Independent Computing Architecture (“ICA®”) on the Windows Server Operating Systems. In addition, Microsoft and the Company have agreed to engage in certain joint marketing efforts to promote the use of Windows Server Operating Systems-based multi-user software and the Company’s ICA protocol. Pursuant to the terms of the Development Agreement, in May 1997, the Company received $75 million as a non-refundable royalty payment for engineering and support services to be rendered by the Company. Under the terms of the Development Agreement, the Company received additional payments totaling $100 million in April 1998. No additional payments are due pursuant to the Development Agreement. The initial fee of $75 million relating to the Development Agreement is being recognized ratably over the ﬁve-year term of the contract, which began in May 1997. The additional $100 million received pursuant to the Development Agreement is being recognized ratably over the remaining term of the contract, effective April 1998. As a result of the Development Agreement, the Company continues to support the Microsoft Windows NT platform, but the MetaFrame In February 2000, the Company acquired all of the operating assets of the Innovex Group, Inc. (“Innovex”) for approximately $47.8 million. At the date of acquisition, the Company paid approximately $28.9 million in consideration and closing costs. Pursuant to the acquisition agreement, the remaining purchase consideration, plus interest, was contingently payable based on future events. During 2001, these contingencies were met, resulting in approximately $16.2 million of additional purchase price and $2.9 million in compensation to the former owners. Pursuant to the acquisition agreement, payment of the contingent amounts and associated interest were made in August 2001 and February 2002 for $10.5 million and $10.7 million, respectively. There are no remaining contingent obligations. These acquisitions were accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, Accounting for Business Combinations.The Company allocated the cost of the acquisitions to the assets acquired and the liabilities assumed based on their estimated fair values. Except for Innovex, the acquired intangible assets included in-process technology projects, among other assets, which were related to research and development that had not reached technological feasibility and for which there was no alternative future use. Critical Accounting Policies and Estimates The Company’s discussion and analysis of its ﬁnancial condition and results of operations are based upon its consolidated ﬁnancial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these ﬁnancial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an ongoing basis, management evaluates its estimates, including those that relate to product returns, multiple-element revenue arrangements, customer programs, bad debts, investments, intangible assets, income tax contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates 11 Management’s Discussion and Analysis under different assumptions and conditions. If actual results signiﬁcantly The Company adopted the provisions of the Securities and Exchange differ from management’s estimates, the Company’s ﬁnancial condition Commission’s Staff Accounting Bulletin No. 101, Revenue Recognition and results of operations could be materially impacted. in Financial Statements (“SAB101”) in October 2000. SAB 101 does not The Company believes the following critical accounting policies affect its more signiﬁcant judgments and estimates used in the preparation of its consolidated ﬁnancial statements. The Company records estimated reductions to revenue for customer programs and incentive offerings supersede the software industry speciﬁc revenue recognition guidance, but provides current interpretations of revenue recognition requirements. The adoption of SAB 101 did not have a signiﬁcant effect on the Company’s ﬁnancial position or results of operations. including volume-based incentives and price protection. If market conditions The Company provides for potential uncollectible accounts receivable were to decline, the Company may take actions to increase customer based on customer speciﬁc information and historical collection incentive offerings and possibly result in an incremental reduction to revenue experience. If market conditions decline, actual collection experience at the time the incentive is offered. The Company also records a reduction in may not meet expectations and may result in increased bad debt expenses. revenue for estimated sales returns and stock rotations. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. If the historical data the Company uses to calculate these estimates does not properly reﬂect future returns, revenue may be misstated. The carrying value of the Company’s net deferred tax assets assumes that the Company will be able to generate sufﬁcient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and assumptions change in the future, the Company Revenue is recognized when earned. The Company’s revenue recognition may be required to record valuation allowances against its deferred policies are in compliance with the American Institute of Certiﬁed Public tax assets resulting in additional income tax expenses. Accountants Statement of Position (“SOP”) 97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations, Software Revenue Recognition. Product revenues are recognized upon shipment of the software product only if no signiﬁcant Company obligations remain, the fee is ﬁxed or determinable, and collection of the resulting receivable is deemed probable at the outset of the arrangement. In the case of non-cancelable product licensing arrangements under which certain original equipment manufacturers (“OEMs”) have software reproduction rights, initial recognition of revenue also requires delivery and customer acceptance of the product master or ﬁrst copy. Subsequent recognition of revenues is based upon reported royalties from the OEMs. Revenue from packaged product sales to distributors and resellers is recorded when related products are shipped. Revenues from enterprise and corporate licensing arrangements are recognized when the related products are shipped and the customer has been electronically provided with the licenses that include the activation keys that allow the customer to take immediate possession of the software pursuant to an agreement or purchase order. In software arrangements that include rights to multiple software products, post- contract customer support (“PCS”), and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on vendor- speciﬁc objective evidence (“VSOE”). The Company sells software and PCS separately and VSOE is determined by the price charged when each element is sold separately. Product returns and sales allowances, including stock rotations, are estimated and provided for at the time of sale. Non- recurring engineering fees are recognized ratably as the work is performed. Revenues from training and consulting are recognized when the services are performed. Service and PCS revenues from customer maintenance fees for ongoing customer support and product updates and upgrades are based on the price charged or derived value of the undelivered elements and are recognized ratably over the term of the contract, which is typically 12 to 24 months. Service revenues are included in net revenues on the face of the consolidated statements of income. In assessing the recoverability of the Company’s goodwill and other intangible assets, the Company must make estimates of expected future cash ﬂows and other factors to determine the fair value of the respective assets. If these estimates and their related assumptions change in the future, the Company may be required to record impairment charges. The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, on January 1, 2002 and will be required to analyze its goodwill for impairment on an annual basis. The Company does not expect to record any impairment charges as a result of the adoption of this statement. The fair value of certain of the Company’s cash equivalents and investments is dependent on the performance of the companies or funds in which the Company has invested, as well as the volatility inherent in the external markets for these investments. In assessing the potential impairment for these investments, the Company considers these factors as well as forecasted ﬁnancial performance of its investees. During the year ended December 31, 2001, the Company recorded $7.7 million of losses resulting from other-than-temporary declines in fair value of certain of the Company’s equity investments. The following discussion relating to the individual ﬁnancial statement captions, the Company’s overall ﬁnancial performance, operations and ﬁnancial position should be read in conjunction with the factors and events described in “— Overview” and “— Certain Factors Which May Affect Future Results” which may impact the Company’s future performance and ﬁnancial position. Results of Operations The following table sets forth the consolidated statements of income data of the Company expressed as a percentage of net revenues and as a percentage of change from period-to-period for the periods indicated: 12 Management’s Discussion and Analysis Net revenues Cost of revenues (excluding amortization, presented separately below) Gross margin Operating expenses: Research and development Sales, marketing and support General and administrative Amortization of intangible assets In-process research and development Write-down of technology Total operating expenses Income from operations Interest income Interest expense Other expense, net Income before income taxes Income taxes Net income *not meaningful. 2001 100.0% Year Ended December 31, 2000 100.0% 1999 100.0% 2001 Compared to 2000 2000 Compared to 1999 25.8% 16.7% 5.1 94.9 11.4 37.9 14.4 8.3 0.4 — 72.4 22.5 7.1 (3.5) (0.3) 25.8 8.0 6.2 93.8 10.8 38.3 12.5 6.5 — 1.9 70.0 23.8 8.8 (3.6) (0.3) 28.7 8.6 3.6 96.4 9.3 30.1 9.4 4.6 0.5 — 53.9 42.5 6.3 (3.1) (0.4) 45.3 16.3 17.8% 20.1% 29.0% 0.3 27.3 33.7 24.2 45.2 60.7 * * 30.2 18.8 1.7 20.2 58.4 13.0 16.8 11.4 99.3 13.6 35.5 48.7 55.4 64.5 * * 51.5 (34.6) 63.3 36.4 (8.2) (26.1) (38.4) (19.2) Net Revenues. The Company’s operations consist of the design, included in Management Products, have been bundled into the development, marketing and support of corporate application and MetaFrame XP™ products introduced in the ﬁrst quarter of 2001. As a information infrastructure software and services for enterprise-wide result, the Company has reclassiﬁed net revenues into the following three deployment and management of applications and information. Previously, categories as presented below: License Revenue, Services Revenue, and the company presented revenues in the following ﬁve categories: Royalty Revenue. License Revenue primarily represents fees related to the Application Servers, Management Products, Computing Appliances licensing of the Company’s MetaFrame products, Subscription Advantage, Products, Microsoft Royalties and Services and Other Revenue. additional user licenses, unbundled management products (such as load Application Servers revenue primarily represented fees related to the balancing services and resource management services), and license fees licensing of the Company’s MetaFrame products, Subscription Advantage, from OEMs who are granted a license to incorporate and/or market the Company’s terminology for PCS, and additional user licenses. the Company’s multi-user technologies in their own product offerings. Management Products consisted of load balancing services, resource Services Revenue consists primarily of customer support and consulting in management services and other options. Computing Appliances Products the delivery of implementation services and systems integration solutions. revenue consisted of license fees and royalties from OEMs who are granted Royalty Revenue represents the fees recognized in connection with the a license to incorporate and/or market the Company’s multi-user Development Agreement. 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. The increase in net revenues in 2001 was primarily attributable to an increase in License Revenue resulting from an increase in the number of MetaFrame licenses sold for Windows operating systems, speciﬁcally due to market acceptance of the Company’s MetaFrame XP family of products introduced in February 2001. The Company expects that License Revenues Certain of the Company’s software management products such as load will continue to represent a large percentage of net revenues. The increase balancing services and resource management services, traditionally in net revenues in 2001 was also due to an increase in Services Revenue due 13 Management’s Discussion and Analysis primarily to an increase in larger scale corporate and enterprise licensing in revenue from the WinFrame® product line. WinFrame is the Company’s arrangements that typically require professional services to ensure Windows application server software based on Windows NT 3.51. successful implementation of Citrix technologies. The revenue from the The increase in net revenues in 2000 was also due to an increase in the Development Agreement with Microsoft will terminate in May 2002 volume of shipments of certain management products included in License upon the expiration of the term of the Development Agreement. Revenue, speciﬁcally, load balancing services and resource management The increase in net revenues in 2000 was primarily attributable to an increase in License Revenue resulting from an increase in the number of MetaFrame licenses sold. This increase was partially offset by a decrease services, and to a lesser extent an increase in Services Revenue due to additional consulting revenue resulting from the Company’s corporate and enterprise customers and initiatives utilizing personnel acquired in the Innovex acquisition. An analysis of the Company’s net revenue is presented below: License Revenue Services Revenue Royalty Revenue Net Revenues 2001 86.4% 6.9 6.7 Year Ended December 31, 2000 85.0% 6.5 8.5 1999 86.2% 3.9 9.9 100.0% 100.0% 100.0% Revenue Growth 2000 to 2001 Revenue Growth 1999 to 2000 27.7% 15.1% 33.8 (0.2) 25.8 93.0 0.2 16.7 International and Segment Revenues. International revenues (sales segment, particularly due to increased sales in Europe. The increased outside of the United States) accounted for approximately 48.0%, 40.3% market acceptance overseas during 2001 represents the result of the and 38.7% of net revenues for the years ended December 31, 2001, 2000 Company’s investment in global operations and development of and 1999, respectively. The increase in international revenues as a percentage international markets over the past two years. The Company currently of net revenues was primarily due to the Company’s increased sales and anticipates that international revenues will account for an increasing marketing efforts and continued demand for the Company’s products in percentage of net revenues in the future as the Company continues to invest Europe and Asia, as well as the economic impact of slower IT spending in overseas markets. For additional information on international revenues, in the United States during 2001. The Company is unable to determine please refer to Note 12 to the Company’s Consolidated Financial if slower IT spending will continue in the United States during 2002. Statements appearing in this Annual Report. Geographic segment revenues have notably increased in the Asia-Paciﬁc segment, particularly due to increased sales in Japan, and in the EMEA An analysis of geographic segment net revenue is presented below: Americas (1) EMEA (2) Asia-Paciﬁc Other (3) 2001 48.9% 36.6 7.8 6.7 Year Ended December 31, 2000 52.8% 33.7 5.0 8.5 1999 53.0% 32.1 5.0 9.9 Consolidated net revenues 100.0% 100.0% 100.0% (1) The Americas segment is comprised of the United States, Canada and Latin America. (2) Deﬁned as Europe, Middle East and Africa. (3) Represents royalty fees in connection with the Development Agreement. Revenue Growth 2000 to 2001 Revenue Growth 1999 to 2000 16.4% 16.3% 36.6 95.8 (0.2) 25.8 22.4 16.2 0.2 16.7 14 Management’s Discussion and Analysis The Company currently expects to continue investing in international and enhance the Company’s product lines, including feature releases of markets and expanding its international operations by establishing MetaFrame and research and development efforts on anticipated future additional foreign locations, hiring personnel, expanding its international product offerings. sales force and adding new third party channel partners. International revenues may ﬂuctuate in future periods as a result of difﬁculties in stafﬁng, dependence on an independent distribution channel, competition, variability of foreign economic and political conditions and changing restrictions imposed by regulatory requirements, localized product release timing and related issues of marketing such products in foreign countries. Sales, Marketing and Support Expenses. The increase in sales, marketing and support expenses in 2001 and 2000 resulted primarily from increased personnel for sales, services and marketing and associated salaries, commissions and related expenses in order to increase the Company’s sales, consulting and marketing efforts. Included in such marketing efforts in 2001 was the Company’s expansion of its end-customer sales force in connection Cost of Revenues. Cost of revenues consisted primarily of compensation with marketing its products to large corporate enterprise accounts. The and other personnel-related costs for consulting services, as well as, the cost increase was also due to a higher level of marketing programs directed at of royalties, product media and duplication, manuals, packaging materials customer and business partner acquisition and retention, and additional and shipping expense. All development costs incurred in connection with promotional activities related to speciﬁc products, such as MetaFrame XP the Development Agreement are expensed as incurred and are reported introduced in February 2001. as cost of revenues. The Company’s cost of revenues exclude amortization of core technology. The increases in cost of revenues for 2001 and 2000 was due to the overall increase in packaged product sales and increases in compensation and other costs of providing services revenues. These increases were offset in part by a reduction of the level of inventory necessary to fulﬁll customer orders due to increased market acceptance of corporate and enterprise licenses. As previously mentioned, corporate and enterprise license sales are typically fulﬁlled with a nominal level of product media and the licenses are delivered electronically. The cost of fulﬁlling such sales is less than traditional packaged product sales, thereby reducing costs of revenues as a percentage of revenue. Gross Margin. The increase in gross margin as a percentage of net revenue from 2000 to 2001 was primarily due to larger reserves for obsolete inventory recorded in 2000. To a lesser extent, this increase was also due to an increase in sales of corporate and enterprise licensing, which have a higher gross margin versus traditional packaged product as a percentage of product revenue. The Company currently anticipates that gross margin as a percentage of net revenues will remain relatively stable as compared with current levels. However, gross margins may ﬂuctuate from time to time based on these factors. General and Administrative Expenses. Increases in general and administrative expenses in 2001 and 2000 resulted primarily from increased staff, associated salaries and related expenses necessary to support overall increases in the scope of the Company’s operations. The increase during 2001 was also due to increased depreciation from the Company’s enterprise resource planning system implemented in 2001, as well as the reallocation of certain overhead costs from other departments into certain general and administrative cost centers and an increase in consulting and accounting fees. The increase in 2000 was also due to an increase in legal fees relating to litigation and general corporate matters. Amortization of Intangible Assets. The increases in amortization of goodwill and identiﬁable intangible assets in 2001 and 2000 are primarily due to the acquisitions of ViewSoft in July 1999, Innovex in February 2000 and Sequoia in April 2001. These acquisitions resulted in additional goodwill and identiﬁable intangible assets of approximately $31.1 million, $26.7 million and $169.9 million, respectively, at their respective dates of acquisition. Additionally, for 2001, the increase was also due to additional goodwill of approximately $16.2 million associated with purchase price contingencies related to the acquisition of Innovex. As of December 31, 2001, the Company had net goodwill and identiﬁable intangible assets of The decrease in gross margin as a percentage of net revenues from 1999 to $185.9 million, associated with these transactions. 