Citrix Systems Annual Report 2001

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FY2001 Annual Report · Citrix Systems

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Making
the
virtual
work
place
real.

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2001 Annual Report

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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)
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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

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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

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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

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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

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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)

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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.

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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.

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

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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

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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

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

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.

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

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:

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

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%

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%

(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

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

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

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.

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

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.

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.

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

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.

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.

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

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

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.

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

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.

Consolidated Statements of Stockholders’ Equity

Common Stock

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

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

—

181,093

6,698

—

187,872

8,541

214

—

181

—

188

—

116,944

—

(2,537)

—

604

50,843

—

309,321

226,105

(2,537)

69,146

1,262

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

63,923

4,870

(15,732)

(76,040)

—

(81,810)

(406)

94,512

351,053

320,617

(2,943)

(76,040)

592,875

113,331

4,008

28,011

12,019

(822)

—

255

—

105,260

—

2,775

—

113,340

4,008

28,011

12,019

(822)

—

(210,477)

—

255

—

2,775

105,260

Balance at December 31, 2001

196,627

$ 197

$ 507,857

$ 425,877

$ (84)

$ (286,517)

$ 647,330

See accompanying notes.

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.

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

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

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

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.

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.

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

$ (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

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

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.

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.

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)

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.

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.

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.

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.

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.

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

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

$ 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

$ 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.

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

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.

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