2000 was primarily due to obsolescence charges and the impact of higher consulting services revenue, which has a lower gross proﬁt margin than that associated software licenses. The identiﬁed obsolete inventory was destroyed in 2000. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, which were adopted by the Company on July 1, 2001 and January 1, 2002, respectively. Under the new rules, Research and Development Expenses. Research and development goodwill (and intangible assets deemed to have indeﬁnite lives) will no expenses consisted primarily of personnel-related costs. All development longer be amortized but will be subject to an annual impairment test. costs included in the research and development of software products Other intangibles will continue to be amortized over their useful lives. and enhancements to existing products have been expensed as incurred The Company will apply the new rules on accounting for goodwill and except for certain intangible assets related to the acquisitions described other intangible assets beginning in the ﬁrst quarter of 2002. At the date herein. Increases in research and development expenses in 2001 and 2000 of adoption, the Company had unamortized goodwill, including acquired resulted primarily from additional stafﬁng, associated salaries and related work force, in the amount of $152.4 million, which will not be amortized expenses. The increase in 2001 was also due to costs incurred for third in the future and which will be subject to the annual impairment test of party software and external consultants and developers used to expand SFAS 142. At January 1, 2002, the Company had unamortized identiﬁed 15 Management’s Discussion and Analysis intangibles with estimable useful lives in the amount of $36.6 million, to support the net book value of the core technology associated with the which will continue to be amortized in accordance with the provisions of APM acquisition. In addition, the Company determined that there was no SFAS 141 and 142. For the quarter ended March 31, 2002, the Company alternative future use for the acquired technology. As a result, the Company expects to record amortization expense of approximately $3.5 million recorded a write-down of $7.3 million, representing the net book value of related to these assets. The Company has completed the required the APM core technology as of December 31, 2000. impairment tests of goodwill and indeﬁnite-lived intangible assets as of January 1, 2002 and does not anticipate an impairment charge during 2002 upon the adoption of this statement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors Which May Affect Future Results.” In July 1998, the Company completed its acquisition of VDOnet Corporation Ltd. (“VDOnet”). The acquired core technology consisted primarily of the ICA Video Services project which allowed video applications and applications containing videos to be viewed on an ICA client. Subsequent development efforts resulted in the VideoFrame™ 1.0 In-Process Research and Development. In 1999, the Company completed product, which was shipped in the third quarter of 1999, but has resulted the acquisition of certain in-process software technologies from ViewSoft, in few sales to end-customers. Since the acquisition, the Company has in which it allocated $2.3 million of the purchase price to in-process explored alternative uses for the acquired technology. By the third quarter research and development (“IPR&D”). In April 2001, the Company of 2000, the Company was exploring uses related primarily to delivering acquired Sequoia, of which $2.6 million of the purchase price was allocated video applications in a server-based computing environment and video to IPR&D. The amounts allocated to IPR&D in the respective acquisitions streaming with ICA devices. In the fourth quarter of 2000, the Company had not reached technological feasibility, had no alternative future use and reviewed potential modiﬁcations to its cash ﬂow projections based on were written off at the acquisition dates. identiﬁed alternative uses for the technology. As a result of its evaluation, The Company’s efforts with respect to the acquired technologies currently consist of integration work and any associated design, development or rework that may be required to support the integration of the technologies into the Company’s anticipated future product offerings. The nature of the the Company did not believe that there were sufﬁcient projected cash ﬂows to support the carrying value of the core technology. As a result, the Company recorded a write-down of $1.8 million, representing the net book value of the VDOnet core technology as of December 31, 2000. efforts required to develop and integrate the acquired in-process technology Interest Income. Interest income increased in 2001 as compared to 2000 into commercially viable products or features and functionalities within the principally from the Company changing the composition of its investment Company’s suite of existing products principally relate to the completion of portfolio in the fourth quarter of 2000 from tax-exempt and taxable to all planning, designing and testing activities that are necessary to establish predominantly taxable securities, partially offset by a decrease in interest that the products can be produced to meet design requirements, including rates during 2001. The increase in 2000 was primarily due to the full year functions, features and technical performance requirements. The Company effect of interest earned on the invested net proceeds from the issuance of currently expects that it will successfully develop products utilizing the the zero coupon convertible subordinated debentures in March 1999 and acquired in-process technology, but there can be no assurance that interest from the increase in cash from operations. commercial viability of any of these products will be achieved. Furthermore, future developments in the software industry, particularly in the server- based computing environment, changes in technology, changes in other products and offerings or other developments may cause the Company to alter or abandon product plans. Interest Expense. The increase in interest expense for 2001 as compared to 2000 was primarily due to interest on contingent payments associated with the Innovex acquisition, as well as the accretion of the original issue discount related to the zero coupon convertible subordinated debentures issued in March 1999. The increase in interest expense in 2000 compared Write-Down of Technology. The Company periodically reviews its to 1999 was due primarily to accretion of the original issue discount related goodwill and other intangible assets to determine if any impairment to the convertible subordinated debentures. Other Expense, Net. The change in other expense, net for 2001 compared to 2000 was the result of $7.7 million of losses recorded in 2001 resulting from other-than-temporary declines in the fair value of certain of the Company’s equity investments, as well as approximately $2.4 million of foreign exchange losses partially offset by realized gains of $8.0 million associated with purchases and sales of available-for-sale securities and associated contracts. exists. In June 1998, the Company completed its acquisition of APM Ltd. (“APM”). The acquired core technology consisted primarily of a Java™ software product that would operate in a MetaFrame server environment. At the time of the acquisition, it was anticipated that there was a growing demand for Java client applications. Since the acquisition, the market has not developed as originally anticipated. In the second quarter of 2000, management changed the Java application server product to a Java Performance Pack product, which adds performance enhancements and management tools to other Citrix products. By the fourth quarter of 2000, the Company had developed a Java Performance Pack and was assessing the market demand for this technology. As of December 31, 2000, the Company did not believe that there were sufﬁcient projected cash ﬂows 16 Management’s Discussion and Analysis Income Taxes. The increase in the effective tax rate from 30% in growth and expansion, and net cash paid for acquisitions, primarily 2000 to 31% in 2001 resulted primarily from non-deductible goodwill Innovex, of $30.1 million, partially offset by cash inﬂows from the net associated with the acquisition of Sequoia offset in part by a rate decrease sale of investments totaling $73.2 million. Cash used in ﬁnancing activities resulting from increased foreign earnings which were taxed at lower of $82.6 million related primarily to the expenditure of $157.9 million foreign tax rates. In July 1999, the Company changed its organizational for stock repurchase programs, partially offset by $70.5 million from structure whereby it moved certain operational and administrative the issuance of common stock under the Company’s stock option and processes to overseas subsidiaries. The repositioning resulted in foreign employee stock purchase plans and $4.9 million generated from premiums earnings being taxed at lower foreign tax rates, as the Company’s foreign charged in the sale of put warrants. earnings are considered permanently reinvested overseas. As a result of these organizational changes, the Company’s effective tax rate decreased to 30% in 2000 from 36% in 1999. Liquidity and Capital Resources At December 31, 2001, the Company’s working capital was $153.6 million compared to $427.3 million at December 31, 2000. The decrease in working capital is primarily due to a shift of cash and investments from short to long-term investments. At December 31, 2001, the Company had $65.0 million in accounts During 2001, the Company generated positive operating cash ﬂows of receivable, mostly due under normal 30-day payment terms, net of $229.8 million related primarily to net income of $105.3 million, adjusted allowances. The increase in accounts receivable compared to 2000 is for non-cash items including tax beneﬁts from the exercise of non-statutory primarily attributed to the increase in the Company’s revenues. From time stock options and disqualifying dispositions of incentive stock options to time, Citrix may maintain individually signiﬁcant accounts receivable of $28.0 million, depreciation and amortization expenses of $79.6 million, balances from its distributors or customers, which are comprised of large provisions for product returns of $22.5 million (primarily due to the business enterprises, governments and small and medium-sized businesses. Company’s stock rotation program) and the accretion of original issue If the ﬁnancial condition of its distributors or customers deteriorates, discount and amortization of ﬁnancing costs on the Company’s convertible the Company’s operating results could be adversely affected. One such subordinated debentures of $17.9 million. These cash inﬂows were partially distributor accounted for approximately 14% of accounts receivable as offset by an aggregate decrease in cash ﬂow from operating assets and of December 31, 2001. In 2000, this distributor accounted for 17% of liabilities of $39.4 million. Cash used in investing activities of $382.2 million accounts receivable. During these periods, no other distributor or customer related primarily to net cash paid for acquisitions (primarily in connection accounted for more than 10% of accounts receivable. with the acquisition of Sequoia), of $183.8 million, the net purchase of investments of $137.9 million and $60.6 million for the purchase of property and equipment and costs associated with the Company’s enterprise resource planning (“ERP”) system implementation. Approximately $11.9 million has been capitalized through December 31, 2001 related to the Company’s ERP system and no future capital expenditures are planned in connection with the Company’s ERP system. Cash used in ﬁnancing activities of $83.0 million related primarily to the expenditure of $210.2 million for stock repurchase programs, partially offset by the proceeds from the issuance of common stock under the Company’s stock option plans of $117.4 million and $12.0 million generated from premiums received upon sale of put warrants. At December 31, 2001, the Company had $746.7 million in cash and investments, including $139.7 million in cash and cash equivalents. The Company’s cash and cash equivalents are generally invested in investment grade, highly liquid securities to minimize interest rate risk and allow for ﬂexibility in the event of immediate cash needs. The Company’s short and long-term investments consist primarily of corporate securities, municipal securities and commercial paper. The Company’s investments are classiﬁed as available-for-sale or as held-to-maturity; therefore, the Company does not recognize changes in the fair value of these investments in earnings unless a decline in the fair value of the investments is other-than-temporary. From time to time, the Company makes equity investments that are accounted for under the cost method due to the limited extent of the During 2000, the Company generated positive operating cash ﬂows of Company’s ownership interest and lack of the Company’s ability to exert $243.2 million related primarily to net income of $94.5 million, adjusted signiﬁcant inﬂuence over the investees. As of December 31, 2001 and for non-cash items including tax beneﬁts from the exercise of non-statutory 2000, such investments were recorded at the lower of cost or estimated stock options and disqualifying dispositions of incentive stock options of net realizable value. During 2001, the Company recorded $7.7 million $63.9 million, depreciation and amortization expenses of $50.2 million, of losses resulting from other-than-temporary declines in fair value of and provisions for product returns and inventory obsolescence of $34.8 certain of the Company’s equity investments. At December 31, 2001, million (primarily due to the Company’s stock rotation program). the Company’s remaining equity investments were not material. These cash inﬂows were partially offset by an aggregate decrease in cash ﬂow from operating assets and liabilities of $26.6 million. Cash used in investing activities of $1.8 million for 2000 related primarily to the expenditure of $43.5 million for the purchase of computer equipment, leasehold improvements and ofﬁce equipment to support the Company’s The Company leases a signiﬁcant portion of its worldwide facilities under non- cancelable operating leases. Future payments due under these non-cancelable operating leases are $20.8 million, $18.4 million, $14.7 million, $13.4 million and $11.6 million for the years ending December 31, 2002, 2003, 2004, 2005, and 2006, respectively. Thereafter, payments due total $76.6 million. 17 Management’s Discussion and Analysis During 2001, the Company purchased Sequoia for approximately $182.6 In October 2000, the Board of Directors approved a program authorizing million in cash. In order to improve the overall credit quality and rebalance the Company to repurchase up to $25 million of the Debentures in open the short and long-term maturity of its investment portfolio subsequent market purchases. As of December 31, 2001, 4,500 units of the Company’s to the cash expenditure, the Company sold corporate debt securities Debentures representing $1.8 million in principal amount at maturity, previously designated as held-to-maturity and purchased higher credit had been repurchased under this program for $2.1 million. The Board quality corporate debt securities with interest rates that reset quarterly. of Directors’ limited authorization to repurchase Debentures allows the Additionally, during 2001, the Company terminated a forward bond Company to repurchase Debentures when market conditions are favorable. purchase agreement previously designated as a hedge of forecasted purchases of corporate security investments. The sale of securities and the termination of the forward bond purchase agreement resulted in a realized gain of approximately $8.0 million, which is included in other expense, net on the accompanying consolidated statements of income. 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 In March 1999, the Company sold $850 million principal amount at Stock (inclusive of the $200 million approved in April 1999). In January maturity of its zero coupon convertible subordinated debentures (the 2002, the Board of Directors authorized an additional $200 million of “Debentures”) due in March 2019, in a private placement. The Debentures repurchase authority under the program, bringing the aggregate amount were priced with a yield to maturity of 5.25% and resulted in net proceeds authorized for repurchase to $600 million. The objective of the Company’s to the Company of approximately $291.9 million, net of original discount stock repurchase program is to minimize the dilutive effect of its stock and net of debt issuance costs of $9.6 million. Except under limited option programs. circumstances, no interest will be paid prior to maturity. The Debentures are convertible at the option of the security holder at any time on or before the maturity date at a conversion rate of 14.0612 shares of the Company’s Common Stock for each $1,000 principal amount at maturity of the Debentures, subject to adjustment in certain events. The Company may redeem the Debentures on or after March 22, 2004, and holders may require the Company to repurchase the Debentures, on ﬁxed dates and at set redemption prices (equal to the issue price plus accrued original discount), beginning on March 22, 2004. The Company’s investment program considered the possible redemption of the Debentures in 2004, and it is the current intention of the Company to maintain sufﬁcient liquidity in the event that redemption is required, or the Debentures are otherwise repurchased at the Company’s option. In December 2000, the Company invested $158.1 million in a trust (“Trust”) managed by an investment advisor. The Company’s investment comprises all of the Trust’s assets. The Trust assets primarily consist of AAA-rated zero-coupon corporate securities that mature on March 22, 2004. The Trust entered into a credit risk swap agreement with the investment advisor, which effectively increased the yield on the Trust assets and for which value the Trust assumed the credit risk of ten investment- grade companies. The effective yield of the Trust, including the credit risk swap agreement, is 6.72% and the principal balance will accrete to $195 million in March 2004. In addition, in November 2001, the Company entered into an interest rate swap agreement with a notional amount of approximately $175 million which has the effect of converting a like amount of ﬂoating rate notes in the Company’s investment portfolio to a synthetic zero coupon investment due in March 2004 with a maturity value of approximately $190 million. The Company believes that the combined proceeds of these investment transactions will be sufﬁcient to substantially fund the redemption of the Debentures in 2004, if required. Pursuant to the Company’s stock repurchase program, the Company is authorized to make open market purchases. Purchases will be made from time to time in the open market and paid out of general corporate funds. During 2001 and 2000, the Company purchased 3,135,500 and 2,750,000 shares, respectively, of outstanding Common Stock on the open market for approximately $90.7 million and $57.9 million, respectively. These shares have been recorded as treasury stock. Additionally, pursuant to the stock repurchase program, the Company entered into two agreements, with a single counterparty in private transactions to purchase approximately 7.3 million shares of the Company’s Common Stock at various times through December 2003. Pursuant to the terms of the agreements, $100 million was paid to the counterparty in 2000 and $50 million was paid in 2001. The ultimate number of shares repurchased will depend on market conditions. During 2001 and 2000, the Company repurchased 2,307,450 shares and 1,067,108 shares, respectively, under this agreement at a total cost of $50.3 million and $18.2 million, respectively. The shares have been recorded as treasury stock. In connection with the Company’s stock repurchase program, in October 2000, the Board of Directors approved a program authorizing the Company to sell put warrants that entitle the holder of each warrant to sell to the Company, generally by physical delivery, one share of the Company’s Common Stock at a speciﬁed price. During 2001, the Company sold 3,190,000 put warrants at an average strike price of $28.95 and received premium proceeds of $12.0 million. During 2001, the Company paid $69.5 million for the purchase of 2,190,000 shares upon the exercise of outstanding put warrants, while 1,000,000 put warrants expired unexercised. The Common Shares purchased upon exercise of these put warrants have been recorded as treasury stock. As of December 31, 2001, 1,300,000 put warrants were outstanding, and expired or will expire on 18 Management’s Discussion and Analysis various dates between January and March 2002, with exercise prices ranging from $20.75 to $26.42. As of December 31, 2001, the Company has a total potential repurchase obligation of approximately $30.8 million associated with the outstanding put warrants, of which $16.6 million is classiﬁed as a put warrant obligation on the consolidated balance sheet. The remaining $14.2 million of outstanding put warrants permit a net- share settlement at the Company’s option and do not result in a put warrant Certain Factors Which May Affect Future Results The Company’s operating results and ﬁnancial condition have varied in the past and may in the future vary signiﬁcantly depending on a number of factors. From time to time, information provided by the Company or statements made by its employees may contain “forward-looking” obligation on the consolidated balance sheet. The outstanding put warrants information that involves risks and uncertainties. In particular, statements classiﬁed as a put warrant obligation on the consolidated balance sheet will be reclassiﬁed to stockholders’ equity when the warrant is exercised or when it expires. Under the terms of the put warrant agreements, the Company must maintain certain levels of cash and investments balances. As of December 31, 2001, the Company had approximately $246.7 million of cash and investments in excess of those required levels. contained in this Annual Report, and in the documents incorporated by reference into this Annual Report, that are not historical facts, including, but not limited to statements concerning new prospects, goals, products, product pricing, hiring and marketing plans, license revenues, development of the MetaFrame enhancements and the contribution of MetaFrame to license revenues, the Development Agreement, growth of international revenues, investments in foreign operations and markets, reinvestment of During 2001 and 2000, the Company expended an aggregate of $198.2 foreign earnings, gross margins, goodwill, intangible assets, impairment million and $153.0 million, net of put warrant premiums received, charges, amortization, in-process research and development, obsolescence of acquired technologies, anticipated operating and capital expenditure requirements, upgrading of Company’s systems, acquisitions, debt redemption obligations, stock repurchases, and potential debt or equity ﬁnancings constitute forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees. The Company’s actual results of operations and ﬁnancial condition have varied and may in the future vary signiﬁcantly from those stated in any forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Annual Report, in the documents incorporated by reference into this Annual Report or presented elsewhere by management from time to time. Such factors, among others, may have a material adverse effect upon the Company’s business, results of operations and ﬁnancial condition. respectively, under all stock repurchase transactions. On April 30, 2001, the Company completed the acquisition of Sequoia, a provider of XML-pure portal software, for approximately $182.6 million in cash, including approximately $2.7 million in transaction costs, all of which were paid during 2001. The acquisition was accounted for as a purchase. In February 2000, the Company acquired all of the operating assets of Innovex for approximately $47.8 million. At the date of acquisition, the Company paid approximately $28.9 million in consideration and closing costs. Pursuant to the acquisition agreement, the remaining purchase consideration, plus interest, was contingently payable based on future events. During 2001, these contingencies were met, resulting in approximately $16.2 million of additional purchase price and $2.9 million in compensation to the former owners. Pursuant to the acquisition agreement, payment of the contingent amounts and associated interest were made in August 2001 and February 2002 for $10.5 million and $10.7 million, respectively. There are no remaining contingent obligations. During 2001 and 2000, a signiﬁcant portion of the Company’s cash inﬂows were generated by operations. Although the Company believes existing cash and investments together with cash ﬂow expected from operations will be sufﬁcient to meet operating and capital expenditures requirements through 2002, there can be no assurance that future operating results will not vary if the Company experiences a decrease in customer demand or acceptance of future product offerings. The Company may from time to time seek to raise additional funds through public or private offerings of debt or equity securities. There can be no guarantee that such ﬁnancings will be available when needed or desired or that, if available, such ﬁnancings will be at terms favorable to the Company or its stockholders. The Company continues to search for suitable acquisition candidates and may acquire or make investments in companies it believes are related to its strategic objectives. Such investments may reduce the Company’s available working capital. 19 Management’s Discussion and Analysis Reliance Upon Strategic Relationship with Microsoft. Microsoft is the There can be no assurances that the Company’s agreements with Microsoft leading provider of desktop operating systems. The Company depends will be extended or renewed by Microsoft upon their expirations or that, upon the license of key technology from Microsoft, including certain if renewed or extended, such agreements will be on terms favorable to the source and object code licenses and technical support. The Company also Company or its stockholders. 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: Fluctuations in Economic and Market Conditions. The demand for the Company’s products depends in part upon the general demand for computer hardware and software, which ﬂuctuates based on numerous factors, including capital spending levels, the spending levels and growth of the Company’s current and prospective customers and general economic conditions. Fluctuations in the demand for the Company’s products could have an adverse effect on the Company’s business, ﬁnancial condition and • Competition with Microsoft. Microsoft Windows NT Server, results of operations. In addition, the impact of slower IT spending in the Terminal Server Edition and Microsoft Windows 2000 future, if any, could impact the Company’s business, ﬁnancial condition (collectively “Windows Server Operating Systems”) are, and and results of operations. future product offerings by Microsoft may be, competitive with the Company’s current MetaFrame products, and any future product offerings by the Company. • Expiration of Microsoft’s Endorsement of the ICA Protocol. Microsoft’s obligation to endorse only the Company’s ICA protocol as the preferred method to provide multi-user Windows access for devices other than Windows clients expired in November 1999. Microsoft may market or endorse other methods The Company’s short and long-term investments with various ﬁnancial institutions are subject to risks inherent with ﬂuctuations in general economic and market conditions. Such ﬂuctuations could cause an adverse effect in the value of such investments and could even result in a total loss of certain of the Company’s investments. A total loss of one or more investments could result in an adverse effect on the Company’s results of operations and ﬁnancial position. to provide multi-user Windows access to non-Windows client New Products and Technological Change. The markets for the devices, including Microsoft’s Remote Desktop Protocol (“RDP”). Company’s products are relatively new and are characterized by: • 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. • rapid technological change; • evolving industry standards; • changes in end-customer requirements; and • frequent new product introductions and enhancements. These market characteristics will require the Company to continually • Product Release Delays. There may be delays in the release enhance its current products and develop and introduce new products and shipment of future versions of Windows Server Operating to keep pace with technological developments and respond to evolving Systems. • Termination of Development Agreement Obligations. The Company’s Development Agreement with Microsoft expires in May 2002. Upon expiration, Microsoft may change its Windows Server Operating Systems to render them inoperable with the Company’s MetaFrame product offerings. Further, upon termination of the Development Agreement, Microsoft may help third parties compete with the Company’s MetaFrame products. Finally, future product offerings by Microsoft may not provide for interoperability with the Company’s products. The lack of interoperability between present or future Microsoft products and the Company’s products could cause a material adverse effect on the Company’s business, results of operations and ﬁnancial condition. • Termination of Development Agreement Revenues. Upon the expiration of the Company’s Development Agreement with Microsoft, the Company will no longer recognize any royalty revenue from the Development Agreement. 20 end-customer requirements. As is common in the computer software industry, the Company may experience delays in the introduction of new products. Moreover, the Company may experience delays in market acceptance of any new products or new releases of its current products. Additionally, the Company and others may announce new product enhancements or technologies that could replace or shorten the life cycle of the Company’s existing product offerings. For example, there can be no guarantee that the Company’s development-stage channel-ready portal software product, NFuse Elite, will be introduced when anticipated or desired by the Company, or that upon introduction, NFuse Elite will be accepted by the Company’s channel and strategic partners, customers or prospective customers. There can be no assurance that the Company will be able to respond effectively to technological changes or new product announcements by others. If the Company experiences material delays or sales shortfalls with respect to new products or new releases of its current products, such delays and shortfalls could have a material adverse effect on the Company’s business, results of operations and ﬁnancial condition. Management’s Discussion and Analysis The Company believes it will incur additional costs and royalties associated announcement of the release and the actual release of products competitive with the development, licensing or acquisition of new technologies or with the Company’s existing and future product lines, such as Windows enhancements to existing products. This will increase the Company’s Server Operating Systems and related enhancements, could cause existing cost of revenues and operating expenses. The Company cannot currently and potential customers of the Company to postpone or cancel plans quantify such increase with respect to transactions that have not occurred. to license the Company’s products. This would adversely impact the The Company may use a substantial portion of its cash and investments Company’s business, operating results and ﬁnancial condition. Further, the 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 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. and uncertainties such as undetected errors in third party software, In addition, alternative products exist for Web applications in the Internet disagreement over the scope of the license and other key terms, such software market that directly or indirectly compete with the Company’s as royalties payable, and infringement actions brought by third party current products and anticipated future product offerings. Existing or licensees. In addition, the loss or inability to maintain any of these third new products that extend Internet software to provide database access or party licenses could result in delays in the shipment or release of the interactive computing (including but not limited to, Microsoft products) Company products, which could have a material adverse effect on the can materially impact the Company’s ability to sell its products in this Company’s business, results of operations and ﬁnancial condition. market. As markets for the Company’s products continue to develop, The Company may need to hire additional personnel to develop new products, product enhancements and technologies and to fulﬁll the Company’s responsibilities under the terms of the Development Agreement. If the Company is unable to add the necessary staff and resources, future enhancement and additional features to its existing or future products may be delayed, which may have a material adverse effect on the Company’s business, results of operations and ﬁnancial condition. In January 2002, the Company adopted SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. As a result, the Company no longer amortizes goodwill and intangible assets deemed to have indeﬁnite lives. However, the Company will continue to have amortization related to certain product and core technologies, trademarks, patents and other intangibles, and the Company must evaluate its intangible assets, including goodwill, at least annually for impairment. If the Company determines that any of its intangible assets are impaired, the Company will be required to take a related charge to earnings. Furthermore, at January 1, 2002, the Company had unamortized identiﬁed intangibles with estimable useful lives in the amount of $36.6 million, of which $34.0 million consists of product and core technology purchased by the Company in its acquisition of Sequoia. The Company currently intends to commercialize such technology through its new access portal line of products that includes NFuse Elite. If the Company’s new access portal line of products is not accepted by the Company’s channel and strategic partners, customers or prospective customers, the Company may determine that the value of such purchased technology is impaired and may be required to take a related charge of earnings. Such a charge to earnings could result in a material adverse effect on the Company’s results of operations and ﬁnancial condition. Competition. The markets in which the Company competes are intensely competitive. Certain of its competitors and potential competitors, including Microsoft and Novell, Inc., have signiﬁcantly greater ﬁnancial, technical, sales and marketing and other resources than the Company. The additional companies, including companies with signiﬁcant market presence in the computer hardware, software and networking industries may enter the markets in which the Company competes and further intensify competition. Competitors in this market include Microsoft, AOL Time Warner, ORACLE, Sun Microsystems and other makers of Web server application and browser software. Finally, although the Company believes that price has historically been a less signiﬁcant competitive factor than product performance, reliability and functionality, the Company believes that price competition may become more signiﬁcant in the future. The Company may not be able to maintain its historic prices and margins, and any inability to do so could adversely affect its business, results of operations and ﬁnancial condition. Dependence Upon Strategic Relationships. In addition to its relationship with Microsoft, the Company has strategic relationships with IBM, Compaq, Hewlett-Packard and others. The Company depends upon its strategic partners to successfully incorporate the Company’s technology into their products and to market and sell such products. If the Company is unable to maintain its current strategic relationships or develop additional strategic relationships, or if any of its key strategic partners are unsuccessful at incorporating the Company’s technology into their products or marketing or selling such products, the Company’s business, operating results and ﬁnancial condition could be materially adversely affected. Dependence on Proprietary Technology. The Company relies primarily on a combination of copyright, trademark and trade secret laws, as well as conﬁdentiality procedures and contractual provisions, to protect its proprietary rights. The Company’s efforts to protect its proprietary technology rights may not be successful. The loss of any material trade secret, trademark, trade name, or copyright could have a material adverse effect on the Company. Despite the Company’s precautions, it may be possible for unauthorized third parties to copy certain portions of the Company’s products or to obtain and use information regarded as proprietary. A signiﬁcant portion of the Company’s sales are derived from the licensing of its packaged products under “shrink wrap” license 21 Management’s Discussion and Analysis agreements that are not signed by licensees and electronic licensing Further, the Company may maintain individually signiﬁcant accounts agreements that may be unenforceable under the laws of certain foreign receivable balances with certain distributors. For example, one such jurisdictions. In addition, the Company’s ability to protect its proprietary distributor accounted for approximately 14% of accounts receivable 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. as of December 31, 2001. In 2000, the same distributor accounted for 17% of accounts receivable. If the ﬁnancial condition of such distributors deteriorates and such distributors signiﬁcantly delay or default on their payment obligations, such delays or defaults could result in a material adverse effect on the Company’s business, results of operations and • Third Party Infringement Claims. Third parties may assert ﬁnancial condition. 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 Upon Broad-Based Acceptance of ICA Protocol. The Company believes that its success in the markets in which it competes will depend upon its ability to make ICA protocol a widely accepted standard for supporting Windows and UNIX applications. If another standard emerges or if the Company otherwise fails to achieve wide acceptance of the ICA protocol as a standard for supporting Windows or UNIX applications, the Company’s business, operating results and ﬁnancial condition could be materially adversely affected. Microsoft includes as a component of Windows Server Operating Systems its Remote Desktop Protocol (RDP), which has certain 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 Need to Attract and Penetrate Large Enterprise Customers. The features. In addition, the Company’s ability to win broad market Company intends to expand its ability to reach and penetrate large acceptance of its ICA protocol will depend upon the degree of success enterprise customers by adding channel partners and expanding its achieved by its strategic partners in marketing their respective platforms, offering of consulting services. The Company’s inability to attract and product pricing and customers’ assessment of its technical, managerial penetrate large enterprise customers could have a material adverse effect service and support expertise. If another standard emerges or if the on its business, operating results and ﬁnancial condition. Large enterprise Company fails to achieve wide acceptance of the ICA protocol as a customers usually request special pricing and generally have longer standard for supporting Windows and UNIX applications, the Company’s sales cycles, which could negatively impact the Company’s revenues. business, operating results and ﬁnancial condition could be materially Additionally, as the Company attempts to attract and penetrate large adversely affected. 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. 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. Need to Expand Channels of Distribution. The Company intends to Additionally, the Company’s products depend upon certain third party leverage its relationships with hardware and software vendors and systems products, which may contain defects and could reduce the performance integrators to encourage them to recommend or distribute the Company’s of the Company’s products or render them useless. Since the Company’s products. In addition, an integral part of the Company’s strategy is to products are often used in mission-critical applications, errors in the expand its ability to reach large enterprise customers by adding channel Company’s products or the products of third parties upon which the partners and expanding its offering of consulting services. The Company is Company’s products rely could give rise to warranty or other claims by currently investing, and intends to continue to invest, signiﬁcant resources the Company’s customers. to develop these channels, which could reduce the Company’s proﬁts. Reliance Upon Indirect Distribution Channels and Major Distributors. The Company relies signiﬁcantly on independent distributors and resellers for the marketing and distribution of its products. The Company does not control its distributors and resellers. Additionally, the Company’s distributors and resellers are not obligated to purchase products from the Company and may also represent other lines of products. 22 Management’s Discussion and Analysis Maintenance of Growth Rate. The Company’s revenue growth rate in Role of Mergers and Acquisitions. Mergers and acquisitions involve 2002 may not approach the levels attained in recent years. The Company’s numerous risks, including the following: growth during recent years is largely attributable to the introduction of MetaFrame for Windows in mid-1998. There can be no assurance that the markets in which the Company operates, including the application server market and the Internet products market, will grow in the manner predicted by independent third parties. In addition, to the extent revenue growth continues, the Company believes that its cost of revenues and certain operating expenses will also increase. Due to the ﬁxed nature of a signiﬁcant portion of such expenses, together with the possibility of slower revenue growth, the Company’s income from operations and cash ﬂows from operating and investing activities may decrease as a percentage of revenues in 2002. In-Process Research and Development Valuation. The Company has in the past re-evaluated the amounts charged to in-process research and development in connection with certain acquisitions and licensing arrangements. The amount and rate of amortization of such amounts are subject to a number of risks and uncertainties, including, without • difﬁculties in integration of the operations, technologies, and products of the acquired companies; • the risk of diverting management’s attention from normal daily operations of the business; • potential difﬁculties in completing projects associated with purchased in process research and development; • 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. limitation, the effects of any changes in accounting standards or guidance Mergers and acquisitions of high-technology companies are inherently adopted by the staff of the Securities and Exchange Commission or the risky, and no assurance can be given that the Company’s previous, accounting profession. Any changes in accounting standards or guidance including the Company’s acquisition of Sequoia, or future acquisitions will adopted by the staff of the Securities and Exchange Commission, may be successful and will not have a material adverse affect on the Company’s materially adversely affect future results of operations through increased business, operating results or ﬁnancial condition. In addition, there can amortization expense. Moreover, no assurance can be given that actual be no assurance that the combined company resulting from any such revenues and operating proﬁt attributable to acquired in-process research acquisition can continue to support the growth achieved by the companies and development will not deviate from the projections used to initially separately. The Company must also focus on its ability to manage and value in-process research and development when acquired. Ongoing integrate any such acquisition. Failure to manage growth effectively and operations and ﬁnancial results for acquired assets and licensed technology, successfully integrate acquired companies could adversely affect the and the Company as a whole, are subject to a variety of factors, which may Company’s business and operating results. not have been known or estimable at the date of such transactions. Revenue Recognition Process. The Company continually re-evaluates Additionally, in 1999, the Company completed the acquisition of certain its programs, including speciﬁc license terms and conditions, to market its in-process software technologies from ViewSoft, in which it allocated current and future products and services. The Company may implement $2.3 million of the purchase price to in process research and development. new programs, including offering speciﬁed and unspeciﬁed enhancements In April 2001, the Company acquired Sequoia, of which $2.6 million of to its current and future product lines. The Company may recognize the purchase price was allocated to in-process research and development. revenues associated with such enhancements after the initial shipment The Company’s efforts with respect to the acquired technologies currently or licensing of the software product or over the product’s life cycle. The consist of integration work and any associated design, development or Company has implemented a new licensing model associated with the rework that may be required to support the integration of these release of MetaFrame XP in February 2001. The Company may implement technologies into the Company’s anticipated future product offerings. a different licensing model, in certain circumstances, which would result in Failure to complete the development of the Company’s anticipated future the recognition of licensing fees over a longer period, which may result in product offerings in their entirety, or in a timely manner, could have a decreasing revenue. The timing of the implementation of such programs, material adverse impact on the Company’s ﬁnancial condition and results the timing of the release of such enhancements and other factors may of operations. The Company is currently unable to determine the impact impact the timing of the Company’s recognition of revenues and related of such delays on its business, future results of operations and ﬁnancial expenses associated with its products, related enhancements and services condition. There can be no assurance that the Company will not incur and could adversely affect the Company’s business and operating results. 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. 23 Management’s Discussion and Analysis Dependence on Key Personnel. The Company’s success will depend, in or anticipated variations in operating and ﬁnancial results, anticipated large part, upon the services of a number of key employees. The Company revenue or earnings growth, analyst reports or recommendations and other does not have long-term employment agreements with any of its key events or factors, many of which are beyond the Company’s control. In personnel. Any ofﬁcer or employee can terminate his or her relationship addition, the stock market in general, and The Nasdaq National Market and with the Company at any time. The effective management of the Company’s anticipated growth will depend, in a large part, upon the Company’s ability to (i) retain its highly skilled technical, managerial and marketing personnel; and (ii) to attract and maintain replacements for and additions to such personnel in the future. Competition for such personnel may affect the Company’s ability to successfully attract, assimilate or retain sufﬁciently qualiﬁed personnel. Product Returns and Price Reductions. The Company provides certain of its distributors with product return rights for stock balancing or limited product evaluation. The Company also provides certain of its distributors with price protection rights. To cover these product returns and price protections, the Company has established reserves based on its evaluation of historical trends and current circumstances. These reserves may not be sufﬁcient to cover product returns and price protections in the future, in which case the Company’s operating results may be adversely affected. International Operations. The Company’s continued growth and proﬁtability will require further expansion of its international operations. To successfully expand international sales, the Company must establish additional foreign 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. the market for software companies and technology companies in particular, have experienced extreme price and volume ﬂuctuations. These broad market and industry factors may materially and adversely affect the market price of the Common Stock, regardless of the Company’s actual operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against such companies. For example, several class-action lawsuits were instituted against the Company, its directors, and certain of its ofﬁcers in 2000 following a decline in the Company’s stock price. Such litigation could result in substantial costs and a diversion of management’s attention and resources, which would have a material adverse effect on the Company’s business, ﬁnancial condition and results of operations. Management of Growth and Higher Operating Expenses. The Company has recently experienced rapid growth in the scope of its operations, the number of its employees and the geographic area of its operations. In addition, the Company has completed certain domestic and international acquisitions. Such growth and assimilation of acquired operations and personnel of such acquired companies has placed and may continue to place a signiﬁcant strain on the Company’s managerial, operational and ﬁnancial resources. To manage its growth effectively, the Company must continue to implement and improve additional management and ﬁnancial systems and controls. The Company believes that it has made adequate allowances for the costs and risks associated with these expansions. However, its systems, procedures or controls may not be adequate to support its current or future operations. In addition, the Company may not be able to effectively manage this expansion and still achieve the rapid execution necessary to fully exploit the market opportunity for its products and services in a timely and cost-effective manner. The Company’s future operating results will also depend on its ability to manage its expanding product line, expand its sales and marketing organizations and expand its support organization commensurate with the increasing base of its installed product. The Company plans to increase its professional staff during 2002 as it expands sales, marketing and support and product development efforts, as well as associated administrative systems, to support planned growth and business objectives. As a result of this planned growth in the size of its staff, the Company believes that it may require additional domestic and international facilities during 2002. Although the Company believes that the cost of such additional facilities will not signiﬁcantly impact its ﬁnancial position or results of operations, the Company anticipates that operating expenses will increase during 2002 as a result of its planned growth in staff. Such an increase in operating expenses may reduce its Volatility of Stock Price. The market price for the Company’s Common income from operations and cash ﬂows from operating activities in 2002. 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 24 Quantitative and Qualitative Disclosures About Market Risk Quantitative and Qualitative Disclosures About Market Risk in a potential change in levels of local currency prices or sales reported in U.S. dollars. The Company does not anticipate any material adverse impact to its consolidated ﬁnancial position, results of operations, or cash ﬂows as The following discussion about the Company’s market risk includes a result of these forward foreign exchange contracts. “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The analysis methods used by the Company to assess and Exposure to Interest Rates mitigate risk discussed below should not be considered projections of In order to better manage its exposure to interest rate risk, in November 2001 the Company entered into an interest rate swap agreement. The swap agreement, with a notional amount of $174.6 million converts the ﬂoating rate return on the Company’s non-trading investment portfolio, to a ﬁxed rate. The fair value of the interest rate swap at December 31, 2001 was $0.1 million. Based upon a hypothetical 1% increase in the market interest rate as of December 31, 2001, the fair value of this asset would have decreased by approximately $3.6 million. The Company also maintains a non-trading investment portfolio of investment grade, highly liquid, debt securities, which limits the amount of credit exposure to any one issue, issuer, or type of instrument. The securities in the Company’s investment portfolio are not leveraged. The securities classiﬁed as available-for-sale are subject to interest rate risk. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates and assumes that ending fair values include principal plus accrued interest, dividends and reinvestment income. If market interest rates were to increase by 100 basis points from December 31, 2001 and 2000 levels, the fair value of the portfolio would decline by approximately $1.1 million and $10.4 million, respectively. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s interest rate swap agreements and non-trading investment portfolio. This analysis does not consider the effect of credit risk as a result of the reduced level of overall economic activity that could exist in such an environment. future events, gains or losses. The Company is exposed to ﬁnancial market risks, including changes in interest rates and foreign currency exchange rates which may adversely affect its results of operations or ﬁnancial condition. To mitigate foreign currency and interest rate risk, the Company utilizes derivative ﬁnancial instruments. The Company does not use derivative ﬁnancial instruments for speculative or trading purposes. The counter-parties to the Company’s derivative instruments are major ﬁnancial institutions. All of the potential changes noted below are based on sensitivity analyses performed on the Company’s ﬁnancial position at December 31, 2001. Actual results may differ materially. Discussions of the Company’s accounting policies for derivatives and hedging activities are included in Notes 2 and 13 of “Notes to Consolidated Financial Statements”, which appears in this report. Exposure to Exchange Rates A substantial majority of the Company’s overseas expense and capital purchasing activities are transacted in local currencies, primarily British pounds sterling, Euros, Swiss francs, and Australian dollars. To protect against increases in expenses and the volatility of resulting future cash ﬂows caused by changes in currency exchange rates, the Company has established a hedging program. The Company uses foreign currency forward contracts to hedge certain forecasted foreign currency expenditures. The Company’s hedging program reduces, but does not entirely eliminate, the impact of currency exchange rate movements. At December 31, 2001 and 2000, the Company had in place foreign currency forward contracts with a notional amount of $47.9 million and $53.0 million, respectively. The fair value of these contracts at December 31, 2001 and 2000 were $0.2 million and $1.1 million, respectively. Based on a hypothetical 10% appreciation of the U.S. dollar from December 31, 2001 market rates the fair value of the Company’s foreign currency forward contracts would decrease by $4.8 million. Conversely, a hypothetical 10% depreciation of the U.S. dollar from December 31, 2001 market rates would increase the fair value of the Company’s foreign currency forward contracts by $4.8 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates quantiﬁed above, changes in exchange rates may also change the dollar value of sales and affect the volume of sales as competitors products become more or less attractive. The Company’s sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor 25 Consolidated Balance Sheets Consolidated Balance Sheets December 31, Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowances of $12,069 and $10,601 at 2001 and 2000, respectively Inventories Prepaid taxes Other prepaids and current assets Current portion of deferred tax assets Total current assets Long-term investments Property and equipment, net Intangible assets, net Long-term portion of deferred tax assets, net Other assets, net Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses Current portion of deferred revenues Total current liabilities Long-term portion of deferred revenues Convertible subordinated debentures Commitments and contingencies Put warrants Stockholders’ equity: Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding Common stock at $.001 par value: 1,000,000 shares authorized; 196,627 and 187,872 issued at 2001 and 2000, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Less—common stock in treasury, at cost (11,450 and 3,817 shares in 2001 and 2000, respectively) Total stockholders’ equity See accompanying notes. 26 2001 2000 (in thousands, except par value) $ 139,693 $ 375,025 77,078 91,612 65,032 3,568 6,069 21,444 33,171 346,055 529,894 90,110 188,977 25,071 28,123 37,299 4,622 26,715 11,493 39,965 586,731 382,524 55,559 52,339 18,977 16,443 $1,208,230 $1,112,573 $ 111,928 $ 78,739 80,573 192,501 5,631 346,214 80,648 159,387 14,082 330,497 16,554 15,732 — — 197 507,857 425,877 (84) 933,847 (286,517) 188 351,053 320,617 (2,943) 668,915 (76,040) 647,330 592,875 $1,208,230 $1,112,573 2001 2000 1999 (in thousands, except per share information) $551,799 $430,548 $363,455 39,830 591,629 29,848 — 29,848 561,781 67,699 224,108 85,212 48,831 2,580 — 428,430 133,351 42,006 (20,553) (2,253) 152,551 47,291 39,898 470,446 28,483 571 29,054 441,392 50,622 180,384 58,685 30,395 — 9,081 329,167 112,225 41,313 (17,099) (1,422) 135,017 40,505 39,830 403,285 13,745 834 14,579 388,706 37,363 121,302 37,757 18,480 2,300 — 217,202 171,504 25,302 (12,532) (1,549) 182,725 65,781 $105,260 $ 94,512 $116,944 $ 0.57 $ 0.51 $ 0.66 185,460 184,804 176,260 $ 0.54 $ 0.47 $ 0.61 194,498 199,731 192,566 Consolidated Statements of Income Consolidated Statements of Income Year ended December 31, Revenues: Revenues Other revenues Total net revenues Cost of revenues: Cost of revenues (excluding amortization, presented separately below) Cost of other revenues Total cost of revenues Gross margin Operating expenses: Research and development Sales, marketing and support General and administrative Amortization of intangible assets In-process research and development Write-down of technology Total operating expenses Income from operations Interest income Interest expense Other expense, net Income before income taxes Income taxes Net income Earnings per common share: Basic earnings per share Weighted average shares outstanding Earnings per common share — assuming dilution: Diluted earnings per share Weighted average shares outstanding See accompanying notes. 27 Consolidated Statements of Stockholders’ Equity Consolidated Statements of Stockholders’ Equity Common Stock Shares Amount Additional Paid-In Capital Retained Earnings (in thousands) Accumulated Other Comprehensive Loss Common Stock in Treasury At Cost Total Stockholders’ Equity Balance at December 31, 1998 171,846 $ 172 $ 188,121 $ 109,161 $ — $ — $ 297,454 Exercise of stock options 9,220 9 69,753 Common stock issued under employee stock purchase plan Tax beneﬁt from employer stock plans Unrealized loss on available-for-sale securities, net of related taxes Net income Balance at December 31, 1999 Exercise of stock options Common stock issued under employee stock purchase plan Common stock issued upon debt conversion Tax beneﬁt from employer stock plans Proceeds from sale of put warrants Put warrant obligations Repurchase of common stock Cash paid in advance for share repurchase contract, net of shares received Unrealized loss on available-for-sale securities, net of related taxes Net income Balance at December 31, 2000 Exercise of stock options Common stock issued under employee stock purchase plan Common stock issued upon debt conversion Tax beneﬁt from employer stock plans Proceeds from sale of put warrants Put warrant obligations, net of expired put warrants Repurchase of common stock Cash paid in advance for share repurchase contract, net of shares received Unrealized gain on forward contracts and interest rate swap, net of reclassiﬁcation adjustments and net of related taxes Unrealized gain on available-for-sale securities, net of related taxes Net income 27 — — — 181,093 6,698 78 3 — — — — — — — 187,872 8,541 214 — — — — — — — — — — — — — 181 7 — — — — — — — — — 188 9 — — — — — — — — — — — — — — 116,944 — — — (2,537) — 604 50,843 — — 309,321 226,105 (2,537) 69,146 1,262 73 63,923 4,870 (15,732) — (81,810) — — — — — — — — — — — 94,512 — — — — — — — — (406) — — — — — — — — — — — — — 69,762 604 50,843 (2,537) 116,944 533,070 69,153 1,262 73 63,923 4,870 (15,732) (76,040) (76,040) — — — (81,810) (406) 94,512 351,053 320,617 (2,943) (76,040) 592,875 113,331 4,008 2 28,011 12,019 (822) — 255 — — — — — — — — — — — — — 105,260 — — — — — — — — 84 2,775 — 113,340 4,008 2 28,011 12,019 (822) — — — — — (210,477) (210,477) — 255 — — — 84 2,775 105,260 Balance at December 31, 2001 196,627 $ 197 $ 507,857 $ 425,877 $ (84) $ (286,517) $ 647,330 See accompanying notes. 28 Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Year ended December 31, Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets Depreciation and amortization of property and equipment Other-than-temporary decline in fair value of investments In-process research and development Write-down of technology Provision for doubtful accounts receivable Provision for product returns Provision for inventory obsolescence Tax beneﬁt related to the exercise of non-statutory stock options and disqualiﬁed dispositions of incentive stock options Accretion of original issue discount and amortization of ﬁnancing cost Other non-cash items Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable Inventories Prepaid expenses and other current assets Other assets Deferred tax assets Accounts payable and accrued expenses Deferred revenues Income taxes payable Net cash provided by operating activities Investing activities Purchases of investments Proceeds from sales and maturities of investments Purchases of property and equipment Cash paid for acquisitions, net of cash acquired Cash paid for licensing agreement Net cash used in investing activities Financing activities Net proceeds from issuance of common stock Net proceeds from issuance of convertible subordinated debentures Cash paid to repurchase convertible subordinated debentures Cash paid under stock repurchase programs Proceeds from sale of put warrants Other Net cash (used in) provided by ﬁnancing activities Change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Cash Flow Information 2001 2000 1999 (in thousands) $ 105,260 $ 94,512 $ 116,944 48,831 30,757 7,689 2,580 — 2,784 22,533 2,292 28,011 17,853 607 (50,665) (1,238) 12,648 (12,034) 2,471 5,523 (8,630) 12,571 229,843 (553,490) 415,633 (60,557) (183,754) — (382,168) 117,350 — (2,141) (210,222) 12,019 (13) (83,007) (235,332) 375,025 $ 139,693 30,395 19,853 — — 9,081 377 27,883 6,932 63,923 16,911 — (8,625) (3,762) 4,614 (2) (2,200) 18,799 (26,987) (8,467) 243,237 (569,795) 642,986 (43,532) (30,102) (1,333) (1,776) 70,488 — — (157,850) 4,870 (60) (82,552) 158,909 216,116 $ 375,025 18,480 9,083 — 2,300 — 584 20,879 1,982 50,843 12,592 — (43,993) (5,641) (32,762) (7,277) (14,674) 25,062 22,970 6,649 184,021 (547,510) 151,284 (26,313) (32,673) (2,333) (457,545) 70,366 291,920 — — — (192) 362,094 88,570 127,546 $ 216,116 The Company paid income taxes of approximately $7,991, $9,277 and, $40,894 in 2001, 2000 and 1999, respectively. Additionally, the Company paid interest of approximately $1,221, $23, and $7 during the years ended December 31, 2001, 2000 and 1999, respectively. See accompanying notes. 29 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 1. Organization value. The Company periodically evaluates the carrying value of its investments to determine if there has been any impairment of value that is other-than-temporary. During 2001, the Company recorded $7.7 million of losses resulting from other-than-temporary declines in fair value of certain of the Company’s equity investments. At December 31, 2001, Citrix Systems, Inc. (“Citrix” or the “Company”), a Delaware corporation the Company’s remaining equity investments were not material. founded on April 17, 1989 is a leading supplier of corporate application and information infrastructure software and services that enable the effective and efﬁcient enterprise-wide deployment and management of applications and information, including those designed for Microsoft Windows® operating systems, UNIX® operating systems and for Web-based information systems. The Company’s MetaFrame® products permit organizations to provide virtual access to Windows-based and UNIX applications without regard to location, network connection, or type of client hardware platforms. The Company also provides portal software and services that are designed to provide personalized, secure Web-based access to a wide variety of business information from any location, device or connection. The Company markets its products through multiple direct and indirect channels such as distributors, value-added resellers and original equipment manufacturers worldwide. The Company also promotes its products through strategic alliance agreements with a wide variety of industry partners, including Microsoft Corporation (“Microsoft”). 2. Significant Accounting Policies Consolidation Policy. The consolidated ﬁnancial statements of the Company include the accounts of its wholly-owned subsidiaries, primarily in Europe and Asia-Paciﬁc. All signiﬁcant transactions and balances between the Company and its subsidiaries have been eliminated in consolidation. Cash and Cash Equivalents. For the purposes of the consolidated statements of cash ﬂows, cash and cash equivalents include marketable securities which are primarily commercial paper, money market funds, municipal securities, government securities and corporate securities with initial or remaining contractual maturities when purchased of three months or less. The Company minimizes its credit risk associated with cash and cash equivalents by investing in high quality, investment grade instruments and periodically evaluating the credit quality of its primary ﬁnancial institutions. Investments. Short-term investments at December 31, 2001 primarily consist of municipal securities, corporate securities, and commercial paper. Long-term investments at December 31, 2001 primarily consist of commercial The Company minimizes its credit risk associated with investments by investing primarily in high quality investment grade securities. The Company maintains investments with various ﬁnancial institutions. The Company’s policy is designed to limit exposure to any one institution depending on credit quality and periodic evaluations of the relative credit standing of those ﬁnancial institutions are considered in the Company’s investment strategy. Accounts Receivable. Substantially all of the Company’s accounts receivable are due from distributors and value-added resellers of computer software. Collateral is not required. Credit losses and expected product returns are provided for in the consolidated ﬁnancial statements and have been within management’s expectations. If the ﬁnancial condition of a signiﬁcant distributor or customer were to deteriorate, the Company’s operating results could be adversely affected. One distributor accounted for approximately 14% and 17% of accounts receivable at December 31, 2001 and 2000, respectively. No other distributor or customer accounted for more than 10% of accounts receivable. Inventories. Inventories, consisting primarily of ﬁnished goods, are stated at the lower of cost (determined by the ﬁrst-in, ﬁrst-out method) or market. When necessary, a provision has been made to reduce obsolete or excess inventories to market. Property and Equipment. Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which is generally three years for computer equipment, software, ofﬁce equipment and furniture, the lesser of the lease term or ﬁve years for leasehold improvements and seven years for the enterprise resource planning system. Assets under capital leases are amortized over the shorter of the asset life or the remaining lease term. Amortization of assets under capital leases is included in depreciation expense. Accumulated amortization of equipment under capital leases approximated $0.4 million at December 31, 2001 and 2000, respectively. Property and equipment consist of the following: paper, municipal securities and corporate securities. Investments classiﬁed December 31, as available-for-sale are stated at fair value with unrealized gains and losses, net of taxes, reported in other comprehensive loss. Investments classiﬁed as held-to-maturity are stated at amortized cost. The Company does not recognize changes in the fair value of these investments in income currently unless a decline in value is considered other-than-temporary. From time to time, the Company makes equity investments that are accounted for under the cost method due to the limited extent of the Company’s Computer equipment Software Property, equipment and furniture Leasehold improvements Land Equipment under capital leases ownership interest and the lack of the Company’s ability to exert signiﬁcant Less accumulated depreciation inﬂuence over the investees. As of December 31, 2001 and 2000, such and amortization investments were recorded at the lower of cost or estimated net realizable 2001 2000 (in thousands) $ 50,561 38,028 30,833 25,930 9,062 451 $ 37,834 21,836 10,937 19,915 — 406 154,865 90,928 (64,755) (35,369) $ 90,110 $ 55,559 30 Notes to Consolidated Financial Statements Intangible Assets. Goodwill and other intangible assets are amortized product sales to distributors and resellers is recorded when related using the straight-line method over periods ranging from two to ﬁve years. products are shipped. Revenues from enterprise and corporate licensing Intangible assets consist of the following: December 31, Goodwill Core technology Other intangibles Less accumulated amortization 2001 2000 (in thousands) $ 192,713 65,706 38,600 $ 53,400 37,650 20,500 297,019 (108,042) 111,550 (59,211) arrangements are recognized when related products are shipped and the customer has been electronically provided with licenses that include the activation keys that allow the customer to take immediate possession of the software pursuant to an agreement or purchase order. In software arrangements that include rights to multiple software products, post- contract customer support (“PCS”), and/or other services, the Company allocates the total arrangement fee among each deliverable based on the relative fair value of each of the deliverables determined based on vendor- speciﬁc objective evidence (“VSOE”). The Company sells software and $ 188,977 $ 52,339 PCS separately, and VSOE is determined by the price charged when each element is sold separately. Product returns and sales allowances, including Long-Lived Assets. The Company reviews long-lived assets and goodwill stock rotations, are estimated and provided for at the time of sale. for impairment whenever events or changes in circumstances indicate that Non-recurring engineering fees are recognized ratably as the work is the carrying amount of such assets may not be fully recoverable. If this performed. Revenues from training and consulting are recognized when review indicates that such assets will not be recoverable, as generally the services are performed. Service and PCS revenues from customer determined based on estimated undiscounted cash ﬂows over the remaining maintenance fees for ongoing customer support and product updates and amortization period, the carrying amount of such assets would be adjusted upgrades are based on the price charged or derived value of the undelivered to fair value. Revenue Recognition. The Company markets software products through indirect channels such as distributors and value-added resellers. Product elements and are recognized ratably over the term of the contract, which is typically 12 to 24 months. Service revenues are included in net revenues on the face of the consolidated statements of income. conﬁgurations consist of traditional packaged products and enterprise and The Company provides most of its distributors with product return rights corporate licensing programs. Packaged products are typically purchased for stock balancing and price protection rights. Stock balancing rights by medium and small-sized businesses with fewer locations and the actual permit distributors to return products to the Company for credit within software license is delivered with the packaged product. Enterprise and speciﬁed limits and subject to ordering an equal amount of the Company’s corporate license arrangements consist of multi-server environments products. Price protection rights require that the Company grant typically found in large business enterprises that want to deploy the retroactive price adjustments for inventories of the Company’s products Company’s products on a department or enterprise-wide basis and which held by distributors if the Company lowers its prices for such products. may require differences in product features and functionality at various The Company provides for estimated returns and rotation at the time of the customer locations. The end-customer license agreement with enterprise sale. These estimates are based on the Company’s experience considering, customers is typically customized based on these factors. Once the among other things, historical return rates for both speciﬁc products Company receives a purchase order and conﬁguration parameters from and customers. Allowances for estimated product returns amounted to the channel partner, the licenses are electronically delivered to the customer approximately $8.3 million and $9.2 million at December 31, 2001 and and serves as keys to activate the conﬁguration ordered by the customer. 2000, respectively. The Company has not and has no plans to reduce its Depending on the size of the enterprise, software may be delivered by the prices for inventory currently held by distributors or resellers; accordingly, indirect channel partner or directly from the Company pursuant to the there were no reserves for price protection at December 31, 2001 and 2000. purchase order from the channel partner. As indicated above, the Company provides consulting services to certain Revenue is recognized when earned. The Company’s revenue recognition license customers. The services consist of network conﬁguration and policies are in compliance with the American Institute of Certiﬁed Public optimization and are typically performed prior to the customers’ purchase Accountants Statement of Position (“SOP”) 97-2 (as amended by SOP 98-4 and implementation of the Company’s software products. Services are and SOP 98-9) and related interpretations, Software Revenue Recognition. not essential to the functionality of the Company’s software and do not Product revenues are recognized upon shipment of the software product constitute modiﬁcations to the Company’s software. Revenue from only if no signiﬁcant Company obligations remain, the fee is ﬁxed or services, support arrangements and training programs and materials, determinable, and collection of the resulting receivable is deemed probable which totaled $40.7 million, $30.4 million, and $15.8 million for the years at the outset of the arrangement. In the case of non-cancelable product ended December 31, 2001, 2000 and 1999, respectively, is recognized when licensing arrangements under which certain original equipment the services are provided. Such items are included in net revenues. The costs manufacturers (“OEMs”) have software reproduction rights, initial for providing consulting services are included in cost of sales. The costs of recognition of revenue also requires delivery and customer acceptance of providing training and services are included in sales, marketing and the product master or ﬁrst copy. Subsequent recognition of revenues is support expenses. based upon reported royalties from the OEMs. Revenue from packaged 31 Notes to Consolidated Financial Statements In May 1997, the Company entered into a ﬁve year joint license, development through earnings, or be recognized in other comprehensive income and marketing agreement with Microsoft (as amended, the “Development until the hedged item is recognized in earnings. The application of the Agreement”), pursuant to which the Company licensed its multi-user provisions of SFAS No. 133 may impact the volatility of other income Windows NT extensions to Microsoft for inclusion in future versions and accumulated other comprehensive loss. of Windows NT server software. The initial fee of $75 million relating to the Development Agreement is being recognized ratably over the ﬁve-year term of the contract. The Company received an additional $100 million in connection with the April 1998 amendment to the Development Agreement, which is being recognized ratably over the remaining term. The Company utilizes derivative instruments that hedge the exposure of variability in expected future cash ﬂows that is attributable to a particular risk and that are designated as cash ﬂow hedges. The effective portion of the net gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income in stockholders’ equity and The Company adopted Staff Accounting Bulletin No. 101, Revenue reclassiﬁed into earnings in the same period or periods during which the Recognition in Financial Statements (“SAB 101”) in October 2000. SAB hedged transaction also affects earnings. The remaining net gain or loss on 101 did not supersede the software industry speciﬁc revenue recognition the derivative instrument in excess of the cumulative change in the present guidance, but provides current interpretations of revenue recognition value of the future cash ﬂows on the hedged item, if any, is recognized in requirements. The adoption of SAB 101 did not have a signiﬁcant effect current earnings. on the Company’s ﬁnancial position or results of operations. The Company formally documents all relationships between hedging Cost of Revenues. Cost of revenues consist primarily of compensation and instruments and hedged items, as well as its risk-management objective and other personnel-related costs for consulting services, as well as, the cost of strategy for undertaking various hedge transactions. This process includes royalties, product media and duplication, manuals, packaging materials attributing all derivatives that are designated as cash ﬂow hedges to ﬂoating and shipping expense. The Company is a party to licensing agreements rate assets or liabilities or forecasted transactions. The Company also with various entities, which give the Company the right to use certain formally assesses, both at the inception of the hedge and on an ongoing software object code in its products or in the development of future basis, whether each derivative is highly effective in offsetting changes in products in exchange for the payment of a ﬁxed fee or certain amounts cash ﬂows of the hedged item. Fluctuations in the value of the derivative based upon the sales of the related product. The licensing agreements instruments are generally offset by changes in the cash ﬂows being hedged; have terms ranging from one to ﬁve years, and generally include renewal however, if it is determined that a derivative is not highly effective as a options. Royalties and other costs related to these agreements are included hedge or if a derivative ceases to be a highly effective hedge, the Company in cost of revenues. All development costs incurred in connection with the will discontinue hedge accounting prospectively for the affected derivative. Development Agreement, if any, are expensed as incurred as cost of other The Company does not use derivative ﬁnancial instruments for speculative revenues. The Company’s cost of revenues excludes amortization of or trading purposes. acquired core technology. Advertising Expense. The Company expenses advertising costs as Foreign Currency. The functional currency of each of the Company’s incurred. The Company has cooperative advertising agreements with wholly-owned foreign subsidiaries is the U.S. dollar. Assets and liabilities certain distributors and resellers whereby the Company will reimburse of the subsidiaries are remeasured into U.S. dollars at year-end exchange distributors and resellers for qualiﬁed advertising of Citrix products. rates, and revenues and expenses are remeasured at average rates prevailing Reimbursement is made once the distributor or reseller provides during the year. Translation adjustments and foreign currency transaction substantiation of qualiﬁed expenditures. The Company estimates the losses of approximately $2.4 million, $0.1 million and, $0.7 million for the impact of this program and recognizes it at the time of product sale. The years ended December 31, 2001, 2000, and 1999, respectively, are included Company recognized advertising expenses of approximately $23.4 million, in other expense, net in the accompanying consolidated statements of income. $15.4 million and $13.0 million, during the years ended December 31, Derivatives and Hedging Activities. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, and its 2001, 2000 and 1999, respectively. These amounts are included in sales, marketing and support expenses in the accompanying consolidated statements of income. corresponding amendments under SFAS No. 138. This guidance establishes Income Taxes. Deferred income tax assets and liabilities are determined accounting and reporting standards for derivative instruments, hedging based upon differences between the ﬁnancial statement and income tax activities, and exposure deﬁnition. Pursuant to the new standard, the bases of assets and liabilities using enacted tax rates in effect for the year in Company records all derivatives as either assets or liabilities on the which the differences are expected to reverse. The realization of deferred balance sheet and measure those instruments at fair value. Derivatives not tax assets is based on historical tax positions and expectations about future designated as hedging instruments, if any, are adjusted to fair value through taxable income. Valuation allowances are recorded related to deferred tax earnings in the current period. If the derivative is a hedge, depending on the assets if their realization does not meet the “not more likely than not” nature of the hedge, changes in fair value will either be offset against the criteria of SFAS 109, Accounting for Income Taxes. change in fair value of the hedged assets, liabilities, or ﬁrm commitments 32 Notes to Consolidated Financial Statements In July 1999, the Company changed its organizational structure whereby Earnings Per Share. Dilutive common stock equivalents consist of stock it moved certain operational and administrative processes to overseas options (calculated using the treasury stock method) and put warrants subsidiaries. The repositioning resulted in foreign earnings being taxed (calculated using the reverse treasury stock method). All common share at lower foreign tax rates. These earnings will be permanently reinvested and per share data, except par value per share, have been retroactively overseas in order to fund the Company’s growth in overseas markets. adjusted to reﬂect the two-for-one stock split of the Company’s Common Software Development Costs. SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, requires certain software development costs to be capitalized upon the establishment Stock effective March 25, 1999 and the two-for-one stock split of the Company’s Common Stock effective February 16, 2000, which are further discussed in Note 7. of technological feasibility. The establishment of technological feasibility Software Developed or Obtained for Internal Use. The Company and the ongoing assessment of the recoverability of these costs requires accounts for internal use software pursuant to SOP 98-1, Accounting for considerable judgment by management with respect to certain external factors the Costs of Computer Software Developed or Obtained for Internal Use. such as anticipated future revenue, estimated economic life, and changes in Pursuant to the SOP, the Company capitalizes external direct costs of software and hardware technologies. Capitalizable software development materials and services used in the project and internal costs such as payroll costs have not been signiﬁcant and have been expensed as incurred. and beneﬁts of those employees directly associated with the development of Use of Estimates. The preparation of ﬁnancial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated ﬁnancial statements and accompanying notes. Such estimates made by management include a provision for doubtful accounts receivables, provision for sales returns and stock rotation, and the software. The amount of costs capitalized in 2001 and 2000 relating to internal use software were $16.2 million and $11.3 million, respectively, consisting principally of purchased software and services provided by external vendors. These costs are being amortized over the estimated useful life of the software developed, which is generally three to seven years and are included in property and equipment in the accompanying consolidated balance sheets. the amortization and depreciation periods for intangible and ﬁxed assets. Reclassiﬁcations. Certain reclassiﬁcations of the prior years’ ﬁnancial While the Company believes that such estimates are fair when considered statements have been made to conform to the current year’s presentation. in conjunction with the consolidated ﬁnancial position and results of operations taken as a whole, the actual amounts of such estimates, when 3. Acquisitions known, will vary from these estimates. In July 1999 and April 2001, the Company completed the acquisitions Product Concentration. The Company derives a substantial portion of its of ViewSoft, Inc. (“ViewSoft”) and Sequoia Software Corporation revenues from one software product and anticipates that this product and (“Sequoia”) for approximately $33.5 million and $182.6 million, future derivative products and product lines based upon this technology, respectively. A portion of the purchase price for each of these acquisitions if any, will constitute a majority of its revenue for the foreseeable future. was allocated to in-process research and development (“IPR&D”), for The Company may experience declines in demand for products, whether as which the Company concluded that the respective in-process technologies a result of general economic conditions, new competitive product releases, had not reached technological feasibility and for which there was no price competition, lack of success of its strategic partners, technological alternative future use after taking into consideration the potential use change or other factors. Accounting for Stock-Based Compensation. SFAS No. 123, Accounting for Stock-Based Compensation, deﬁnes a fair value method of accounting for issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which of technologies in different products, the stage of development and life cycle of each project, resale of the software and internal use. The value of the respective purchased IPR&D was expensed at the time of each of the transactions and resulted in pre-tax charges to the Company’s operations of approximately $2.3 million in 1999 and $2.6 million in 2001 associated with these acquisitions, respectively. is usually the vesting period. Pursuant to SFAS No. 123, companies are not In February 2000, the Company acquired all of the operating assets of required to adopt the fair value method of accounting for employee stock- the Innovex Group, Inc. (“Innovex”) for approximately $47.8 million. At based transactions. Companies are permitted to continue to account for the date of acquisition, the Company paid approximately $28.7 million in such transactions under Accounting Principles Board Opinion No. 25, consideration and $0.2 million in transaction costs, respectively. Pursuant Accounting for Stock Issued to Employees, (“APB Opinion 25”) but are to the acquisition agreement, the remaining purchase consideration, plus required to disclose in a note to the consolidated ﬁnancial statements pro interest, was contingently payable based on future events. During 2001, forma net income and per share amounts as if the Company had applied these contingencies were met, resulting in approximately $16.2 million of the methods prescribed by SFAS No. 123. The Company applies APB Opinion 25 and related interpretations in accounting for its plans and has complied with the disclosure requirements of SFAS No. 123. additional purchase price and $2.9 million in compensation to the former owners. Pursuant to the acquisition agreement, payment of $10.5 million of the contingent amounts and associated interest were made in August 2001 and $10.7 million was paid in 2002. There are no remaining contingent obligations. 33 Notes to Consolidated Financial Statements Each of the acquisitions was accounted for under the purchase method of The Company’s cash and cash equivalents have an initial or remaining accounting. The consolidated ﬁnancial statements reﬂect the operations of the maturity of three months or less when purchased. The unrealized gain acquired businesses for the periods after their respective dates of acquisition. (loss) associated with each individual category of cash and investments The purchase consideration was allocated to the acquired assets and is not signiﬁcant. liabilities based on fair values as follows: In December 2000, the Company invested $158.1 million in a trust Net assets acquired Purchased identiﬁable intangibles Purchased in-process research and development Goodwill ViewSoft Innovex (in thousands) Sequoia $ 128 2,200 $ 2,259 $ 10,058 46,775 9,908 2,300 28,904 — 32,944 2,580 123,157 Total purchase consideration $33,532 $45,111 $182,570 During the fourth quarter of 2000, the Company did not believe that there were sufﬁcient projected cash ﬂows or alternative future uses to support the net book value of core technology associated with certain previous acquisitions. As a result, the Company wrote off $9.1 million of certain core technology as of December 31, 2000. 4. Cash and Investments (“Trust”) managed by an investment advisor. The Trust assets primarily consist of AAA-rated zero-coupon corporate securities that mature on March 22, 2004. The Trust entered into a credit risk swap agreement with the investment advisor, which effectively increased the yield on the Trust assets and for which value the Trust assumed the credit risk of ten investment-grade companies. The effective yield of the Trust, including the credit risk swap agreement, is 6.72% and the principal balance will accrete to $195 million in March 2004. The Company records the investment as held-to-maturity zero-coupon corporate securities. The Company does not recognize changes in the fair value of these investments unless a decline in the fair value of the Trust assets is other-than-temporary, in which case a loss would be recognized in earnings. At December 31, 2001 and 2000, the amortized cost of the Company’s investments were $169.0 million and $158.5 million, respectively, which are classiﬁed above as long-term corporate securities. Other than the Trust investments described above, the Company’s short The summary of cash and cash equivalents and investments consists of the following: and long-term investments are classiﬁed as available-for-sale and are December 31, Cash and cash equivalents: Cash Commercial paper Money market funds Municipal securities Government securities Corporate securities Cash and cash equivalents Short-term investments: Commercial paper Corporate securities Government securities Municipal securities Short-term investments Long-term investments: Commercial paper Municipal securities Corporate securities Government securities Other Long-term investments 2001 2000 (in thousands) $ 55,209 $114,570 131,248 44,157 — 85,050 — 3,950 20,515 16,855 3,682 39,482 $139,693 $375,025 $ 3,990 $ 14,078 37,062 40,472 — 68,912 — 4,176 $ 77,078 $ 91,612 $ 22,063 $ — — 334,961 42,945 4,618 3,132 503,138 — 1,561 $529,894 $382,524 recorded at fair value. At December 31, 2001, the unrealized gain (loss) associated with each individual category of investments is not signiﬁcant. Amounts included in accumulated other comprehensive loss in prior periods are reclassiﬁed to earnings using the speciﬁc identiﬁcation method. At December 31, 2001, the average contractual and remaining maturity of the Company’s short-term investments was approximately 15 and seven months, respectively. The Company’s long-term available-for-sale investments at December 31, 2001 include $202.2 million of investments with contractual maturities of one to 30 years and $157.1 million of investments in mortgage backed securities not due at a single maturity date. As discussed in Note 3, the Company purchased Sequoia for approximately $182.6 million in cash. In order to improve the overall credit quality and rebalance the short and long-term maturity of its investment portfolio subsequent to the cash expenditure, the Company sold corporate debt securities that were previously designated as held-to-maturity and purchased higher credit quality corporate debt securities with interest rates that reset quarterly. Additionally, during 2001, the Company terminated a forward bond purchase agreement previously designated as a hedge of forecasted purchases of corporate security investments. The sale of securities and the termination of the forward bond purchase agreement resulted in a realized gain of approximately $8.0 million, which is included in other expense, net on the 2001 consolidated statement of income. 34 Notes to Consolidated Financial Statements 5. Accounts Payable and Accrued Expenses The determination of the fair value of all options is based on the assumptions described in the preceding paragraph, and because additional option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects on reported net income or loss for future years. 17,510 11,857 1995 Stock Plan (the “1995 Plan”) was originally adopted by the Board Fixed Stock Option Plans. The Company’s amended and restated Accounts payable and accrued expenses consist of the following: December 31, Accounts payable Accrued compensation and employee beneﬁts Accrued cooperative advertising and marketing programs Accrued taxes Other 2001 2000 (in thousands) $ 10,635 $ 7,123 20,368 35,885 27,530 21,034 19,627 19,098 $111,928 $78,739 6. Employee Stock Compensation and Benefit Plans Stock Compensation Plans. As of December 31, 2001, the Company has ﬁve stock-based compensation plans, which are described below. The Company grants stock options for a ﬁxed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. As mentioned in Note 2, the Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its ﬁxed stock plans and its stock purchase plan. Had compensation cost for the Company’s ﬁve stock- based compensation plans been determined based on the fair value at the grant dates for grants under those plans consistent with the method of SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below: 2001 2000 (in thousands, except per share information) 1999 $105,260 $ 94,512 $116,944 December 31, Net income (loss) As reported Pro forma Basic earnings (loss) per share As reported Pro forma Diluted earnings (loss) per share As reported Pro forma $ 0.54 $ 0.47 $ 0.61 $ (0.22) $ (0.21) $ 0.33 For purposes of the proforma calculations, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions used: 2001 Grants 2000 Grants 1999 Grants Dividend yield Expected volatility factor Approximate risk free interest rate Expected lives none 0.6 5.0% 4.68 years none 0.8 6.0% 4.64 years none 0.6 5.5% 4.50 years on September 28, 1995 and approved by the Company’s stockholders in October 1995. Under the terms of the 1995 Plan the Company is authorized to grant incentive stock options (“ISOs”) and nonqualiﬁed stock options (“NSOs”), make stock awards and provide the opportunity to purchase stock to employees, directors and ofﬁcers and consultants of the Company. The 1995 Plan, as amended, provides for the issuance of a maximum of 69,945,623 (as adjusted for stock splits) shares of Common Stock, plus, effective January 1, 2001 and each year thereafter, a number of shares of Common Stock equal to 5% of the total number of shares of Common Stock issued and outstanding as of December 31 of the preceding year. Under the 1995 Plan, a maximum of 60,000,000 ISOs may be granted and ISOs must be granted at exercise prices no less than market value at the date of grant, except for ISOs granted to employees who own more than 10% of the Company’s combined voting power, for which the exercise prices will be no less than 110% of the market value at the date of grant. NSOs, stock awards or stock purchases may be granted or authorized, as applicable, at prices no less than the minimum legal consideration required. Under the 1995 Plan, as amended, ISOs must be granted at exercise prices no less than market value at the date of grant, provided however, that if an NSO is expressly granted in lieu of a reasonable amount of salary or cash bonus, the exercise price may be equal to or greater than 85% of the fair market value at the date of such grant. ISOs and NSOs expire ten years from the date of grant. All options are exercisable upon vesting. The options typically vest over four years at a rate of 25.00% of the shares Option and Incentive Plan (the “2000 Plan”) was originally adopted by the Board of Directors and approved by the Company’s stockholders on May 18, 2000. Under the terms of the 2000 Plan, the Company is authorized to make stock awards, provide eligible individuals with the opportunity to purchase stock, grant ISOs and grant NSOs to ofﬁcers and directors of the Company. The 2000 Plan provides for the issuance of up to 4,000,000 shares, plus, effective on January 1, 2001, on January 1 of each year, a number of shares of Common Stock equal to one-half of one percent (0.5%) of the total number of shares of Common Stock issued and outstanding as of December 31 of the preceding year. Notwithstanding the foregoing, no more than 3,000,000 shares of Common Stock may be issued pursuant to the exercise of incentive stock options granted under the 2000 Plan. Under the 2000 Plan, ISOs must be granted at exercise prices no less than market value at the date of grant, provided however, that if an NSO is expressly granted in lieu of a reasonable amount of salary or cash bonus, the exercise price may be equal to or greater than 85% of the fair market 35 $ (41,188) $(38,036) $ 64,069 underlying the option one year from the date of grant and at a rate of 2.08% monthly thereafter. $ 0.57 $ 0.51 $ 0.66 The Company’s amended and restated 2000 Director and Ofﬁcer Stock $ (0.22) $ (0.21) $ 0.36 Notes to Consolidated Financial Statements value at the date of such grant. ISOs and NSOs expire ten years from date thereafter. In addition, on each one-year anniversary of such director’s ﬁrst of grant. All options are exercisable upon vesting. The options typically election to the Board of directors, such director would receive an additional vest over four years at a rate of 25% of the shares underlying the option option to purchase 20,000 shares of Common Stock, which shall vest at one year from date of grant and at a rate of 2.08% monthly thereafter. a rate of 8.33% per month, provided such director continues to serve on The amended and restated 1995 Non-Employee Director Stock Option Plan (the “Director Option Plan”) was adopted by the Board of Directors on September 28, 1995 and approved by the Company’s stockholders in October 1995. The Director Option Plan provides for the grant of options to purchase a maximum of 3,600,000 (as adjusted for stock splits) shares of Common Stock of the Company to non-employee directors of the Company. Under the original terms of the Director Option Plan, each director who was not also an employee of the Company and who is ﬁrst elected as a director would receive, upon the date of his or her initial election, an option to purchase 180,000 shares of Common Stock. Options granted under the Director Option Plan vest at a rate of 33.33% one year from the date of grant and vest at a rate of 2.78% monthly thereafter. In addition, on each three-year anniversary of such director’s ﬁrst election to the Board of Directors, such director will receive an additional option to purchase 180,000 shares of Common Stock, vesting in accordance with the aforementioned schedule, provided that such director continues to serve on the Board of Directors at the time of grant. In July 2001, the Director Option Plan was amended so that each director who is not also an employee of the Company and who is ﬁrst elected as a director will receive, upon the date of his or her initial election, an option to purchase 60,000 shares of Common Stock. Such options will vest at a rate of 33.33% per year from the date of the grant and vest at a rate of 2.78% monthly the Board of Directors at the time of grant. All options granted under the Director Option Plan have an exercise price equal to the fair market value of the Common Stock on the date of grant and a term of ten years from the date of grant. In January 2002, the Company amended the Director Option Plan to, among other things, change the date of the annual grant of option to the ﬁrst day of the month following the Annual Stockholders’ Meeting. Options are exercisable to the extent vested only while the optionee is serving as a director of the Company or within 90 days after the optionee ceases to serve as a director of the Company. The Company’s 1989 Stock Option Plan (the “1989 Plan”) as amended, permitted the Company to grant ISOs and NSOs to purchase up to 25,256,544 (as adjusted for stock splits) shares of the Company’s Common Stock. Under the 1989 Plan, options may be granted at exercise prices no less than market value at the date of grant. All options are fully exercisable from the date of grant and are subject to a repurchase option in favor of the Company which lapses as to 25.00% of the shares underlying the option one year from the date of grant and as to 2.08% monthly thereafter. If the purchaser of stock pursuant to the 1989 Plan is terminated from employment with the Company, the Company has the right and option to purchase from the employee, at the price paid for the shares by the employee, the number of unvested shares at the date of termination. No shares have been repurchased under this Plan. Effective November 1999 no further options may be granted under this Plan. A summary of the status and activity of the Company’s stock option plans is as follows: Year Ended December 31, 2001 2000 1999 Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Outstanding at beginning of year 43,288,840 $25.67 42,358,350 $18.28 32,279,324 $ 9.50 12,671,582 (6,692,488) (5,048,604) 43,288,840 42.38 10.32 25.65 25.67 21,157,900 (9,221,440) (1,857,434) 42,358,350 26.80 7.57 15.99 18.28 14,364,325 16.49 7,062,760 7.86 $28.07 $14.37 Granted Exercised Forfeited Outstanding at end of year Options exercisable at end of year Weighted-average fair value of options granted during the year 8,351,092 (8,545,575) (3,498,079) 39,596,278 18,140,094 30.68 13.27 31.06 28.92 26.02 $20.92 36 Notes to Consolidated Financial Statements Information about stock options outstanding as of December 31, 2001 is as follows: Range of Exercise Prices $ 0.13 to $ 15.69 $ 15.84 to $ 23.87 $24.38 to $ 29.31 $29.69 to $ 48.44 $53.38 to $104.00 Options Outstanding at December 31, 2001 Options Outstanding Weighted Average Remaining Contractual Life Options Exercisable Weighted Average Exercise Price Options Exercisable at December 31, 2001 Weighted Average Exercise Price 10,703,849 8,047,806 7,960,956 8,241,710 4,641,957 39,596,278 6.94 7.78 7.65 9.02 8.14 7.83 $12.25 $20.47 $25.68 $35.18 $76.44 $28.92 6,662,017 3,705,371 4,158,869 1,477,363 2,136,474 18,140,094 $10.48 $19.92 $25.70 $38.51 $76.99 $26.02 Stock Purchase Plan. The amended and restated 1995 Employee Stock discretion, may contribute up to $0.50 on each dollar of employee Purchase Plan (the “1995 Purchase Plan”) was originally adopted by the contribution, limited to a maximum of 6% of the employee’s annual Board of Directors on September 28, 1995 and approved by the Company’s contribution. The Company’s matching contributions for 2001, 2000 stockholders in October 1995. The 1995 Purchase Plan provides for the and 1999 were $1.8 million, $1.2 million and $0.6 million, respectively. issuance of a maximum of 9,000,000 shares of Common Stock upon the The Company’s contributions vest over a four-year period at 25% per year. exercise of nontransferable options granted to participating employees. All U.S.-based employees of the Company, whose customary employment 7. Capital Stock is 20 hours or more per week and more than ﬁve months in any calendar year, and employees of certain international subsidiaries, are eligible to participate in the 1995 Purchase Plan. In June 2000, the 1995 Purchase Plan was amended to allow employees to deduct up to 10% of their total Common Stock. The Company has reserved for future issuance 61,587,699 shares of Common Stock for the exercise of stock options outstanding or available for grant and 11,885,862 shares for the cash compensation, up from 5% previously, and to remove the requirement conversion of the zero coupon convertible debentures into Common Stock. that employees complete at least one year of employment to be eligible to participate in the plan. Employees who would immediately after the grant own 5% or more of the Company’s Common Stock, and directors who are not employees of the Company, may not participate in the 1995 Purchase Plan. To participate in the 1995 Purchase Plan, an employee must authorize the Company to deduct an amount (not less than 1% nor more than 10% of a participant’s total cash compensation) from his or her pay during six- month periods (each a Plan Period). The maximum number of shares of Common Stock an employee may purchase in any Plan Period is 6,000 shares subject to certain other limitations. The exercise price for the option for each Plan Period is 85% of the lesser of the market price of the Common Stock on the ﬁrst or last business day of the Plan Period. If an employee is not a participant on the last day of the Plan Period, such employee is not entitled to exercise his or her option, and the amount of his or her accumulated payroll deductions are refunded. An employee’s rights under the 1995 Purchase Plan terminate upon his or her voluntary withdrawal from the 1995 Purchase Plan at any time or upon termination of employment. In January 2002, the Company amended the 1995 Purchase Plan to change the payment periods. Under the 1995 Purchase Plan, the Company issued 213,907, 77,781 and 27,004 shares in 2001, 2000, and 1999, respectively. Beneﬁt Plan. The Company maintains a 401(k) beneﬁt plan (the “Plan”) allowing eligible U.S.-based employees to contribute up to 15% of their annual compensation, limited to an annual maximum amount as set periodically by the Internal Revenue Service. The Company, at its On May 13, 1999, the stockholders approved an increase of authorized Common Stock from 150,000,000 shares, $0.001 par value per share to 400,000,000 shares, $0.001 par value per share. On May 18, 2000, the stockholders approved an increase of authorized Common Stock from 400,000,000 shares, $0.001 par value per share to 1,000,000,000 shares, $0.001 par value per share. Stock Repurchase Programs. On April 15, 1999, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $200 million of the Company’s Common Stock. On April 26, 2001, the Board of Directors increased the scope of the repurchase program by authorizing the Company to repurchase up to $400 million of the Company’s Common Stock (inclusive of the $200 million approved in April 1999). In January 2002, the Board of Directors authorized an additional $200 million of repurchase authority under the program, bringing the aggregate amount authorized for repurchase to $600 million. Pursuant to the Company’s stock repurchase program, the Company is authorized to make open market purchases. Purchases will be made from time to time in the open market and paid out of general corporate funds. During 2001 and 2000, the Company purchased 3,135,500 shares and 2,750,000 shares, respectively, of outstanding Common Stock on the open market for approximately $90.7 million and $57.9 million (at an average price of $28.92 and $21.04 per share), respectively. These shares have been recorded as treasury stock. 37 Notes to Consolidated Financial Statements Additionally, pursuant to the stock repurchase program, the Company Preferred Stock. The Company is authorized to issue 5,000,000 shares of entered into two agreements, with a single counterparty in private preferred stock, $0.01 par value per share. The Company has no present transactions to purchase approximately 7.3 million shares of the Company’s plans to issue such shares. Common Stock at various times through December 2003. Pursuant to the terms of the agreements, $100 million was paid to the counterparty in 8. Convertible Subordinated Debentures 2000 and $50 million was paid in 2001. The ultimate number of shares repurchased will depend on market conditions. During 2001 and 2000, the Company repurchased 2,307,450 shares and 1,067,108 shares, respectively, under this agreement at a total cost of $50.3 million and $18.2 million, respectively. The shares have been recorded as treasury stock. In March 1999, the Company sold $850 million principal amount at maturity of its zero coupon convertible subordinated debentures (the “Debentures”) due March 22, 2019, in a private placement. The Debentures were priced with a yield to maturity of 5.25% and resulted in net proceeds to the Company of approximately $291.9 million, In connection with the Company’s stock repurchase program, in October net of original issue discount and net of debt issuance costs of $9.6 million. 2000, the Board of Directors approved a program authorizing the Company Except under limited circumstances, no interest will be paid on the to sell put warrants that entitle the holder of each warrant to sell to the Debentures prior to maturity. The Debentures are convertible at the Company, generally by physical delivery, one share of the Company’s option of the security holder at any time on or before the maturity date Common Stock at a speciﬁed price. During 2001, the Company sold at a conversion rate of 14.0612 shares of the Company’s Common Stock 3,190,000 put warrants at an average strike price of $28.95 and received for each $1,000 principal amount at maturity of Debentures, subject to premium proceeds of $12.0 million. During 2001, the Company paid adjustment in certain events. The Company may redeem the Debentures on $69.5 million for the purchase of 2,190,000 shares upon the exercise or after March 22, 2004. Holders may require the Company to repurchase of outstanding put warrants, while 1,000,000 put warrants expired the Debentures, on ﬁxed dates and at set redemption prices (equal to unexercised. The Common Shares purchased upon exercise of these put the issue price plus accrued original issue discount), beginning on warrants have been recorded as treasury stock. As of December 31, 2001, March 22, 2004. In October 2000, the Board of Directors approved a 1,300,000 put warrants were outstanding, with exercise prices ranging program authorizing the Company to repurchase up to $25 million of from $20.75 to $26.42 which mature on various dates between January the Debentures in open market purchases. As of December 31, 2001, and March 2002. As of December 31, 2001, the Company has a total 4,500 units of the Company’s Debentures, representing $1.8 million in potential repurchase obligation of approximately $30.8 million associated principal amount at maturity, had been repurchased under this program for with the outstanding put warrants, of which $16.6 million is classiﬁed as $2.1 million. Interest expense related to the Debentures was $17.9 million, a put warrant obligation on the consolidated balance sheet. The remaining $17.0 million and $12.6 million in 2001, 2000 and 1999, respectively. $14.2 million of outstanding put warrants permit a net-share settlement at the Company’s option and do not result in a put warrant obligation on 9. Fair Values of Financial Instruments the consolidated balance sheet. The outstanding put warrants classiﬁed as a put warrant obligation on the consolidated balance sheet will be The carrying value of cash and cash equivalents, accounts receivable, reclassiﬁed to equity when the warrant is exercised or when it expires. accounts payable and accrued expenses approximate their fair value due to Under the terms of certain of the put warrant agreements, the Company the short maturity of these items. The Company’s investments classiﬁed as must maintain certain levels of cash and investments balances. As of available-for-sale securities are carried at fair value on the accompanying December 31, 2001, the Company has approximately $246.7 million consolidated balance sheets, based primarily on quoted market prices for of cash and investments in excess of required levels. Stock Splits. On March 1, 1999, the Company announced a two-for-one stock split in the form of a stock dividend paid on March 25, 1999, to stockholders of record as of March 17, 1999. On January 19, 2000, the Company announced a two-for-one stock split in the form of a stock dividend paid on February 16, 2000, to stockholders of record as of January 31, 2000. The number of options issuable and previously granted and their respective exercise prices under the Company’s stock option plans have been proportionately adjusted to reﬂect stock splits. The accompanying consolidated ﬁnancial statements have been retroactively restated to reﬂect stock splits. such ﬁnancial instruments. The Company’s held-to-maturity investments had a carrying value of $169.0 million and $158.1 million at December 31, 2001 and 2000, respectively, and an aggregate fair value of $170.7 million and $158.4 million at December 31, 2001 and 2000, respectively, based on dealer quotation. The carrying amount of the Company’s Debentures at December 31, 2001 and 2000 were approximately $346.2 and $330.5 million, respectively. The fair value of the Debentures, based on the quoted market price as of December 31, 2001 and 2000 were approximately $388.0 million and $352.7 million, respectively. 38 Notes to Consolidated Financial Statements 10. Commitments The signiﬁcant components of the Company’s deferred tax assets and The Company leases certain ofﬁce space and equipment under various operating leases. Certain of these leases contain stated escalation clauses while others contain renewal options. Rental expense for the years ended December 31, 2001, 2000 and 1999 totaled approximately $17.1 million, $8.7 million and $5.0 million, respectively. Lease commitments under non-cancelable operating leases with initial or remaining terms in excess of one year are as follows: Years ending December 31, (in thousands) liabilities consisted of the following: December 31, Deferred tax assets: Acquired technology Deferred revenue Accounts receivable allowances Depreciation and amortization Tax credits Net operating losses Other 2001 2000 (in thousands) $16,726 5,833 2,901 4,597 13,264 17,346 6,328 $18,362 21,549 1,915 4,458 12,047 — 9,364 2002 2003 2004 2005 2006 Thereafter $ 20,792 18,364 14,702 13,392 11,645 76,606 $155,501 Total deferred tax assets 66,995 67,695 Deferred tax liabilities: Foreign earnings Total deferred tax liabilities (8,753) (8,753) (8,753) (8,753) Total net deferred tax assets $58,242 $58,942 To consolidate certain of the Company’s corporate ofﬁces and to accommodate the Company’s projected growth, the Company entered into a lease agreement for ofﬁce space at its corporate headquarters beginning in the second quarter of 2001. Lease commitments under this lease agreement are included in the table above. Upon occupancy of this new facility, the Company plans to sublease the space in certain existing buildings for the remainder of their respective lease terms. 11. Income Taxes The United States and foreign components of income before income taxes are as follows: United States Foreign Total 2001 $ 57,096 95,455 2000 (in thousands) $ 80,465 54,552 1999 $122,131 60,594 $152,551 $135,017 $182,725 The components of the provision for income taxes are as follows: Current: Federal Foreign State Total current Deferred 2001 2000 (in thousands) 1999 $ 38,469 6,319 3,566 $ 29,252 3,428 1,585 $ 53,060 16,782 9,256 48,354 (1,063) 34,265 6,240 79,098 (13,317) Total provision for income taxes $ 47,291 $ 40,505 $ 65,781 During the years ended December 31, 2001, 2000, and 1999, the Company recognized tax beneﬁts related to the exercise of employee stock options in the amount of $28.0 million, $63.9 million and $50.8 million, respectively. This beneﬁt was recorded to additional paid-in capital. At December 31, 2001, the Company had approximately $64.5 million of U.S. net operating loss carryforwards, a substantial portion of which begins to expire in 2020. The Company will record the beneﬁt of the net operating loss carryforwards generated from the exercise of employee stock options, through additional paid-in capital when the net operating loss carryforwards are utilized. During 2001, the Company acquired an entity with approximately $37.9 million of net operating loss carryforwards. Additionally, the Company had approximately $6.8 million of net operating loss carryforwards from prior acquisitions. These net operating loss carryforwards are limited in any one year pursuant to Internal Revenue Code Section 382 and begin to expire in 2010. At December 31, 2001, the Company had research and development tax credit carryforwards of approximately $7.0 million that expire beginning in 2018. Additionally, the Company had foreign tax credit carryforwards of approximately $6.3 million at December 31, 2001 that expire beginning in 2003. The Company does not expect to remit earnings from its foreign subsidiaries. Accordingly, the Company did not provide for deferred taxes on foreign earnings. 39 Notes to Consolidated Financial Statements A reconciliation of the Company’s income taxes to amounts calculated at In July 2001, the Company implemented a new enterprise resource the statutory federal rate is as follows: Year Ended December 31, 2001 Federal statutory taxes State income taxes, net of federal tax beneﬁt Foreign sales corporation beneﬁts Foreign operations Interest income Intangible assets Other permanent differences Tax credits Other $ 53,393 5,771 — (30,701) — 11,236 2,780 (1,217) 6,029 2000 (in thousands) $ 47,256 1999 $ 63,954 5,134 — (19,634) (5,979) 3,047 3,143 632 6,906 5,378 (2,556) — (4,555) 8,260 5,220 (10,981) 1,061 $ 47,291 $40,505 $65,781 12. Geographic Information and Significant Customers planning system. The new system was designed to provide a structure that would meet the growing demands of the Company and to provide management improved focus on the results of operations and the Company’s financial resources. The features and functionality of the new system allowed the Company to summarize and classify information included in the results of operations differently than that provided by the Company’s legacy information systems. The Company began planning for the new information system in 2000, and as a result, detailed transaction information for 2001 and 2000, prior to the implementation of the new system, was retained and converted to the new system. Detailed transaction information for 1999 is not available and therefore, it is impracticable for the Company to present 1999 information in the same fashion as 2001 and 2000. Net revenues and segment proﬁt for 2001 and 2000, classiﬁed by the major geographic area in which the Company operates, are presented below. 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. Net revenues: Americas EMEA Asia-Paciﬁc Other (1) Consolidated 2001 2000 (in thousands) $ 289,017 $248,398 158,645 23,505 39,898 216,766 46,016 39,830 $ 591,629 $470,446 $ 163,621 $149,856 102,356 2,610 39,898 134,096 22,880 39,830 (48,831) (2,580) (67,699) — 19,200 (107,966) (30,395) — (50,622) (9,081) 22,792 (92,397) Segment proﬁt: Americas EMEA Asia-Paciﬁc Other (1) Unallocated expenses (2): Amortization of intangibles In-process research and development Research and development Write-down of technology Net interest and other income Other corporate expenses Consolidated income before income taxes $ 152,551 $ 135,017 (1) Represents royalty fees in connection with the Development Agreement. (2) Represents expenses presented to management only on a consolidated basis and not allocated to the geographic operating segments. The Company tracks revenues by geography and product category but does not track expenses or identiﬁable assets on a product category basis. The Company does not engage in intercompany transfers between segments. The Company’s management evaluates performance based primarily on revenues in the geographic locations that the Company operates. Segment proﬁt for each segment includes costs of goods sold and operating expenses directly attributable to the segment and excludes certain expenses that are managed outside the reportable segments. Costs excluded from segment proﬁt primarily consist of research and development costs, amortization of intangible assets, interest, corporate expenses, income taxes, and non-recurring charges for purchased in-process technology and technology write downs. Corporate expenses are comprised primarily of corporate marketing costs, operations and other corporate general and administrative expenses, which are separately managed. Accounting policies of the segments are the same as the Company’s consolidated accounting policies. During 1999 and 2000, wholly-owned subsidiaries were formed in various locations within Europe, Middle East and Africa (EMEA) and Asia-Paciﬁc, respectively. These subsidiaries are responsible for sales and distribution of the Company’s products. Prior to this time, sales in these geographic segments were classiﬁed as export sales from the Americas segment (see below). For purposes of the presentation of segment information, the sales previously reported as Americas export sales have been reclassiﬁed to the geographical segments where the sale was made for each of the periods presented. 40 Notes to Consolidated Financial Statements Net revenues and segment proﬁt for 2000 and 1999, classiﬁed by major Export revenue represents shipments of ﬁnished goods and services from geographic area in which the Company operates is included below as the United States to international customers. As of July 1, 1999 and July 1, previously presented: Net revenues : Americas EMEA Asia-Paciﬁc Other (1) Consolidated Segment proﬁt: Americas EMEA Asia-Paciﬁc Other (1) Unallocated expenses (2): Cost of revenues Overhead costs Research and development In-process research and development Write-down of technology Net interest Other corporate expenses 2000 1999 (in thousands) $248,398 $ 213,575 129,649 20,231 39,830 158,645 23,505 39,898 $470,446 $403,285 $206,984 $174,829 103,811 10,834 39,830 123,056 10,238 39,898 (29,054) (84,129) (50,622) — (9,081) 22,792 (95,065) (14,579) (51,721) (37,363) (2,300) — 11,221 (51,837) Consolidated income before income taxes $135,017 $182,725 (1) Represents royalty fees in connection with the Development Agreement. (2) Represents expenses presented to management only on a consolidated basis and not allocated to the geographic operating segments. Identiﬁable assets classiﬁed by major geographic area in which the Company operates are shown below. Long-lived assets consist of property, plant and equipment, net at December 31: Identiﬁable assets: Americas EMEA Asia-Paciﬁc Total identiﬁable assets Long-lived assets: United States United Kingdom Other foreign countries Total long-lived assets 2001 2000 (in thousands) $ 945,299 $ 964,205 132,440 15,928 241,943 20,988 $1,208,230 $1,112,573 $ 50,601 $ 43,775 6,078 5,706 33,029 6,480 $ 90,110 $ 55,559 2000, the Company began shipping ﬁnished goods to European and Asia- Paciﬁc customers, respectively, from its warehouse location in Europe. Shipments from the United States were as follows: Year Ended December 31, EMEA Asia-Paciﬁc Other 2001 1999 2000 (in thousands) $ — $ — $ 60,590 20,202 11,249 6,289 7,274 — 21,392 $ 21,392 $ 18,523 $ 87,081 The Company had net revenue attributed to individual customers in excess of 10% of total net sales as follows: Year Ended December 31, 2001 2000 1999 Customer A Customer B Customer C 13% 10% 9% 13% 12% 10% 13% 10% 9% Additional information regarding revenue by products and services groups is as follows: Year Ended December 31, 2001 2000 1999 Revenues: License Revenue Services Revenue Royalty Revenue Net Revenues $511,147 40,652 39,830 $400,156 30,392 39,898 $347,705 15,750 39,830 $591,629 $470,446 $403,285 13. Derivative Financial Instruments Forward Foreign Currency Contracts. A substantial portion of the Company’s anticipated overseas expense and capital purchasing activities are transacted in local currencies. To protect against reductions in value and the volatility of future cash ﬂows caused by changes in currency exchange rates, the Company has established a hedging program. The Company uses forward foreign exchange contracts to reduce a portion of its exposure to these potential changes. The terms of such instruments, and the hedging transactions to which they relate, generally do not exceed 12 months. Principal currencies hedged are British pounds sterling, Euros, Swiss francs, and Australian dollars. The Company may choose not to hedge certain foreign exchange transaction exposures due to immateriality, prohibitive economic cost of hedging particular exposures, and availability of appropriate hedging instruments. Interest Rate Agreements. In order to manage its exposure to interest rate risk, in November 2001 the Company entered into an interest rate swap agreement with a notional amount of $174.6 million that expires in March 2004. The swap converts the ﬂoating rate return on certain of the Company’s available for sale investment securities to a ﬁxed interest rate. At December 31, 2001, the fair value of the swap is not material and is recorded in accrued expenses in the accompanying consolidated ﬁnancial statements. 41 Notes to Consolidated Financial Statements In connection with the efforts to manage the credit quality and maturities 15. Earnings Per Share of its available-for-sale investment portfolio, during 2001 the Company terminated a forward bond purchase agreement previously designated as a hedge of forecasted purchases of corporate security investments. As a result, the Company recorded a realized gain of $1.4 million, which is included in other expense, net on the 2001 consolidated statements of income. At the time of the sale, the Company realized approximately $0.5 million of amounts previously classiﬁed in accumulated other comprehensive loss. The ineffectiveness of hedges on existing derivative instruments for the year ended December 31, 2001, was not material. In addition, there were no gains or losses resulting from the discontinuance of cash ﬂow hedges, as all originally forecasted transactions are expected to occur. The income tax expense (beneﬁt) associated with any individual item of comprehensive income (loss) is not signiﬁcant. As of December 31, 2001, the Company recorded $0.6 million of derivative assets and $0.5 million of derivative liabilities, representing the fair values of the Company’s outstanding derivative instruments. Derivative Activity in Accumulated Other Comprehensive Income. As of December 31, 2001, the Company had a net deferred gain associated with cash ﬂow hedges and the interest rate swap of approximately $84,000, net of taxes, a substantial portion of which are expected to be reclassiﬁed to earnings by the end of 2002. The following table summarizes activity in other comprehensive income (“OCI”) related to derivatives, net of taxes, during the year ended December 31, 2001 (in thousands): Cumulative effect of adopting SFAS No. 133 Net changes in fair value of derivative instruments Net unrealized losses (gains) reclassiﬁed into earnings $ — (224) 308 Change in net unrealized losses on derivative instruments $ 84 14. Related Party Transactions Microsoft, which held a greater than 5% equity interest in the Company at December 31, 1999, is a party to one of the licensing agreements discussed in Note 2. The Company recognized $0.2 million, $0.3 million and $1.9 million of royalty expense in cost of revenues in the years ended December 31, 2001, 2000 and 1999, respectively, and accrued royalties and other accounts payable of $100,000 at December 31, 2000 in connection with this agreement. The Company has recognized revenue of approximately $39.8 million, $39.9 million and $39.8 million in 2001, 2000 and 1999, respectively, in connection with the Development Agreement, as amended, discussed in Note 2. The following table sets forth the computation of basic and diluted earnings per share: Year Ended December 31, Numerator: Net income Denominator: 2001 2000 (in thousands, except per share information) 1999 $105,260 $ 94,512 $116,944 Denominator for basic earnings per share — weighted average shares Effect of dilutive securities: Put warrants Employee stock options Denominator for diluted earnings per share — adjusted weighted-average shares 185,460 184,804 176,260 — 9,038 41 14,886 — 16,306 194,498 199,731 192,566 Basic earnings per share $ 0.57 $ 0.51 $ 0.66 Diluted earnings per share $ 0.54 $ 0.47 $ 0.61 Antidilutive weighted shares 43,789 41,612 38,002 The above antidilutive weighted shares to purchase shares of Common Stock includes certain shares under the Company’s stock option program and Common Stock potentially issuable on the conversion of the Debentures and on the exercise of outstanding put warrants and were not included in computing diluted earnings per share because their effects were antidilutive for the respective periods. 16. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, which were adopted by the Company on July 1, 2001 and January 1, 2002, respectively. Under the new rules, goodwill (and intangible assets deemed to have indeﬁnite lives) will no longer be amortized but will be subject to an annual impairment test. Other intangibles will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the ﬁrst quarter of 2002. At the date of adoption, the Company had unamortized goodwill, including acquired work force, in the amount of $152.4 million, which will not be amortized in the future and which will be subject to the annual impairment test of SFAS 142. At January 1, 2002, the Company had unamortized identiﬁed intangibles with estimable useful lives in the amount of $36.6 million, which will continue to be amortized in accordance with the provisions of SFAS 141 and 142. For the quarter ended March 31, 2002, the Company expects to record amortization expense of approximately $3.5 million related to these assets. The Company has completed the required impairment tests of goodwill and indeﬁnite lived intangible assets as of January 1, 2002 and does not anticipate an impairment charge as a result of the adoption of this statement. 42 Notes to Consolidated Financial Statements SFAS 143, Accounting for Asset Retirement Obligations,establishes In addition, the Company is a defendant in various matters of litigation accounting standards for the recognition and measurement of an asset generally arising out of the normal course of business. Although it is retirement obligation and its associated asset retirement cost. It also difﬁcult to predict the ultimate outcome of these cases, management provides accounting guidance for legal obligations associated with the believes, based on discussions with counsel, that any ultimate liability retirement of tangible long-lived assets. SFAS 143 is effective in ﬁscal would not materially affect the Company’s ﬁnancial position, results of years beginning after June 15, 2002, with early adoption permitted. The operations, or liquidity. Company expects that the provisions of SFAS 143 will not have a material impact on its consolidated results of operations and ﬁnancial position upon adoption. The Company plans to adopt SFAS 143 effective January 1, 2003. SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. SFAS 144 supersedes SFAS Statement No. 121 and APB Opinion No. 30, Reporting the Results of Operations— Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS 144 are effective in ﬁscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. The Company plans to adopt SFAS 144 effective January 1, 2002 and does not expect that the adoption will have a material impact on its consolidated results of operations and ﬁnancial position. 17. Legal Matters In June 2000, the Company and certain of its ofﬁcers and directors were named as defendants in several securities class action lawsuits ﬁled in the United States District Court for the Southern District of Florida on behalf of purchasers of the Company’s Common Stock during the period October 20, 1999 to June 9, 2000 (the “Class Period”). These actions were consolidated as In Re Citrix Systems, Inc. Securities Litigation. The lawsuits generally alleged that, during the Class Period, the defendants made misstatements to the investing public about the Company’s ﬁnancial condition and prospects. The Court dismissed the action with prejudice on October 30, 2001. In September 2000, a shareholder ﬁled a claim in the Court of Chancery of the State of Delaware against the Company and nine of its ofﬁcers and directors alleging breach of ﬁduciary duty by failing to disclose all material information concerning the Company’s ﬁnancial condition at the time of the proxy solicitation. The complaint sought unspeciﬁed damages. In January 2001, a portion of the action was stayed by the Court and later dismissed by the plaintiff without prejudice to reﬁling the action at a later date. In February 2001, the plaintiff ﬁled a motion with the court for award of attorneys’ fees and litigation costs in the amount of $2,000,000 and $60,000, respectively. In September 2001, the Court awarded the plaintiff $140,000 and $8,250 for attorneys’ fees and litigation costs, respectively. On February 22, 2002, plaintiffs reﬁled the remaining portion of the action. The Company believes the plaintiffs’ claim lacks merit, however, the company is unable to determine the ultimate outcome of this matter and intends to vigorously defend it. 43 Report of Independent Certified Public Accountants Report of Independent Certified Public Accountants Board of Directors and Stockholders Citrix Systems, Inc. We have audited the accompanying consolidated balance sheets of Citrix Systems, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity and cash ﬂows for each of the three years in the period ended December 31, 2001. These ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁnancial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁnancial statements. An audit also includes assessing the accounting principles used and signiﬁcant estimates made by management, as well as evaluating the overall ﬁnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the ﬁnancial statements referred to above present fairly, in all material respects, the consolidated ﬁnancial position of Citrix Systems, Inc. at December 31, 2001 and 2000 and the consolidated results of its operations and its cash ﬂows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. West Palm Beach, Florida January 17, 2002, except for the second paragraph of Note 17, to which the date is February 22, 2002 44 Quarterly Financial Information (Unaudited) Quarterly Financial Information (Unaudited) 2001 Net revenues Gross margin Income from operations Net income Basic earnings per common share Diluted earnings per common share Common Stock Prices (b)—High —Low 2000 Net revenues Gross margin Income from operations Net income Basic earnings per common share Diluted earnings per common share Common Stock Prices (b)—High —Low First Quarter Second Quarter Third Quarter Fourth Quarter (a) (in thousands, except per share amounts) $ 132,812 $ 147,274 $ 153,495 $ 158,048 125,500 35,596 28,935 0.16 0.15 $ 36.63 $ 17.31 140,051 31,192 22,894 0.12 0.12 $ 34.90 $ 18.19 145,922 32,384 27,790 0.15 0.14 $ 36.69 $ 18.38 150,308 34,179 25,641 0.14 0.13 $ 25.80 $ 19.81 $ 127,515 $ 106,086 $ 113,491 $ 123,354 122,386 49,611 38,545 0.21 0.19 $ 118.56 $ 52.50 97,682 15,902 14,973 0.08 0.07 104,637 25,911 21,617 0.12 0.11 116,687 20,801 19,377 0.10 0.10 $ 83.69 $ 18.44 $ 23.75 $ 30.89 $ 14.31 $ 17.13 (a) In the fourth quarter of 2000, the Company recorded impairment write-downs of previously acquired core technology of $9.1 million, as discussed in Note 3. (b) The Company’s Common Stock is currently traded on the Nasdaq National Market under the symbol “CTXS.” This information reﬂects the high and low closing prices for the Company’s Common Stock as reported on the Nasdaq National Market for the periods indicated, as adjusted to the nearest cent to reﬂect the two-for-one stock split in the form of a stock dividend declared on January 19, 2000 and paid on February 16, 2000 to holders of record of the Company’s Common Stock on January 31, 2000. Such information reﬂects inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions. On March 14, 2002, the last reported sale price of the Common Stock on the Nasdaq National Market was $18.41 per share. As of March 14, 2002, there were approximately 1,094 holders of record of the Common Stock. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends on its capital stock in the foreseeable future. 45 Corporate Information Corporate Officers Board of Directors Mark B. Templeton President and Chief Executive Ofﬁcer John P. Cunningham Senior Vice President— Finance and Operations, Chief Financial Ofﬁcer, Assistant Secretary John C. Burris Senior Vice President— Worldwide Sales and Customer Services Robert G. Kruger Senior Vice President— Product Development, Chief Technology Ofﬁcer David A.G. Jones Senior Vice President— Corporate Marketing and Development Jeanne Moreno Vice President and Chief Information Ofﬁcer David Urbani Vice President, Finance and Corporate Controller Daniel P. Roy Vice President, General Counsel and Secretary International Distribution Argentina, Austria, Australia, Belgium, Brazil, Chile, China, Columbia, Canada, Czech Republic, European Community, Denmark, United Kingdom, Finland, France, Germany, Greece, Hong Kong, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, North Korea, South Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Peru, Philippines, Poland, Portugal, Romania, Russia, Russian Federation, Saudi Arabia, Singapore, Spain, South Africa, Sweden, Switzerland, Taiwan, Thailand, Turkey and United States of America. Marvin W. Adams Vice President and Chief Information Ofﬁcer, Ford Motor Company Kevin R. Compton General Partner, Kleiner Perkins Cauﬁeld & Byers Stephen M. Dow General Partner, Sevin Rosen Funds Robert N. Goldman Chairman and Former Chief Executive Ofﬁcer, eXcelon Corporation Kenneth E. Lonchar Executive Vice President and Chief Financial Ofﬁcer, Veritas Software Tyrone F. Pike President and Chief Executive Ofﬁcer, Bravara Communication, Inc. Roger W. Roberts Chairman of the Board, Citrix Systems, Inc. Mark B. Templeton President and Chief Executive Ofﬁcer, Citrix Systems, Inc. John W. White Former Vice President and Chief Information Ofﬁcer, Compaq Computer Corporation 46 995374_Citrix_Cover 3/28/02 05:05 PM Page 3 Corporate Information World Headquarters Citrix Systems, Inc. 851 West Cypress Creek Road Fort Lauderdale, FL 33309 USA Tel: +1 (954) 267 3000 Tel: +1 (800) 393 1888 www.citrix.com Americas Headquarters Citrix Systems, Inc. 851 West Cypress Creek Road Fort Lauderdale, FL 33309 USA Tel: +1 (800) 437 7503 European Headquarters Citrix Systems International GmbH Rheinweg 9 8200 Schaffhausen Switzerland Tel: +41 (52) 635 7700 www.eu.citrix.com Asia/Pacific Headquarters Citrix Systems Australia Pty Ltd. Level 3, 1 Julius Avenue Riverside Corporate Park North Ryde NSW 2113 Sydney, Australia Phone: +61 (0) 2 8870 0800 Annual Meeting of Stockholders The Annual Meeting of Stockholders of Citrix Systems, Inc. will be held on May 16, 2002 at 10 a.m. Fort Lauderdale Marriott North, 6650 North Andrews Avenue, Fort Lauderdale, FL 33309 USA Stock Trading Information Nasdaq National Market symbol: CTXS Transfer Agent and Registrar EquiServe Trust Company P.O. Box 43010 Providence RI 02940 Tel: +1 (781) 575 3402 www.equiserve.com Independent Certified Public Accountants Ernst & Young LLP Phillips Point, West Tower 777 S. Flagler Drive, Suite 1200 West Palm Beach, FL 33401 Report on Form 10-K Stockholders may obtain additional ﬁnancial and other information about Citrix from the Company’s report on Form 10-K ﬁled with the Securities and Exchange Commission. Copies are available, without charge, upon request from the Company’s Investor Relations Department. Requests for information should be directed to: Investor Relations Citrix Systems, Inc. 851 West Cypress Creek Road Fort Lauderdale, FL 33309 USA Tel: +1 (888) 595 CTXS (2897) www.citrix.com/investors/ The Citrix Annual Report and Form 10-K are available electronically at Citrix online www.citrix.com © 2002 Citrix Systems, Inc. All rights reserved. Citrix®, ICA®, MetaFrame®, WinFrame®, Citrix Business Alliance™, Citrix Extranet™, NFuse™, NFuse™ Classic, NFuse™ Elite, MetaFrame XP™, VideoFrame™ and the Citrix logo are the registered trademarks or trademarks of Citrix Systems, Inc. in the United States and other countries. Microsoft®, Windows® and Windows NT® are registered trademarks of Microsoft Corporation. UNIX® is a registered trademark of The Open Group in the United States and other countries. Macintosh® and PowerBook® are registered trademarks of Apple Computer, Inc. Fortune 500® is a registered trademark of Time, Inc. Java™ is a trademark or registered trademark of Sun Microsystems, Inc. All other trademarks and registered trademarks are the property of their respective owners. 47 995374_Citrix_Cover 3/28/02 05:05 PM Page 4

Continue reading text version or see original annual report in PDF format above